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2012-5950

  • Federal Register, Volume 77 Issue 51 (Thursday, March 15, 2012)[Federal Register Volume 77, Number 51 (Thursday, March 15, 2012)]

    [Proposed Rules]

    [Pages 15460-15527]

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

    [FR Doc No: 2012-5950]

    [[Page 15459]]

    Vol. 77

    Thursday,

    No. 51

    March 15, 2012

    Part II

    Commodity Futures Trading Commission

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    17 CFR Part 43

    Procedures To Establish Appropriate Minimum Block Sizes for Large

    Notional Off-Facility Swaps and Block Trades; Proposed Rule

    Federal Register / Vol. 77 , No. 51 / Thursday, March 15, 2012 /

    Proposed Rules

    [[Page 15460]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 43

    RIN 3038-AD08

    Procedures To Establish Appropriate Minimum Block Sizes for Large

    Notional Off-Facility Swaps and Block Trades

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Further notice of proposed rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission is proposing

    regulations to implement certain statutory provisions enacted by Title

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

    Specifically, in accordance with section 727 of the Dodd-Frank Act, the

    Commission is proposing regulations that would define the criteria for

    grouping swaps into separate swap categories and would establish

    methodologies for setting appropriate minimum block sizes for each swap

    category. In addition, the Commission is proposing further measures

    under the Commission's regulations to prevent the public disclosure of

    the identities, business transactions and market positions of swap

    market participants.

    DATES: Comments must be received on or before May 14, 2012.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AD08,

    by any of the following methods:

    The agency's Web site, at http://comments.cftc.gov. Follow

    the instructions for submitting comments through the Web site.

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

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

    Street NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

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

    Follow the instructions for submitting comments.

    Please submit your comments using only one method.

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

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

    www.cftc.gov. You should submit only information that you wish to make

    available publicly. If you wish the Commission to consider information

    that you believe 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 procedures established in

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

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    \1\ See 17 CFR 145.9.

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    Commenters to this further notice of proposed rulemaking are

    requested to refrain from providing comments with respect to the

    provisions in part 43 of the Commission's regulations that are beyond

    the scope of this proposed rulemaking. The Commission only plans to

    address those comments that are responsive to the policies, merits and

    substance of the proposed provisions set forth in this further notice

    of proposed rulemaking.

    Throughout this further notice of proposed rulemaking, the

    Commission requests comment in response to several specific questions.

    For convenience, the Commission has numbered each of these requests for

    comment. The Commission asks that, in submitting comments, commenters

    kindly identify the specific number of each request to which their

    comments are responsive.

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

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

    submission from www.cftc.gov that it may deem to be inappropriate for

    publication, such as obscene language. All submissions that have been

    redacted or removed that contain comments on the merits of the

    rulemaking will be retained in the public comment file and will be

    considered as required under the Administrative Procedure Act and other

    applicable laws, and may be accessible under the Freedom of Information

    Act.

    FOR FURTHER INFORMATION CONTACT: Carl E. Kennedy, Counsel, Office of

    the General Counsel, 202-418-6625, c_kennedy@cftc.gov; or George

    Pullen, Economist, Division of Market Oversight, 202-418-6709,

    gpullen@cftc.gov; Commodity Futures Trading Commission, Three Lafayette

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

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    A. The Dodd-Frank Act

    B. The Initial Proposal

    C. Public Comments in Response to the Initial Proposal

    1. Public Comments Regarding the Proposed Determination of

    Appropriate Minimum Block Sizes

    2. Public Comments Regarding the Proposed Anonymity Protections

    3. Public Comments Regarding Implementation

    D. Analysis of Swap Market Data; Issuance of the Adopting

    Release

    II. Further Proposal--Block Trades

    A. Policy Goals

    B. Summary of the Proposed Approach

    C. Proposing Criteria for Distinguishing Among Swap Categories

    in Each Asset Class

    1. Interest Rate and Credit Asset Classes

    a. Background

    b. Interest Rate Swap Categories

    i. Interest Rate Swap Data Summary

    ii. Interest Rate Swap Data Analysis

    c. Credit Swap Categories

    i. Credit Swap Data Summary

    ii. Credit Swap Data Analysis

    2. Swap Category in the Equity Asset Class

    3. Swap Categories in the FX Asset Class

    4. Swap Categories in the Other Commodity Asset Class

    D. Proposed Appropriate Minimum Block Size Methodologies for the

    Initial and Post-Initial Periods

    1. Methodology for Determining the Appropriate Minimum Block

    Sizes in the Interest Rate and Credit Asset Classes

    2. Treatment of Swaps Within the Equity Asset Class

    3. Methodologies for Determining the Appropriate Minimum Block

    Sizes in the FX Asset Class

    a. Initial Period Methodology for Determining Appropriate

    Minimum Block Sizes in the FX Asset Class

    b. Post-Initial Period Methodology for Determining Appropriate

    Minimum Block Sizes in the FX Asset Class

    4. Methodologies for Determining Appropriate Minimum Block Sizes

    in the Other Commodity Asset Class

    a. Initial Period Methodology for Determining Appropriate

    Minimum Block Sizes in the Other Commodity Asset Class (Other Than

    Natural Gas and Electricity Swaps Proposed To Be Listed in Appendix

    B to Part 43)

    b. Initial Period Methodology for Natural Gas and Electricity

    Swaps in the Other Commodity Asset Class Proposed To Be Listed in

    Appendix B to Part 43

    c. Post-Initial Period Methodology for Determining Appropriate

    Minimum Block Sizes in the Other Commodity Asset Class

    5. Special Provisions for the Determination of Appropriate

    Minimum Block Sizes for Certain Types of Swaps

    a. Swaps With Optionality

    b. Swaps With Composite Reference Prices

    c. Physical Commodity Swaps

    d. Currency Conversion

    e. Successor Currencies

    E. Procedural Provisions

    1. Proposed Sec. 43.6(a) Commission Determination

    2. Proposed Sec. 43.6(f)(3) and(4) Publication and Effective

    Date of Post-Initial Appropriate Minimum Block Sizes

    3. Proposed Sec. 43.6(g) Notification of Election

    4. Proposed Sec. 43.7 Delegation of Authority

    III. Further Proposal--Anonymity Protections for the Public

    Dissemination of Swap Transaction and Pricing Data

    A. Policy Goals

    B. Establishing Notional Cap Sizes for Swap Transaction and

    Pricing Data To Be Publicly Disseminated in Real-Time

    1. Policy Goals for Establishing Notional Cap Sizes

    [[Page 15461]]

    2. Proposed Amendments Related to Cap Sizes--Sec. 43.2

    Definitions and Sec. 43.4 Swap Transaction and Pricing Data To Be

    Publicly Disseminated in Real-Time

    a. Initial Cap Sizes

    b. Post-Initial Cap Sizes and the 75-Percent Notional Amount

    Calculation

    c. Alternative Cap Size Calculations

    C. Masking the Geographic Detail of Swaps in the Other Commodity

    Asset Class

    1. Policy Goals for Masking the Geographic Detail for Swaps in

    the Other Commodity Asset Class

    2. Proposed Amendments to Sec. 43.4

    3. Application of Proposed Sec. 43.4(d)(4)(iii) and Proposed

    Appendix E to Part 43--Geographic Detail for Delivery or Pricing

    Points

    a. U.S. Delivery of Pricing Points

    i. Natural Gas and Related Products

    ii. Petroleum and Products

    iii. Electricity and Sources

    iv. All Remaining Other Commodities

    b. Non-U.S. Delivery or Pricing Points

    c. Basis Swaps

    4. Further Revisions to Part 43

    a. Additional Contracts Added to Appendix B to Part 43

    b. Technical Revisions to Part 43

    IV. Regulatory Flexibility Act

    A. Potential Economic Impact--Proposed Sec. 43.6(g)--

    Notification of Election

    B. Identification of Duplicative, Overlapping or Conflicting

    Federal Rules

    C. Alternatives to Proposed Rules That Will Have an Impact

    D. Certification

    V. Paperwork Reduction Act

    A. Background

    B. Description of the Collection

    1. Proposed Sec. 43.6(g)--Notification of Election

    2. Proposed Amendments to Sec. Sec. 43.4(d)(4) and 43.4(h)

    C. Request for Comments on Collection

    VI. Cost-Benefit Considerations

    A. Introduction

    B. The Requirements of Section 15(a)

    C. Structure of the Commission's Analysis; Cost Estimation

    Methodology

    D. Background; Objectives of This Further Proposal

    E. Costs and Benefits Relevant to the Block Trade Rules Section

    of the Further Proposal (Sec. Sec. 43.6(a)-(f) and (h))

    1. Costs and Benefits Relevant to the Proposed Criteria and

    Methodology

    a. Proposed Sec. 43.6(a) Commission Determination

    b. Proposed Sec. 43.6(b) Swap Category

    c. Proposed Sec. Sec. 43.6(c)-(f) and (h) Methods for

    Determining Appropriate Minimum Block Sizes

    d. Proposed Sec. Sec. 43.6(a)-(f) and (h) Costs Relevant to the

    Proposed Criteria and Methodology

    e. Benefits Relevant to Proposed Sec. Sec. 43.6(a)-(f) and (h)

    f. Application of the Section 15(a) Factors to Proposed

    Sec. Sec. 43.6(a)-(f) and (h)

    i. Protection of Market Participants and the Public

    ii. Efficiency, Competitiveness and Financial Integrity of

    Markets

    iii. Price Discovery

    iv. Sound Risk Management Practices

    v. Other Public Interest Considerations

    g. Specific Questions Regarding the Proposed Criteria and

    Methodology

    2. Cost-Benefit Considerations Relevant to the Proposed Block

    Trade/Large Notional Off-Facility Swap Election Process (Proposed

    Sec. 43.6(g))

    a. Costs Relevant to the Proposed Election Process (Proposed

    Sec. 43.6(g))

    i. Incremental, Non-Recurring Expenditure to a Non-Financial

    End-user, SEF or DCM To Update Existing Technology

    ii. Incremental, Non-Recurring Expenditure to a Non-Financial

    End-User, SEF or DCM To Provide Training to Existing personnel and

    Update Written Policies and Procedures

    iii. Incremental, Recurring Expenses to a Non-Financial End-

    User, DCM or SEF Associated With Incremental Compliance, Maintenance

    and Operational Support in Connection With the Proposed Election

    Process

    iv. Incremental, Non-Recurring Expenditure to an SDR To Update

    Existing Technology To Capture and Publicly Disseminate Swap Data

    for Block Trades and Large Notional Off-Facility Swaps

    b. Benefits Relevant to the Proposed Election Process (Proposed

    Sec. 43.6(g))

    c. Application of the Section 15(a) Factors to Proposed Sec.

    43.6(g)

    i. Protection of Market Participants and the Public

    ii. Efficiency, Competitiveness and Financial Integrity

    iii. Price Discovery

    iv. Sound Risk Management Practices

    v. Other Public Interest Considerations

    d. Specific Questions Regarding the Proposed Election Process

    F. Costs and Benefits Relevant to Proposed Anonymity Protections

    (Amendments to Sec. Sec. 43.4(d)(4) and (h))

    1. Proposed Amendments to Sec. 43.4(d)(4)

    2. Proposed Amendments to Sec. 43.4(h)

    3. Costs Relevant to the Proposed Amendments to Sec. Sec.

    43.4(d)(4) and (h)

    4. Benefits Relevant to the Proposed Amendments to Sec. 43.4

    5. Application of the Section 15(a) Factors to the Proposed

    Amendments to Sec. 43.4

    a. Protection of Market Participants and the Public

    b. Efficiency, Competitiveness and Financial Integrity

    c. Price Discovery

    d. Sound Risk Management Practices

    e. Other Public Interest Considerations

    6. Specific Questions Regarding the Proposed Amendments to Sec.

    43.4

    VII. Example of a Post-Initial Appropriate Minimum Block Size

    Determination Using the 50-Percent Notional Amount Calculation

    VIII. List of Commenters Who Responded to the Initial Proposal

    I. Background

    A. The Dodd-Frank Act

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

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

    of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (``CEA'')

    \4\ to establish a comprehensive, new regulatory framework for swaps

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

    increase transparency and promote market integrity within the financial

    system by, inter alia: (1) Providing for the registration and

    comprehensive regulation of swap dealers (``SDs'') and major swap

    participants (``MSPs''); (2) imposing mandatory clearing and trade

    execution requirements on standardized derivative products; (3)

    creating robust recordkeeping and real-time reporting regimes; and (4)

    enhancing the Commission's rulemaking and enforcement authorities with

    respect to, among others, all registered entities and intermediaries

    subject to the Commission's oversight.

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    \2\ See Public Law 111-203, 124 Stat. 1376 (2010).

    \3\ The short title of Title VII of the Dodd-Frank Act is the

    ``Wall Street Transparency and Accountability Act of 2010.''

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

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    Section 727 of the Dodd-Frank Act created section 2(a)(13) of the

    CEA, which authorizes and requires the Commission to promulgate

    regulations for the real-time public reporting of swap transaction and

    pricing data.\5\ Section 2(a)(13)(A) provides that the definition of

    ``real-time public reporting'' means reporting ``data relating to a

    swap transaction, including price and volume, as soon as

    technologically practicable after the time at which the swap

    transaction has been executed.'' \6\ Section 2(a)(13)(B) states that

    the purpose of section 2(a)(13) is ``to authorize the Commission to

    make swap transaction and pricing data available to the public in such

    form and at such times as the Commission determines appropriate to

    enhance price discovery.''

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    \5\ See generally CEA section 2(a)(13), 7 U.S.C. 2(a)(13).

    \6\ CEA section 2(a)(13)(A).

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    In general, section 2(a)(13) of the CEA directs the Commission to

    prescribe regulations ``providing for the public availability of

    transaction and pricing data'' for certain swaps. Section 2(a)(13) also

    places two other statutory requirements on the Commission that are

    relevant to this further notice of proposed rulemaking (``Further

    Proposal''). First, sections 2(a)(13)(E)(ii) and (iii) of the CEA

    respectively require the Commission to prescribe regulations specifying

    ``the criteria for determining what constitutes a large notional swap

    transaction (block trade) for particular markets and contracts'' and

    ``the appropriate time delay for reporting

    [[Page 15462]]

    large notional swap transactions (block trades) to the public.'' \7\ In

    promulgating regulations under section 2(a)(13), section

    2(a)(13)(E)(iv) directs the Commission to take into account whether

    public disclosure of swap transaction and pricing data will

    ``materially reduce market liquidity.'' \8\

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    \7\ See CEA sections 2(a)(13)(E)(ii) and (iii). Section

    2(a)(13)(E) explicitly refers to the swaps described only in

    sections 2(a)(13)(C)(i) and 2(a)(13)(C)(ii) of the CEA (i.e.,

    clearable swaps, including swaps that are exempt from clearing). As

    noted in the Commission's Initial Proposal (as defined below) and

    its Adopting Release (as defined below), the Commission interprets

    the provisions in section 2(a)(13)(E) to apply to all categories of

    swaps described in section 2(a)(13)(C) of the CEA.

    \8\ CEA section 2(a)(13)(E)(iv). Similarly, section 5h(f)(2)(C)

    of the CEA directs a registered swap execution facility (``SEF'') to

    set forth rules for block trades for swap execution purposes.

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    The second statutory requirement relevant to this Further Proposal

    is found in sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) of the CEA.

    Section 2(a)(13)(E)(i) requires the Commission to protect the

    identities of counterparties to mandatorily-cleared swaps, swaps

    excepted from the mandatory clearing requirement and voluntarily-

    cleared swaps. Section 2(a)(13)(C)(iii) of the CEA requires the

    Commission to prescribe rules that maintain the anonymity of business

    transactions and market positions of the counterparties to an uncleared

    swap.\9\ Indeed, Congress sought to ``ensure that the public reporting

    of swap transaction and pricing data [would] not disclose the names or

    identities of the parties to [swap] transactions.'' \10\

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    \9\ This provision does not cover swaps that are ``determined to

    be required to be cleared but are not cleared.'' See CEA section

    2(a)(13)(C)(iv).

    \10\ 156 Cong. Rec. S5921 (daily ed. July 15, 2010) (Statement

    of Sen. Blanche Lincoln).

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    In carrying out these two statutory requirements under section

    2(a)(13), the Commission issued a notice of proposed rulemaking. A

    discussion of that notice is described immediately below.

    B. The Initial Proposal

    On December 7, 2010, the Commission published in the Federal

    Register a notice of proposed rulemaking to implement section 2(a)(13)

    of the CEA (the ``Initial Proposal''), which included, among others,

    specific provisions pursuant to sections 2(a)(13)(E)(i)-(iv) and

    2(a)(13)(C)(iii).\11\ In the Initial Proposal, the Commission set out

    proposed provisions to satisfy the statutory requirements discussed

    above. With respect to the first statutory requirement, the Commission

    proposed: (1) Definitions for the terms ``large notional off-facility

    swap'' and ``block trade'' \12\; (2) a method for determining the

    appropriate minimum block sizes for large notional off-facility swaps

    and block trades; \13\ and (3) a framework for timely reporting of such

    transactions and trades.\14\ Proposed Sec. 43.5(g) provided that

    registered swap data repositories (``SDRs'') shall be responsible for

    calculating the appropriate minimum block size for each ``swap

    instrument'' using the greater result of the distribution test \15\ and

    the multiple test.\16\ Proposed Sec. 43.2(y) broadly defined ``swap

    instrument'' as ``a grouping of swaps in the same asset class with the

    same or similar characteristics.'' \17\ Proposed Sec. 43.5(h) provided

    that for any swap listed on a SEF or DCM, the SEF or DCM must set the

    appropriate minimum block trade size.\18\

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    \11\ See Real-Time Public Reporting of Swap Transaction Data, 75

    FR 76,139, Dec. 7, 2010, as corrected in Real-Time Public Reporting

    of Swap Transaction Data Correction, 75 FR 76,930, Dec. 10, 2010.

    Interested persons are directed to the Initial Proposal for a full

    discussion of each of the proposed part 43 rules.

    \12\ The Initial Proposal defined the term ``large notional

    swap.'' See proposed Sec. 43.2(l), 75 FR 76,171. The Adopting

    Release finalized the term as ``large notional off-facility swap,''

    to denote, in relevant part, that the swap is not executed pursuant

    to a SEF or designated contract market's (``DCM'') rules and

    procedures. See Sec. 43.2, 77 FR 1,182, 1,244, Jan. 9, 2012

    (``Adopting Release''). Specifically, the Adopting Release defined

    the term as an ``off-facility swap that has a notional or principal

    amount at or above the appropriate minimum block size applicable to

    such publicly reportable swap transaction and is not a block trade

    as defined in Sec. 43.2 of the Commission's regulations.'' Id.

    Throughout this Further Proposal, the Commission uses the term

    ``large notional off-facility swap'' as adopted in the Adopting

    Release.

    The Initial Proposal's definition of ``block trade'' was similar

    to the final definition in the Adopting Release. See proposed Sec.

    43.2(f), 75 FR 76,171. The Adopting Release defines the term ``block

    trade'' as a publicly reportable swap transaction that: ``(1)

    [i]nvolves a swap that is listed on a SEF or DCM; (2) [o]ccurs away

    from the [SEF's or DCM's] trading system or platform and is executed

    pursuant to the [SEF's or DCM's] rules and procedures; (3) has a

    notional or principal amount at or above the appropriate minimum

    block applicable to such swap; and (4) [i]s reported subject to the

    rules and procedures of the [SEF or DCM] and the rules described in

    [part 43], including the appropriate time delay requirements set

    forth in Sec. 43.5.'' See Sec. 43.2, 77 FR 1,243.

    \13\ See proposed Sec. 43.5, 75 FR 76,174-76.

    \14\ Proposed Sec. 43.5(k)(1) in the Initial Proposal provided

    that the time delay for the public dissemination of data for a block

    trade or large notional off-facility swap shall commence at the time

    of execution of such trade or swap. See 75 FR 76,176. Proposed Sec.

    43.5(k)(2) provided that the time delay for standardized block

    trades and large notional off-facility swaps (i.e., swaps that fall

    under CEA Section 2(a)(13)(C)(i) and (iv)) would be 15 minutes from

    the time of execution. Id. The Initial Proposal did not provide

    specific time delays for large notional off-facility swaps (i.e.,

    swaps that fall under Section 2(a)(13)(C)(ii) and (iii)). Instead,

    proposed Sec. 43.5(k)(3) provided that the time delay for such

    swaps shall be reported subject to a time delay that may be

    prescribed by the Commission. Id.

    The Adopting Release established time delays for the public

    dissemination of block trades and large notional off-facility swaps

    in Sec. 43.5. See 77 FR 1,247-49.

    \15\ The distribution test, described in proposed Sec.

    43.5(g)(1)(i) of the Initial Proposal, required that an SDR take the

    rounded transaction sizes of all trades executed over a period of

    time for a particular swap instrument and create a distribution of

    those trades. An SDR would then determine the minimum threshold

    amount as an amount that is greater than 95 percent of the notional

    or principal transaction sizes for the swap instrument for an

    applicable period of time. See 75 FR 76,175.

    \16\ The multiple test, described in proposed Sec.

    43.5(g)(1)(ii) in the Initial Proposal, required that an SDR

    multiply the block trade multiple by the ``social size'' of a

    particular swap instrument. Proposed Sec. 43.2(x) defined ``social

    size'' as the greatest of the mean, median or mode for a particular

    swap instrument. The Commission proposed a block trade multiple of

    five. Id.

    \17\ See proposed Sec. 43.2(y), 75 FR 76,172. For the reasons

    described in section II.B. infra, the Commission is proposing to use

    the term ``swap category'' instead of ``swap instrument.'' The

    Commission is of the view that the term swap category is a more

    descriptive term to convey the concept of a grouping of swap

    contracts that would be subject to the same appropriate minimum

    block size.

    \18\ See 75 FR 76,176.

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    With respect to the second statutory requirement relevant to this

    Further Proposal, the Initial Proposal set forth several provisions to

    address issues pertinent to protecting the identities of parties to a

    swap. Essentially, these proposed provisions sought to protect the

    identities of parties to a swap through the limited disclosure of

    information and data relevant to the swap. In particular, proposed

    Sec. 43.4(e)(1) in the Initial Proposal provided that an SDR could not

    publicly report swap transaction and pricing data in a manner that

    discloses or otherwise facilitates the identification of a party to a

    swap. Proposed Sec. 43.4(e)(2) would have placed a requirement on

    SEFs, DCMs and reporting parties to provide an SDR with a specific

    description of the underlying asset and tenor of a swap. This proposed

    section also included a qualification with respect to the reporting of

    the specific description. In particular, this section provided that

    ``[the] description must be general enough to provide anonymity but

    specific enough to provide for a meaningful understanding of the

    economic characteristics of the swap.'' \19\ This qualification would

    have applied to all swaps.

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    \19\ See 75 FR 76,174.

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    In the Initial Proposal, the Commission acknowledged that swaps

    that are executed on or pursuant to the rules of a SEF or DCM do not

    raise the same level of concerns in protecting the identities, business

    transactions or market positions of swap counterparties since these

    swaps generally lack

    [[Page 15463]]

    customization.\20\ As a result, the Commission provided that SEFs and

    DCMs should tailor the description required by proposed section 43.2(e)

    depending on the asset class and place of execution of each swap.

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    \20\ See 75 FR 76,151 (``In contrast, for those swaps that are

    executed on a swap market, the Commission believes that since such

    contracts will be listed on a particular trading platform or

    facility, it will be unlikely that a party to a swap could be

    inferred based on the reporting of the underlying asset and

    therefore parties to swaps executed on swap markets must report the

    specific underlying assets and tenor of the swap.'').

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

    In contrast, the Commission acknowledged that the public

    dissemination of a description of the specific underlying asset and

    tenor of swaps that are not executed on or pursuant to the rules of a

    SEF or DCM (i.e., swaps that are executed bilaterally) may result in

    the unintended disclosure of the identities, business transactions or

    market positions of swap counterparties, particularly for swaps in the

    other commodity asset class.\21\ To address this issue, the Commission

    proposed in Sec. 43.4(e)(2) that an SDR publicly disseminate a more

    general description of the specific underlying asset and tenor.\22\ In

    the Initial Proposal, the Commission provided a hypothetical example of

    how an SDR could mask or otherwise protect the underlying asset from

    public disclosure in a manner too specific so as to divulge the

    identity of a swap counterparty. The Commission, however, did not set

    forth a specific manner in which SDRs should carry out this

    requirement.\23\

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    \21\ See 75 FR 76,150-51.

    \22\ See 75 FR 76,174.

    \23\ See 75 FR 76,150. The Initial Proposal further provided

    that the requirement in proposed Sec. 43.4(e)(2) was separate from

    the requirement that a reporting party report swap data to an SDR

    pursuant to section 2(a)(13)(G) of the CEA. See 75 FR 76,174.

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    To further protect the identities, business transactions or market

    positions of swap counterparties, proposed Sec. 43.4(i) of the Initial

    Proposal included a rounding convention for all swaps, which included a

    ``notional cap'' provision. The proposed notional cap provision

    provided, for example, that if the notional size of a swap is greater

    than $250 million, then an SDR only would publicly disseminate a

    notation of ``$250+'' to reflect the notional size of the swap.\24\

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    \24\ See 75 FR 76,152.

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    The Commission issued the Initial Proposal for public comment for a

    period of 60 days, but later reopened the comment period for an

    additional 45 days.\25\ The comments that were submitted in response to

    the Initial Proposal are discussed in the section that follows.

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    \25\ The initial comment period for the Initial Proposal closed

    on February 7, 2011. The comment periods for most proposed

    rulemakings implementing the Dodd-Frank Act--including the proposed

    part 43 rules--subsequently were reopened for the period of April 27

    through June 2, 2011.

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    C. Public Comments in Response to the Initial Proposal

    After issuing the Initial Proposal, the Commission received 105

    comment letters and held 40 meetings with interested parties regarding

    the proposed provisions.\26\ The commenters provided general and

    specific comments relating to the proposed provisions regarding the

    determination of appropriate minimum block sizes and anonymity

    protections for the identities, business transactions and market

    positions of swap counterparties.\27\ Subsection 1 below sets out a

    discussion of the comments submitted in response to the Initial

    Proposal regarding the provisions that pertain to the determination of

    appropriate minimum block sizes. Subsection 2 below sets out a

    discussion of the comments submitted in response to the Initial

    Proposal regarding the proposed provisions that provide anonymity

    protections for the identities, business transactions or market

    positions of swap counterparties. Subsection 3 below sets out a

    discussion of the comments submitted in response to the Initial

    Proposal regarding the implementation of proposed part 43.

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

    \26\ The interested parties who either submitted comment letters

    or met with Commission staff included end-users, potential swap

    dealers, asset managers, industry groups/associations, potential

    SDRs, a potential SEF, multiple law firms on behalf of their clients

    and a DCM. Of the 105 comment letters submitted in response to the

    Initial Proposal, 42 letters focused on various issues relating to

    block trades and large notional off-facility swaps. Of the 40

    meetings, five meetings focused on various issues relating to block

    trades and large notional off-facility swaps. All comment letters

    received in response to the Initial Proposal may be found on the

    Commission's Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=919.

    \27\ A list of the full names and abbreviations of commenters

    who responded to the Initial Proposal and who the Commission refers

    to in this Further Proposal is included in section VI below. As

    noted above, letters from these commenters and others submitted in

    response to the Initial Proposal are available through the

    Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=919.

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

    1. Public Comments Regarding the Proposed Determination of Appropriate

    Minimum Block Sizes

    In terms of general comments, many commenters argued that the

    potential effects of the large notional off-facility swap and block

    trade provisions (including the provisions regarding the appropriate

    time delay) would adversely affect market liquidity.\28\ Several

    commenters generally argued that the Commission's proposed methodology

    was not supported by actual swap market data.\29\ In support of these

    comments, a few commenters also argued that the Commission should

    examine swap markets over a sufficient period of time to obtain a

    comprehensive view of market liquidity.\30\ Other commenters also

    contended that the proposed methodology to determine appropriate

    minimum block sizes would increase transaction costs if the appropriate

    minimum block sizes are set too large or if time delays are not long

    enough.\31\

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

    \28\ See, e.g., Freddie Mac CL at 2; ICI CL at 2; ABC/CIEBA CL

    at 1-2; ISDA/SIFMA CL at 2-4; Cleary Gottlieb CL at 6; JP Morgan CL

    at 2; WMBAA CL at 3.

    \29\ See, e.g., Cleary Gottlieb CL at 4-5; SIFMA/AFME/ASIFMA CL

    at 12; AII CL at 3-5. In their joint comment letter, for example,

    ISDA and SIFMA urged the Commission to conduct an empirical study on

    the impact of post-trade transparency on the over-the-counter

    (``OTC'') markets prior to finalizing the rulemaking. See ISDA/SIFMA

    CL at 4-5. In addition, ISDA and SIFMA argued that the Commission

    should conduct a three-month study, during which time the Commission

    should prescribe interim block trade rules. Id.

    \30\ Commenters did not agree on what constitutes a sufficient

    period of time to obtain a comprehensive view of liquidity. See,

    e.g., ISDA/SIFMA CL at 4 (three months); but see AII CL at 4 (one

    year); ABC/CIEBA CL at 5-6 (at least one year); UBS (six month

    consultation period).

    \31\ See, e.g., UBS CL at 1; AII CL at 4; SIFMA/AFME/ASIFMA CL

    at 11-13; BlackRock CL at 3-4; Hunton & Williams CL at 20; Cleary

    Gottlieb CL at 4-6; CCMR CL at 4; Coalition of Derivatives End-Users

    CL at 4-7; MFA CL at 3-4; MetLife CL at 2-3.

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

    Some commenters made specific recommendations regarding the

    Commission's proposed method for determining appropriate minimum block

    sizes for large notional off-facility swaps and block trades.\32\ For

    example, four commenters proffered alternative methods in which to

    group or categorize swaps for the purposes of the appropriate minimum

    block size determination.\33\ Ten commenters recommended ways to modify

    the multiple test.\34\ Specifically, four commenters suggested that the

    Commission remove the mean from the calculation of social size.\35\

    Several of

    [[Page 15464]]

    these commenters also suggested that the Commission use a multiple of

    less than five, with a multiple of two as the most often suggested

    alternative.\36\

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

    \32\ See, e.g., BlackRock CL at attachment 3; Coalition of

    Derivatives End-Users CL at 2-4.

    \33\ See, e.g., UBS CL at 1; Coalition of Derivatives End-Users

    CL at 2-4; Cleary Gottlieb CL at 5-6; SIFMA AMG CL at 5; Goldman CL

    at 3-4; ICI CL at 3.

    \34\ See e.g., JP Morgan CL at 9; BlackRock CL at 4; Goldman CL

    at 5.

    \35\ See, e.g., Goldman CL at 5 (``[W]e encourage the

    [Commission] to modify the multiple test by eliminating the mean

    prong. Defining the social size of a swap category with reference to

    the mean of transaction sizes would make the calculation susceptible

    to skewing * * *.''). See also JPM CL at 8, UBS CL at 2, Federal

    National Mortgage Association CL at 2.

    \36\ See, e.g., UBS CL at 2 (multiple of 2); JP Morgan CL at 9

    (multiple of 2). But see MetLife CL at 5 (multiple of 1.5).

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

    Ten commenters also recommended that the Commission alter the

    distribution test in a way that they would support it as a test, which

    should be used individually or used in combination with the multiple

    test.\37\ The majority of these commenters suggested that the

    Commission use a lower percentage than the proposed 95th

    percentile.\38\ Specifically, these commenters suggested a percentile

    between the 50th and 80th percentile.\39\

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

    \37\ See e.g., PIMCO CL at 4; SIFMA AMG CL at 4; UBS CL at 2.

    \38\ See, e.g., BlackRock CL at 4; SIFMA AMG CL at 5; Vanguard

    CL at 5 . See also UBS CL at 2.

    \39\ See, e.g., BlackRock CL at 4 (use 75th percentile); SIFMA

    AMG CL at 5 (recommending ``somewhere in the range of the 66th to

    80th percentiles''); Vanguard CL at 5 (80th percentile); JP Morgan

    CL at 9 (50th percentile). See also UBS CL at 2.

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

    A few commenters focused their recommendations on the methodologies

    that an SDR would use to calculate the appropriate minimum block sizes

    for specific asset classes. For example, three commenters made specific

    recommendations regarding the calculation and criteria of large

    notional off-facility swaps and block trades in the interest rate swap

    market.\40\ A third commenter made specific recommendations regarding

    the calculation and criteria of large notional off-facility swaps and

    block trades in the credit default swap market.\41\

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

    \40\ See PIMCO CL at 3 (for interest rate swaps, ``$250 million

    for swaps of 0-2 years, $200 million for swaps of 2-5 years, $100

    million for swaps of 6-10 years, $75 million for swaps of 11-20

    years, and $50 million for swaps over 20 years.''); AII CL at 5

    (``For interest rate swaps 0-5 year interest rate swaps, it may be

    appropriate to set the limit at approximately $100 million. For 5-10

    year interest rate swaps, the threshold might be approximately $50

    million and for 10-30 year interest rate swaps, the appropriate

    threshold could be approximately $25 million.''); BlackRock CL at

    attachment 3 (for interest rate swaps, ``$300K DV01 (approximately

    $350 million 10 year equivalent)'').

    \41\ See BlackRock CL at attachment 3. See also SIFMA/AFME/

    ASIFMA CL at 12 (recommending criteria for swaps and other

    instruments in the FX asset class).

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

    One commenter shared its view regarding whether the block trade

    rules that are applied in the futures markets are an appropriate

    analogy for determining appropriate minimum block sizes in related

    swaps markets. In its comment letter to the Initial Proposal, this

    commenter argued that the appropriate minimum block sizes in place for

    the futures market should be used as a comparison for determining

    appropriate minimum block sizes in the swaps market.\42\ The commenter

    stated that where an economically-equivalent futures contract is listed

    on a DCM, then the rules establishing appropriate minimum block sizes

    for a swap should be comparable to such futures contracts.\43\ The

    commenter also suggested that the Commission use comparable futures

    contracts in determining, inter alia, appropriate minimum block sizes

    and reporting and recordkeeping requirements.\44\ The commenter warned

    otherwise that, if the Commission was to adopt a different approach,

    then such action would unintentionally ``[tilt] the playing field in

    favor of one class of instruments.'' \45\ The commenter further argued

    that this consequence would not be consistent with Congress's intent

    when it enacted the Dodd-Frank Act.

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

    \42\ See CME CL at 12.

    \43\ See id.

    \44\ See id.

    \45\ Id. at 13.

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

    In contrast, other commenters suggested that the appropriate

    minimum block sizes in place for futures contracts would be an

    inappropriate comparative measure for the swaps market.\46\ Some of

    these commenters, for example, argued that the futures market is not an

    appropriate basis for setting appropriate minimum block sizes for block

    trades and large notional off-facility swaps because the swap market is

    significantly different than the futures market.\47\

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

    \46\ See, e.g., Freddie Mac CL at 2; Barclays CL at 2; ICI CL at

    2-3; ISDA/SIFMA CL at 3-4; Vanguard CL at 4; TriOptima CL at 5; CCMR

    CL at 3.

    \47\ See ISDA/SIFMA CL at 3-4; Vanguard CL at 4; TriOptima CL at

    5; Freddie Mac CL at 2; Barclays CL at 2; ICI CL at 2-3; CCMR CL at

    3.

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

    Many commenters to the Initial Proposal contended that the

    Commission should determine appropriate minimum block sizes based on

    the liquidity of a ``swap instrument.'' \48\ Two commenters suggested

    that markets with differing levels of liquidity should be subject to

    different block size methodologies.\49\ Another commenter suggested

    that a volume of less than five transactions per day be used to

    classify certain swap categories as illiquid and therefore subject to

    lower relative block size thresholds.\50\ Yet another commenter

    suggested utilizing a benchmark volume level to classify swaps within

    an asset class for the purpose of determining appropriate block

    sizes.\51\ One commenter suggested considering the turnover in a market

    to determine appropriate block sizes and time delays.\52\ Finally,

    another commenter recommended that the Commission review historical

    swap transaction data and consult with market participants in

    determining a liquidity spectrum for each swap category, with liquidity

    determined based on the average number of transactions per day (based

    on true risk transfer) over the preceding six months and the number of

    market makers regularly trading the instrument.\53\

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

    \48\ See note 17 supra for the Commission's proposal to use the

    term ``swap category'' instead of ``swap instrument.''

    \49\ See ISDA/SIFMA CL at 4; Coalition of Derivatives End-Users

    CL at 4.

    \50\ See Morgan Stanley CL at 11.

    \51\ See Vanguard CL at 5.

    \52\ See TriOptima CL at 5.

    \53\ See UBS CL at 2.

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

    2. Public Comments Regarding the Proposed Anonymity Protections

    Several commenters expressed concerns that the Initial Proposal did

    not address possible disclosure of the identities, business

    transactions and market positions of swap counterparties.\54\ Many

    commenters stated that the failure to adequately protect the identities

    and business transactions of the counterparties in connection with

    transacting block trades or large notional off-facility swaps would

    result in harm to the market.\55\ These commenters argued that the

    proposal would increase the risk that sophisticated market participants

    or some counterparties would be able to detect either the asset being

    offset or the identity of the end-user doing the offsetting,

    notwithstanding the anonymity protections proposed in the Initial

    Proposal.\56\ According to these commenters, this issue is of

    particular concern when a swap market participant enters into multiple

    swap transactions to place a large offsetting position and some or all

    of those transactions involve thinly-traded products or illiquid

    markets.\57\ Under

    [[Page 15465]]

    those circumstances, the commenters asserted that the parties to a swap

    would face an increased risk that their identities or transactions

    would be revealed to the public in violation of sections 2(a)(13)(E)(i)

    and 2(a)(13)(C)(iv) of the CEA.\58\ The commenters concluded that, as a

    result, swap counterparties could experience difficulty in offsetting

    their positions at a competitive price.\59\

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

    \54\ See e.g., Sutherland CL at 4-5; PIMCO CL at 3; Cleary

    Gottlieb CL at 5; Bracewell & Giuliani CL at 2-7; DTCC CL at 12;

    FINRA CL at 5; Dominion CL at 6-9; Commission staff meeting with

    Argus Media, Inc. on Feb. 3, 2011. See also ISDA and SIFMA, Block

    trade reporting over-the-counter derivatives markets, 6 (Jan. 2011),

    available at http://www.isda.org/speeches/pdf/Block-Trade-Reporting.pdf.

    \55\ See, e.g., Dominion CL at 5-6; PIMCO CL at 3; ABC/CEIBA CL

    at 16; WMBAA CL at 10; MFA CL at 2-3; Coalition for Derivatives End-

    Users CL at 10; Sutherland CL at 5; Argus CL at 3-4; ATA CL at 5;

    Sadis Goldberg CL at 2-4.

    \56\ See, e.g., Sutherland CL at 5; Coalition for Derivatives

    End-Users CL at 10; ATA CL at 5.

    \57\ See, e.g., Argus CL at 3-4 (``In situations where only a

    few entities trade a certain type of underlying asset, real-time

    reporting may inadvertently reveal the identity of the swap

    participants, particularly where the underlying asset is a

    commodity.''); see also Dominion CL at 5-6; Sutherland CL at 5;

    Coalition for Derivatives End-Users CL at 10.

    \58\ See, e.g., Argus CL at 3-4; ATA CL at 5; Dominion CL at 5-

    6; Sadis Goldberg CL at 2-4.

    \59\ Id. See note 58 supra.

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

    To address concerns regarding limited disclosure, several

    commenters recommended that the Commission establish a ``masking

    rule.'' \60\ For example, one commenter suggested that the Commission

    set masking thresholds at or near the level that represents the

    dividing line between retail and institutional trades.\61\ Another

    commenter suggested that the Commission develop a masking rule for the

    swaps market that is similar to the one established by the Financial

    Industry Regulatory Authority (``FINRA'') for the bond market.\62\

    These commenters suggested, however, that the Commission establish

    alternative methodologies to ensure limited public disclosure of swap

    transaction and pricing data.\63\

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

    \60\ JP Morgan CL at 12-14 (``The masking rule is similar in

    concept to the so-called `5+ rule' in TRACE. Under TRACE,

    transactions involving bonds in excess of $5 [m]illion are reported

    as `5+' * * *.''); see also WMBAA CL at 10; ABC/CIEBA CL at 8-9.

    \61\ See JP Morgan CL at 12-13.

    \62\ See WMBAA CL at 10.

    \63\ See, e.g., ABC/CIEBA CL at 9 (``We ask the Commission adopt

    a rule * * * which will require that the volume of those swaps which

    are not block trades be disseminated in the form of ranges.'').

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

    Some commenters expressed general concerns regarding anonymity as

    well as specific concerns with respect to swaps in the other commodity

    asset class. One commenter provided specific examples of how the

    identities of the counterparties could be revealed by publicly

    disseminating information relating to energy products.\64\ Another

    commenter suggested the use of broad geographic regions when publicly

    disseminating data for commodity swaps with very specific underlying

    assets or delivery points (e.g., natural gas) in order to protect the

    anonymity of the parties to these swaps.\65\ In commenting on the

    hypothetical example provided in the Initial Proposal,\66\ the

    commenter suggested that instead of reporting Lake Charles, Louisiana

    as the delivery point, an SDR could publicly disseminate ``Louisiana''

    or ``Gulf Coast.'' \67\

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

    \64\ See MS CL at 3.

    \65\ See Argus CL at 1-3.

    \66\ See 75 FR 76,150-76,151.

    \67\ See Argus CL at 1-3.

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

    Six commenters argued that the proposed anonymity provisions are

    not sufficient for certain swaps or certain markets (e.g., large,

    bespoke trades offsetting energy assets; illiquid contracts entered

    into by non-financial end-users; etc.). These commenters further argued

    that the public dissemination requirement in the Initial Proposal may

    result in undue harm to the swap market by increasing the risk of

    public disclosure of the identities, business transactions and market

    positions of swap counterparties.\68\

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

    \68\ See Argus CL at 1-3; Coalition for Derivatives End-Users CL

    at 8-9; Dominion CL at 6-9; Cleary Gottlieb CL at 5; MS CL at 3;

    Bracewell & Giuliani CL at 2-7. See also Commission staff meeting

    with NFPEEU, June 11, 2011.

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

    3. Public Comments Regarding Implementation

    In the Initial Proposal, the Commission solicited comments in

    response to specific questions regarding the implementation of real-

    time public reporting, including, inter alia, the timetable in which

    the Commission would require the public dissemination of swap

    transaction and pricing data for block trades and large notional off-

    facility swaps. In response to the Initial Proposal, several commenters

    suggested that the Commission phase-in the block trade thresholds and

    time delays, starting with lower thresholds and longer time delays.\69\

    These commenters further suggested that the Commission phase-in

    stricter methodologies and time delays over time.\70\ For example, one

    commenter stated in its comment letter that the Commission should

    specify appropriate minimum block sizes in advance and readjust those

    sizes over time in order to provide certainty to the market.\71\ In

    contrast, another commenter argued that the Commission should use data

    that is currently available to set appropriate minimum block sizes

    without any delay.\72\

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

    \69\ See, e.g., Barclays Capital CL at 5; World Federation of

    Exchanges CL at 2; ISDA/SIFMA CL at 11-12; and Cleary Gottlieb CL at

    18-19.

    \70\ See, e.g., Freddie Mac CL at 2-3; Barclays Capital CL at 5.

    \71\ See CCMR CL at 2-4. Accord Freddie Mac CL at 2-3 (``As the

    Commission collects data about the liquidity of the swaps market and

    the effects of the Commission's reporting rules, it may be

    appropriate to revisit the initial parameters for block trade

    reporting in order to further increase transparency.'').

    \72\ See SDMA CL at 3.

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

    Following the close of the comment period, the Commission took

    several actions in consideration of the comments received regarding the

    proposed methodology to determine appropriate minimum block sizes, the

    proposed anonymity protections and the proposed implementation

    approach.\73\ A discussion of the Commission's actions and their impact

    on this Further Proposal is set out immediately below.

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

    \73\ Commission staff also consulted with the staffs of several

    other federal financial regulators in connection with the issuance

    of this Further Proposal.

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

    D. Analysis of Swap Market Data; Issuance of the Adopting Release

    In consideration of the public comments submitted in response to

    the Initial Proposal, the Commission obtained and analyzed swap data in

    order to better understand the trading activity of swaps in certain

    asset classes.\74\ The Commission also reviewed additional information,

    including a recent study pertaining to the mandatory execution

    requirements and post-trade transparency concerns that arose out of two

    of the Commission's proposed rulemakings,\75\ as well as a report

    issued by two industry trade associations on block trade reporting in

    the swaps market.\76\ In addition, the Commission and the Securities

    and Exchange Commission, held a two-day public roundtable on Dodd-Frank

    Act implementation on May 2 and 3, 2011 (``Public Roundtable'').\77\

    During the Public Roundtable and in comment letters submitted in

    support thereof, interested parties recommended that the Commission

    adopt a phased-in approach with respect to the establishment of block

    trade rules.

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

    \74\ A detailed discussion of the Commission staff's review and

    analysis process is set out below in section II.B.1.a. of this

    Further Proposal.

    \75\ See ISDA, Costs and Benefits of Mandatory Electronic

    Execution Requirements for Interest Rate Products, 24 (ISDA

    Discussion Paper No. 2, Nov. 2011), available at http://www2.isda.org/attachment/Mzc0NA==/ISDA%20Mandatory%20Electronic%20Execution%20Discussion%20Paper.pdf.

    This paper cited the Commission's notice of proposed rulemaking with

    respect to SEFs (Core Principles and Other Requirements for Swap

    Execution Facilities, 76 FR 1,214, 1,220, Jan. 7, 2011) and the

    Initial Proposal.

    \76\ See Block trade reporting for over-the-counter derivatives

    markets, note 54 supra.

    \77\ See Joint Public Roundtable on Issues Related to the

    Schedule for Implementing Final Rules for Swaps and Security-Based

    Swaps Under the Dodd-Frank Wall Street Reform and Consumer

    Protection Act, 76 FR 23,211, Apr. 26, 2011. A copy of the

    transcript is accessible at: http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/csjac_transcript050211.pdf.

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

    Recently, the Commission issued the Adopting Release that finalized

    several provisions that were proposed in the Initial Proposal.\78\

    Those provisions,

    [[Page 15466]]

    once effective, will implement, among other things: (1) Several

    definitions proposed in the Initial Proposal relevant to this Further

    Proposal \79\; (2) the scope of part 43; (3) the reporting

    responsibilities of the parties to each swap; (4) the requirement that

    SDRs publicly disseminate swap transaction and pricing data; (5) the

    data fields that SDRs will publicly disseminate; (6) the time-stamping

    and recordkeeping requirements of SDRs, SEFs, DCMs and the ``reporting

    party'' to each swap \80\; (7) the interim time delays for public

    dissemination and the time delays for public dissemination of large

    notional off-facility swaps and block trades; and (8) interim notional

    cap sizes for all swaps that are publicly disseminated.\81\

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

    \78\ See 77 FR 1,182.

    \79\ The Adopting Release includes final definitions for the

    following terms: (1) Block trade; (2) large notional off-facility

    swap; (3) appropriate minimum block size; and (4) asset class. As

    noted above, the Adopting Release did not define the term swap

    instrument. This Further Proposal puts forth a new term swap

    category, which groups swaps for the purpose of determining whether

    a swap transaction qualifies as a large notional off-facility swap

    or block trade. See note 17 supra.

    \80\ See Sec. 43.2 of the Commission's regulations. 77 FR

    1,244. The Adopting Release finalized the definition of ``reporting

    party'' as a ``party to a swap with the duty to report a publicly

    reportable swap transaction in accordance with this part [43] and

    section 2(a)(13)(F) of the [CEA].'' 77 FR 1,244.

    \81\ See 77 FR 1,244.

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

    Based on the public comments received in response to the Initial

    Proposal, and in order to successfully implement the real-time public

    reporting regulatory framework established in the Adopting Release, the

    Commission has decided to further propose provisions that: (1) Specify

    the criteria for determining swap categories and methodologies for

    determining the appropriate minimum block sizes for large notional off-

    facility swaps and block trades; and (2) provide increased protections

    to the identities of swap counterparties to large swap transactions and

    certain other commodity swaps, which were not fully addressed in the

    Adopting Release.\82\

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

    \82\ In several places in the Adopting Release, the Commission

    stated that it plans to address these requirements in a separate,

    forthcoming release. See, e.g., 77 FR 1,185, 1,191, 1,193 and 1,217.

    This Further Proposal is that release.

    Commenters to this Further Proposal are requested to refrain

    from providing comments with respect to the provisions adopted in

    the Adopting Release. Those provisions are not the subject of this

    Further Proposal. The Commission will not address the policy merits

    or substance of those provisions in its final rulemaking to this

    Further Proposal.

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

    In section II of this Further Proposal, the Commission sets out its

    proposal with respect to the criteria for determining swap categories

    and the methodologies for determining appropriate minimum block sizes

    for block trades and large notional off-facility swaps. In section III

    of this Further Proposal, the Commission sets out its proposal with

    respect to methodologies that provide anonymity to the swap

    counterparties to large swap transactions and certain other commodity

    swaps.

    II. Further Proposal--Block Trades

    A. Policy Goals

    In section 2(a)(13) of the CEA, Congress intended that the

    Commission consider both the benefits of enhanced market transparency

    and the effects such transparency would have on market liquidity.\83\

    The Commission anticipates that the public dissemination of swap

    transaction and pricing data will generally reduce costs associated

    with price discovery and prevent information asymmetries between market

    makers and end users.\84\ The Commission is of the view that the

    benefits of enhanced market transparency are not boundless,

    particularly in swap markets with limited liquidity. As noted above,

    section 2(a)(13)(E)(iv) of the CEA places constraints on the

    requirements for the real-time public reporting of swap transaction and

    pricing data. Specifically, this section provides that the Commission

    shall ``take into account whether the public disclosure [of swap

    transaction and pricing data] will materially reduce market

    liquidity.'' \85\

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

    \83\ In considering the benefits and effects of enhanced market

    transparency, the Commission notes that the ``guiding principle in

    setting appropriate block trade levels [is that] the vast majority

    of swap transactions should be exposed to the public market through

    exchange trading.'' Congressional Record--Senate, S5902, S5922 (July

    15, 2010).

    \84\ See e.g., CEA section 2(a)(13)(B) (``The purpose of this

    section is to authorize the Commission to make swap transaction and

    pricing data available to the public in such form and at such times

    as the Commission determines appropriate to enhance price

    discovery.'').

    \85\ CEA section 2(a)(13)(E)(iv). See also CEA section

    5h(f)(2)(C) (concerning the treatment of block trades for execution

    purposes).

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

    The Commission believes that the publication of detailed

    information regarding ``outsize swap transactions'' \86\ could expose

    swap counterparties to higher trading costs.\87\ In this regard, the

    publication of detailed information about an outsize swap transaction

    may alert the market to the possibility that the original liquidity

    provider to the outsize swap transaction will be re-entering the market

    to offset that transaction.\88\ Other market participants might be

    alerted to the liquidity provider's need to offset risk and therefore

    would have a strong incentive to exact a premium from the liquidity

    provider. As a result, liquidity providers possibly could be deterred

    from becoming counterparties to outsize swap transactions if swap

    transaction and pricing data is publicly disseminated before liquidity

    providers can offset their positions. The Commission anticipates that,

    in turn, this result could negatively affect market liquidity in the

    swaps market. In consideration of these potential outcomes, this

    Further Proposal seeks to provide maximum transparency while taking

    into account reductions in market liquidity through more detailed

    criteria to establish: (1) Swap categories (relative to the definition

    of swap instrument in the Initial Proposal); and (2) a phased-in

    approach to determining appropriate minimum block sizes for block

    trades and large notional off-facility swaps. A summary of the

    Commission's proposed approach is described below.

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

    \86\ As used in this Further Proposal, an ``outsize swap

    transaction'' is a transaction that, as a function of its size and

    the depth of the liquidity of the relevant market (and equivalent

    markets), leaves one or both parties to such transaction unlikely to

    transact at a competitive price.

    \87\ The Commission's proposed SEF rulemaking, would require

    pre-trade transparency for swap transactions that: (1) Are subject

    to the mandatory clearing requirement; (2) involves a swap that a

    SEF makes available to trade; and (3) are not block trades. See

    proposed Sec. 37.9(a)(2)(v), 76 FR 1,220. This Further Proposal

    also would require SEFs to utilize the Commission's rules for block

    trades (i.e., the subject matter of this Further Proposal) in

    determining the trading procedures that apply to swap transactions.

    Therefore, swap transactions exceeding an appropriate minimum block

    size would therefore be exempt from the mandatory trading

    requirements.

    \88\ The price of such a transaction would reflect market

    conditions for the underlying commodity or reference index and the

    liquidity premium for executing the swap transaction. The time

    delays in part 43 of the Commission's regulations will protect end-

    users and liquidity providers from the expected price impact of the

    disclosure of publicly reportable swap transactions. Trading that

    exploits the need of traders to reduce or offset their positions has

    been defined in financial economics literature as ``predatory

    trading.'' See e.g., Markus Brunnermeier and Lasse Heje Pedersen,

    Predatory Trading, Journal of Finance LX 4, Aug. 2005, available at

    http://pages.stern.nyu.edu/~lpederse/papers/predatory_trading.pdf.

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

    B. Summary of the Proposed Approach

    The Commission is proposing a two-period, phased-in approach to

    implement of regulations for determining appropriate minimum block

    sizes.\89\ That is, the Commission is

    [[Page 15467]]

    proposing to phase-in its regulations during an initial period and

    thereafter on an ongoing basis (i.e., the post-initial period) so that

    market participants can better adjust their swap trading strategies to

    manage risk, secure new technologies and make necessary arrangements in

    order to comply with part 43. The Commission is proposing two

    provisions relating to the Commission's determination of appropriate

    minimum block sizes: (1) Initial appropriate minimum block sizes under

    proposed Sec. 43.6(e); and (2) post-initial appropriate minimum block

    sizes under proposed Sec. 43.6(f).

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

    \89\ The Commission is proposing the same phased-in approach for

    determining cap sizes. For a more detailed discussion of the

    Commission's proposed approach with respect to cap sizes, see

    section III of this Further Proposal infra.

    The two-period, phased-in approach would become effective after

    the implementation of the part 43 provisions in the Adopting

    Release. Until the date on which the proposed provisions in this

    Further Proposal become effective, all swaps would be subject to a

    time delay pursuant to the provisions in part 43.

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

    In proposed Sec. 43.6(e), the Commission is establishing initial

    appropriate minimum block sizes for each category of swaps within the

    interest rate, credit, foreign exchange (``FX'') and other commodity

    asset classes.\90\ The Commission has listed the prescribed initial

    appropriate minimum block sizes in proposed appendix F to part 43 based

    on these swap categories.\91\ For interest rate and credit swaps, the

    Commission reviewed actual market data and has prescribed initial

    appropriate minimum block sizes for swap categories in these asset

    classes based on that data. For the other asset classes, the Commission

    did not have access to relevant market data. As such, during the

    initial period, the Commission is proposing to use a methodology based

    on whether a swap or swap category is ``economically related'' to a

    futures contract.\92\ Swaps and swap categories that are not

    economically related to a futures contract would remain subject to a

    time delay (i.e., treated as block trades or large notional off-

    facility swaps, as applicable, regardless of notional amount). All

    initial appropriate minimum block sizes in proposed appendix F to part

    43 would become effective 60 days following the publication in the

    Federal Register of a final rule adopting the provisions set forth in

    this Further Proposal.

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

    \90\ The Commission is proposing that swaps in the equity asset

    class do not qualify as block trades and large notional off-facility

    swaps. See proposed Sec. 43.6(d). Otherwise, the Commission is

    prescribing swap categories for each asset class as set forth in

    proposed Sec. 43.6(b). These swap categories would remain the same

    during the initial and post-initial periods.

    \91\ The Commission notes SEFs and DCMs would not be prohibited

    under this Further Proposal from setting block sizes for swaps at

    levels that are higher than the appropriate minimum block sizes as

    determined by the Commission.

    \92\ A discussion of the term ``economically related'' is set

    forth below in section II.C.4 of this Further Proposal.

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

    In proposed Sec. 43.6(f)(1), the Commission provides that the

    duration of this initial period would be no less than one year after an

    SDR has collected reliable data for a particular asset class as

    determined by the Commission. During the initial period, the Commission

    would review reliable data for each asset class. For the purposes of

    this proposed provision, reliable data would include all data collected

    by an SDR for each asset class in accordance with the compliance chart

    in the adopting release to part 45 of the Commission's regulations.\93\

    The proposed initial period would expire following the publication of a

    Commission determination of post-initial appropriate minimum block

    sizes in accordance with the publication process set forth in proposed

    Sec. Sec. 43.6(f)(3) and (4). Thereafter, the Commission would set

    post-initial appropriate minimum block sizes for swap categories no

    less than once each calendar year using the calculation methodology set

    forth in proposed Sec. 43.6(c)(1).\94\

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

    \93\ See Swap Data Recordkeeping and Reporting Requirements, 77

    FR 2,136, 2,196, Jan. 13, 2012. The Commission is currently of the

    view, however, that data is per se reliable if it is collected by an

    SDR for an asset class after the respective compliance date for such

    asset class as set forth in part 45 of the Commission's regulations.

    \94\ In particular, the Commission is proposing a 67-percent

    notional amount calculation, which is discussed in more detail infra

    in section II.D.1 of this Further Proposal.

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

    The Commission is also proposing special rules for determining

    appropriate minimum block sizes in certain instances. In particular, in

    proposed Sec. 43.6(d), the Commission prescribes special rules for

    swaps in the equity asset class. In proposed Sec. 43.6(h), the

    Commission is establishing special rules for determining appropriate

    minimum block sizes in certain circumstances including, for example,

    rules for converting currencies and rules for determining whether a

    swap with optionality qualifies for block trade or large notional off-

    facility swap treatment.

    Section C below describes the Commission's proposed approach to

    establish swap categories across the five asset classes. A discussion

    of the Commission's proposed methodologies to determine appropriate

    minimum block sizes follows in section D.

    C. Proposing Criteria for Distinguishing Among Swap Categories in Each

    Asset Class

    The Commission is proposing to use the term ``swap category'' to

    convey the concept of a grouping of swap contracts that would be

    subject to a common appropriate minimum block size.\95\ Specifically,

    the Commission is proposing specific criteria for defining swap

    categories in each asset class. These proposed criteria are intended to

    address the following two policy objectives: (1) Categorizing together

    swaps with similar quantitative or qualitative characteristics that

    warrant being subject to the same appropriate minimum block size; and

    (2) minimizing the number of the swap categories within an asset class

    in order to avoid unnecessary complexity in the determination

    process.\96\ In the Commission's view, balancing these policy

    objectives and considering the characteristics of different types of

    swaps within an asset class are necessary in establishing appropriate

    criteria for determining swap categories within each asset class. The

    five asset classes established by the Commission in the Adopting

    Release are discussed briefly in the paragraph below, followed by a

    discussion of the proposed swap category criteria for each asset class.

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

    \95\ Proposed Sec. 43.6(b) does not set out a definition for

    the term ``swap category.'' Instead, proposed Sec. 43.6(b) sets out

    the provisions that group swaps within each asset class with common

    risk and liquidity profiles, as determined by the Commission.

    \96\ These objectives are specific to the determination of

    appropriate swap category criteria and are intended to promote the

    general policy goals described above in section II.A.of this Further

    Proposal.

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

    Section 43.2 of the Commission's regulations currently defines

    ``asset class'' as ``a broad category of commodities, including without

    limitation, any `excluded commodity' as defined in section 1a(19) of

    the [CEA], with common characteristics underlying a swap.'' \97\

    Section 43.2 also identifies the following five swap asset classes:

    interest rates; \98\ equity; credit; FX; \99\ and other

    commodities.\100\

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

    \97\ See Sec. 43.2, 77 FR 1,243.

    \98\ In the Adopting Release, the Commission determined that

    cross-currency swaps are a part of the interest rate asset class.

    See 77 FR 1,193. The Commission noted that this determination is

    consistent with industry practice. See id.

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

    In this Further Proposal, the Commission is proposing to breakdown

    each asset class further into separate swap categories for the purpose

    of determining appropriate minimum block sizes for such categories.

    During the initial and post-initial periods, the Commission would group

    swaps in the five asset classes into the prescribed swap categories as

    set forth in proposed Sec. 43.6(b). In the subsections that follow,

    the Commission discusses in detail the proposed criteria for further

    delineating groups of swaps in the interest rate, credit, equity, FX,

    and other commodity

    [[Page 15468]]

    asset classes into separate swap categories.

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

    \99\ To the extent that FX swaps or forwards, or both, are

    excluded from the definition of ``swap'' pursuant to a determination

    by United States Department of the Treasury (``Treasury''), the

    requirements of section 2(a)(13) of the CEA would not apply to those

    transactions, and such transactions would not be subject to part 43

    of the Commission's regulations. Treasury issued a proposed

    determination on April 29, 2011, in which it stated that FX swaps

    and forwards would be excluded from the definition of ``swap,'' and

    thereby exempt from certain requirements established in the Dodd-

    Frank Act, including registration and clearing. See Determination of

    Foreign Exchange Swaps and Foreign Exchange Forwards Under the

    Commodity Exchange Act, 76 FR 25,774, May 5, 2011. Treasury's

    proposed determination may also be found at http://www.treasury.gov/initiatives/wsr/Documents/FX%20Swaps%20and%20Forwards%20NPD.pdf.

    The CEA provides, however, that, even if Treasury determines

    that FX swaps and forwards may be excluded from the definition of

    ``swap'', these transactions still are not excluded from regulatory

    reporting requirements to an SDR. Nonetheless, as stated, such

    transactions would not be subject to part 43 of the Commission's

    regulations. See 77 FR 1,188. Treasury has proposed to act pursuant

    to the authority in section 721 of the Dodd-Frank Act that permits a

    determination that certain FX swaps and forwards should not be

    regulated as swaps and are not structured to evade the Dodd-Frank

    Act. The Commission has noted that, as proposed, Treasury's

    determination would exclude FX swaps and forwards, as defined in CEA

    section 1a, but would not apply to FX options or non-deliverable

    forwards. FX instruments that are not covered by Treasury's final

    determination would still be subject to part 43 of the Commission's

    regulations.

    \100\ The Adopting Release defines the term ``other commodity''

    to mean any commodity that is not categorized in the other asset

    classes as may be determined by the Commission. See 77 FR 1,244. The

    definition of asset class in Sec. 43.2 also provides that the

    Commission may later determine that there are other asset classes

    not identified currently in that section. See 77 FR 1,243.

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

    Request for Comment

    Q1. Should the Commission provide for special swap categories and

    appropriate minimum block size methodologies for bilateral versus

    cleared swap transactions? If so, why?

    1. Interest Rate and Credit Asset Classes

    a. Background

    The Commission was able to obtain and review non-public swap data

    to make inferences about patterns of trading activity, price impact and

    liquidity in the market for swaps in the interest rate and credit asset

    classes. Based on that review, the Commission is proposing criteria for

    determining swap categories in these two asset classes. Specifically,

    the Commission is proposing to define swap categories for: (1) Interest

    rate swaps based on unique combinations of tenor \101\ and currency;

    and (2) credit default swaps (``CDS'') based on unique combinations of

    tenor and conventional spreads.\102\

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

    \101\ As used in the Further Proposal, the tenor of a swap

    refers to the amount of time from the effective or start date of a

    swap to the end date of such swap. In circumstances where the

    effective or start date of the swap was different from the trade

    date of the swap, the Commission used the later occurring of the two

    dates to determine tenor.

    \102\ As generally used in the industry, the term ``conventional

    spread'' represents the equivalent of a swap dealer's quoted spread

    (i.e., an upfront fee based on a fixed coupon and using standard

    assumptions such as auctions and recovery rates. More information

    regarding the use of this term can be found at Markit, The CDS Big

    Bang: Understanding the Changes to the Global CDS Contract and North

    American Conventions, at http://www.markit.com/cds/announcements/resource/cds_big_bang.pdf, (Mar. 2009), at 19.

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

    The Commission obtained transaction-level data for these asset

    classes from two third-party service providers with the assistance of

    the Over-the-Counter Derivatives Supervisors Group (``ODSG'').\103\ The

    ODSG was established in 2005 and is chaired by the Federal Reserve Bank

    of New York. The ODSG is comprised of domestic and international

    supervisors of representatives from major OTC derivatives market

    participants.\104\ In particular, the ODSG coordinated with the ``G-14

    banks'' in order to gain written permission to access the non-public

    swap data.\105\

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

    \103\ Section 8(a) of the CEA protects non-public, transaction-

    level data from public disclosure. Section 8(a)(1) provides, in

    relevant part, that ``the Commission may not publish data and

    information that would separately disclose the business transactions

    or market positions of any person and trade secrets or names of

    customers * * *.'' To assist commenters, this Further Release

    includes various tables and summary statistics depicting the ODSG

    data in aggregate forms. In the discussion that follows, the

    Commission additionally has described the methodology it employed in

    reviewing, analyzing and drawing conclusions based on the ODSG data.

    \104\ See OTC Derivatives Supervisors Group--Federal Reserve

    Bank of New York, http://www.ny.frb.org/markets/otc_derivatives_supervisors_group.html (last visited Jan. 15, 2012). The ODSG was

    formed ``in order to address the emerging risks of inadequate

    infrastructure for the rapidly growing market in the credit

    derivatives * * *.'' The ODSG works directly with market

    participants to plan, monitor and coordinate industry progress

    toward collective commitments made by firms.

    \105\ The G-14 banks are: Bank of America-Merrill Lynch;

    Barclays Capital; BNP Paribas; Citigroup; Credit Suisse; Deutsche

    Bank AG; Goldman Sachs & Co.; HSBC Group; J.P. Morgan; Morgan

    Stanley; The Royal Bank of Scotland Group; Societe Generale; UBS AG;

    and Wells Fargo Bank, N.A.

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

    MarkitSERV, a post-trade processing company jointly owned by Markit

    and The Depository Trust & Clearing Corporation (``DTCC''), provided

    the interest rate swap data set. The interest rate swap data set

    covered transactions confirmed on the MarkitWire platform between June

    1, 2010 and August 31, 2010 where at least one party was a G-14

    Bank.\106\

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

    \106\ The interest rate swap data was limited to transactions

    and events submitted to the MarkitWire platform. MarkitWire is a

    trade confirmation service offered by MarkitSERV.

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

    The Warehouse Trust Company LLC (``The Warehouse Trust'') provided

    the CDS data set.\107\ The CDS data set covered CDS transactions for a

    three-month period beginning on May 1, 2010 and ending on July 31,

    2010.\108\

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

    \107\ The Warehouse Trust, a subsidiary of DTCC DerivSERV LLC,

    is regulated as a member of the U.S. Federal Reserve System and as a

    limited purpose trust company by the New York State Banking

    Department. The Warehouse Trust provides the market with a trade

    database and centralized electronic infrastructure for post-trade

    processing of OTC credit derivatives contracts over their entire

    lifecycle. See DTCC, The Warehouse Trust Company, About the

    Warehouse Trust Company, http://www.dtcc.com/about/subs/derivserv/warehousetrustco.php. (last visited Jan. 31, 2012).

    \108\ The Warehouse Trust data contained ``allocation-level

    data,'' which refers to refers to transactional data that does not

    distinguish between isolated transactions and transactions that,

    although documented separately, comprise part of a larger

    transaction.

    The Commission notes the work of other regulators in aggregating

    observations believed to be part of a single transaction. See

    Kathryn Chen, et al., Federal Reserve Bank of New York Staff Report,

    An Analysis of CDS Transactions: Implications for Public Reporting,

    (Sept. 2011), at 25, http://www.newyorkfed.org/research/staff_reports/sr517.html. The Commission notes that this allocation-level

    information could produce a downward bias in the notional amounts of

    the swap transactions in the data sets provided by the ODSG. In

    turn, this downward bias would produce smaller appropriate minimum

    block trade sizes relative to a data set that, if available with

    appropriate execution time stamps, would reflect the aggregate

    notional amount of swaps completed in a single transaction.

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

    b. The Commission filtered both data sets in order to analyze only

    transaction-level data corresponding to ``publicly reportable swap

    transactions,'' as defined in Sec. 43.2 of the Adopting Release.\109\

    As such, the Commission excluded from its analysis duplicate and non-

    price forming transactions.\110\ The

    [[Page 15469]]

    Commission also converted the notional amount of each swap transaction

    into a common currency denominator the U.S. dollar.\111\ Interest Rate

    Swap Categories.

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

    \109\ ``Publicly reportable swap transaction'' means, unless

    otherwise provided in this part: (1) Any executed swap that is an

    arm's-length transaction between two parties that results in a

    corresponding change in the market risk position between the two

    parties; or (2) any termination, assignment, novation, exchange,

    transfer, amendment, conveyance, or extinguishing of rights or

    obligations of a swap that changes the pricing of the swap. Examples

    of an executed swap that does not fall within the definition of

    publicly reportable swap transaction may include: (1) Certain

    internal swaps between 100-percent-owned subsidiaries of the same

    parent entity; and (2) portfolio compression exercises. These

    examples represent swaps that are not at arm's length, but that do

    result in a corresponding change in the market risk position between

    two parties. See 77 FR 1,244.

    \110\ The excluded records represented activities such as option

    exercises or assignments for physical, risk optimization or

    compression transactions, and amendments or cancellations that were

    assumed to be mis-confirmed. A transaction was assumed to be mis-

    confirmed when it was canceled without a fee, which the Commission

    has inferred was the result of a confirmation correction. The

    Commission also excluded interest rate transactions that were

    indicated as assignments, terminations, and structurally excluded

    records since the Commission was unable to determine if these

    records were price-forming. The Commission also excluded CDS

    transactions that were notated as single name transactions. The data

    sets also included transaction records created for workflow purposes

    (and therefore redundant), duplicates and transaction records

    resulting from name changes or mergers.

    \111\ The Commission calculated the average daily exchange rates

    between relevant currencies and the U.S. dollar for the relevant

    three-month period covered by the data. This average daily exchange

    rate was then applied to the notional amounts for non-U.S. dollar

    denominated swap transactions.

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

    i. Interest Rate Swap Data Summary

    The filtered transaction records in the interest rate swap data set

    contained 166,874 transactions with a combined notional value of

    approximately $45.4 trillion dollars.\112\ These transactions included

    trades with a wide range of notional amounts, 28 different currencies,

    eight product types, 57 different floating rate indexes and tenors

    ranging from under one week to 55 years. Summary statistics of the

    filtered interest rate swap data set are presented in Table 1.\113\

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

    \112\ The Commission only reviewed relevant transaction records

    in the interest rate swap data set. As noted above, the Commission

    excluded duplicate and non-price forming transactions from its

    review. See note 110 supra for a list of excluded transaction

    records.

    \113\ See the International Organization for Standardization

    (ISO) standard ISO 4217 for information on the currency codes used

    by the Commission. For information on floating rate indexes, see

    also ISDA, 2006 Definitions (2006), and supplements.

    \114\ In producing Table 1, the Commission counted tenors for

    swaps with an end date within four calendar days of a complete month

    relative to the swap's start date as ending on the nearest complete

    month.

    Table 1--Summary Statistics for the Interest Rate Swap Data Set by Product Type, Currency, Floating Index and

    Tenor \114\

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

    Notional

    Number of Percentage of amount Percentage of

    transactions total (billions of total notional

    transactions USD) amount (%)

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

    Product Type:

    Single Currency Interest Rate Swap.......... 128,658 77 16,276 36

    Over Night Index Swap (OIS)................. 12,816 8 16,878 37

    Forward Rate Agreement (FRA)................ 5,936 4 7,071 16

    Swaption.................................... 11,042 7 2,256 5

    Other....................................... 8,395 5 2,909 6

    Currency:

    European Union Euro Area euro (EUR)......... 46,412 28 18,648 41

    United States dollar (USD).................. 50,917 31 11,377 25

    United Kingdom pound sterling (GBP)......... 16,715 10 7,560 17

    Japan yen (JPY)............................. 19,502 12 4,253 9

    Other....................................... 33,301 20 3,553 8

    Floating Index:

    USD-LIBOR-BBA............................... 48,651 29 9,411 21

    EUR-EURIBOR-Reuters......................... 39,446 24 9,495 21

    EUR-EONIA-OIS-COMPOUND...................... 6,517 4 9,122 20

    JPY-LIBOR-BBA............................... 19,194 12 4,010 9

    GBP-LIBOR-BBA............................... 12,835 8 2,419 5

    GBP-WMBA-SONIA-COMPOUND..................... 2,014 1 5,123 11

    Other....................................... 38,190 23 5,809 13

    Tenor:

    1 Month..................................... 3,171 2 11,859 26

    3 Month..................................... 10,229 6 11,660 26

    6 Month..................................... 2,822 2 1,701 4

    1 Year...................................... 9,522 6 3,484 8

    2 Year...................................... 16,450 10 3,347 7

    3 Year...................................... 9,628 6 1,488 3

    5 Year...................................... 26,139 16 2,712 6

    7 Year...................................... 6,599 4 661 1

    10 Year..................................... 34,000 20 2,746 6

    30 Year..................................... 9,616 6 448 1

    Other....................................... 38,671 23 5,284 12

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

    Sample Totals........................... 166,847 100 45,390 100

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

    Table 2 below sets out the notional amounts of the interest rate

    swap data set organized by product type, currency, floating index and

    tenor. The table also includes the notional amounts in each percentile

    of a distribution of the data set.

    [[Page 15470]]

    Table 2--Notional Amounts of Interest Rate Swap Data Set Organized by Product Type, Currency, Floating Index and

    Tenor

    [In millions of USD]

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

    Mean Percentiles

    notional ---------------------------------------------------------------

    amount 5th 10th 25th 50th 75th 90th 95th

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

    Product Type:

    Single Currency Interest Rate 127 4 9 23 52 117 252 438

    Swap............................

    OIS.............................. 1,293 6 13 63 341 1,261 3,784 5,282

    FRA.............................. 1,168 90 133 266 631 1,039 2,000 3,018

    Swaption......................... 204 3 20 50 100 226 500 642

    Other............................ 346 * 1 23 89 250 631 1,132

    Currency:

    EUR.............................. 400 6 15 38 91 249 631 1,617

    USD.............................. 221 5 12 31 89 200 500 1,000

    GBP.............................. 435 1 1 15 57 167 755 1,698

    JPY.............................. 221 11 13 28 57 124 339 790

    Other............................ 108 4 6 13 30 78 175 308

    Floating Index:

    USD-LIBOR-BBA.................... 192 5 12 30 76 180 500 803

    EUR-EURIBOR-Reuters.............. 241 8 17 38 79 189 416 757

    EUR-EONIA-OIS-COMPOUND........... 1,385 4 10 61 315 1,261 3,784 6,306

    JPY-LIBOR-BBA.................... 211 11 12 28 57 113 339 658

    GBP-LIBOR-BBA.................... 181 1 4 23 54 151 377 755

    GBP-WMBA-SONIA-COMPOUND.......... 2,450 75 113 283 1,509 3,018 6,037 9,055

    Other............................ 152 2 4 12 31 88 264 500

    Tenor:

    1 Month.......................... 3,523 37 252 1,251 2,522 3,784 7,546 12,074

    3 Month.......................... 1,081 11 38 208 604 1,250 2,000 3,018

    6 Month.......................... 581 19 49 150 377 747 1,261 1,892

    1 Year........................... 348 20 31 70 151 341 755 1,261

    2 Year........................... 205 10 16 39 111 243 453 631

    3 Year........................... 154 10 16 44 95 169 315 500

    5 Year........................... 107 5 9 25 63 113 226 316

    7 Year........................... 105 7 13 29 57 113 221 315

    10 Year.......................... 83 5 10 23 50 95 175 252

    30 Year.......................... 47 4 7 18 26 50 95 132

    Other............................ 249 2 4 15 50 126 340 883

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

    The Commission also analyzed the interest rate swap data set to

    classify the counterparties into broad groups.\115\ The Commission's

    analysis of the interest rate swap data set revealed that approximately

    50 percent of transactions were between buyers and sellers who were

    both identified as G-14 banks and that these transactions represented a

    combined notional amount of approximately $22.85 trillion or 50 percent

    of the relevant IRS data set's total combined notional amount.

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

    \115\ MarkitSERV anonymized the identities of the counterparties

    and indicated whether a G-14 bank was a party to the swap

    transaction. Summary statistics relating to these anonymous numbers

    included: (1) Total count of unique counterparties was equal to

    approximately 300; (2) the average notional size of transactions

    involving two G-14 banks was equal to approximately $280 million;

    (3) the average notional size of transactions involving both a G-14

    bank and a non G-14 bank (which traded at least 100 swap

    transactions) was equal to approximately $260 million.

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

    ii. Interest Rate Swap Data Analysis

    As noted above, the Commission is proposing swap categories in the

    interest rate asset class based on tenor and underlying currency. The

    Commission is of the view that these criteria would meet the objectives

    of grouping swaps with economic similarity and reducing unnecessary

    complexity for market participants in determining whether their swaps

    are classified within a particular swap category. Tenors were

    associated with concentrations of liquidity at commonly recognized

    points along the yield curve. In general, the Commission observed that

    transactions in the data set (and related market liquidity) tended to

    cluster at certain tenors.\116\

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

    \116\ The Commission alternatively considered using tenor solely

    to determine interest rate swap categories. While this alternative

    approach would result in fewer swap categories (and would be based

    on the strongest single variable indicator of notional size in

    statistical regressions performed by the Commission on the interest

    rate swap data set), it may result in overbroad swap categories

    treating, for example, interest rate swaps denominated in U.S.

    dollars the same as those denominated in Polish zlotys, despite

    relative liquidity differences. As a result, this alternative

    approach may result in the super-major currency-denominated interest

    rate swaps setting the block size for all other currencies because

    of the super-major currency's relatively higher trading frequency.

    See note 123 infra for the Commission's definition of ``super-

    majority currency.''

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

    The Commission is proposing interest rate swap tenor groupings

    based on two observations regarding the data in the interest rate swap

    data set.\117\ First, the Commission observed that price-notation

    conventions and points of concentrated transaction activity correspond

    with specific tenors (e.g., three months, six months, one year, two

    years, etc.). Second, the Commission observed a similarity in the

    transaction amounts within a given tenor grouping (e.g., longer-dated

    tenors in the data set generally had lower average notional sizes).

    Based on these observations, table 3 below details the proposed tenor

    groups for the interest rate asset class.

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

    \117\ Through the performance of statistical regressions on the

    interest rate swap data set, the Commission found that tenor was the

    single strongest indicator of variations in notional amounts.

    \118\ The Commission chose to extend the tenor groups about one-

    half month beyond the commonly observed tenors to group similar

    tenors together and capture variations in day counts. The Commission

    added an additional 15 days beyond a multiple of one year to the

    number of days in each group to avoid ending each group on specific

    years.

    [[Page 15471]]

    Table 3--Proposed Tenor Groups for Interest Rates Asset Class \118\

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

    And tenor less than

    Tenor group Tenor greater than or equal to

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

    1........................... .................... Three months (107

    days).

    2........................... Three months (107 Six months (198

    days). days).

    3........................... Six months (198 One year (381 days).

    days).

    4........................... One year (381 days). Two years (746

    days).

    5........................... Two years (746 days) Five years (1,842

    days).

    6........................... Five years (1,842 Ten years (3,668

    days). days).

    7........................... Ten years (3,668 30 years (10,973

    days). days).

    8........................... 30 years (10,973

    days).

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

    Similarly, through its analysis of the interest rate swap data set,

    the Commission found that the currency referenced in a swap explains a

    significant amount of variation in notional size and, hence, can be

    used to categorize interest rate swaps given this relationship.\119\

    The Commission is proposing currency groupings after considering: (1)

    Price-notation conventions; (2) the relative development of currency

    groups in the interest rate and FX futures markets; (3) the relative

    swap transaction total notional amounts and transaction volumes of each

    currency group; and (4) the relative average transaction notional

    amounts and lack of evidence of large transacted notional amounts or

    substantial volume of each currency group.\120\ After considering these

    factors, the Commission is proposing three currency categories for the

    interest rate asset class: (1) Super-major currencies, which are

    currencies with large volume and total notional amounts; \121\ (2)

    major currencies, which generally exhibit moderate volume and total

    notional amounts; \122\ and (3) non-major currencies, which generally

    exhibit moderate to very low volume and notional amounts.

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

    \119\ The Commission considered alternative approaches of using

    the individual floating rate indexes or currencies to determine swap

    categories in the interest rate asset class. These alternative

    approaches would have the benefit of being more correlated to an

    underlying curve than the recommended currency and tenor groupings.

    The data contained 57 floating rate indexes and 28 currencies, which

    would result in 456 and 224 categories respectively, after sorting

    by the eight identified tenor groups. The Commission anticipates,

    however, that grouping swaps using individual rates or currencies

    would not substantially increase the explanation of variations in

    notional amounts, while it could result in cells with relatively few

    observations in some currency-tenor categories. Hence, the

    Commission does not believe there would be a significant benefit to

    offset the additional compliance burden that a more granular

    approach would impose on market participants.

    \120\ Non-major currencies represent less than two percent of

    the total notional and about 10 percent of the transactions. These

    currencies typically do not have corresponding futures markets.

    \121\ Super-major currencies represent over 92 percent of the

    total notional amounts and 80 percent of the total transactions in

    the data set. It is noteworthy that these currencies have well-

    developed futures markets for general interest rates and exchange

    rates.

    \122\ Major currencies represent about six percent of the total

    notional amount and about 10 percent of the transactions. Some of

    these currencies host liquid futures markets for interest rates, and

    all exhibit liquid foreign exchange markets.

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

    Table 4 below summarizes the Commission's three proposed currency

    swap categories.

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

    \123\ The Commission selected these currencies for inclusion in

    the definition of major currencies based on the relative liquidity

    of these currencies in the interest rate and FX futures markets. The

    Commission is of the view that this list of currencies is

    consistent, in part, with the Commission's existing regulations in

    Sec. 15.03(a), which defines ``major foreign currency as ``the

    currency, and the cross-rates between the currencies, of Japan, the

    United Kingdom, Canada, Australia, Switzerland, Sweden and the

    European Monetary Union.'' 17 CFR 15.03(a).

    Table 4--Proposed Currency Categories for Interest Rates Asset Class

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

    Currency category Component currencies

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

    Super-Major Currencies....... United States dollar (USD), European

    Union Euro Area euro (EUR), United

    Kingdom pound sterling (GBP), and Japan

    yen (JPY).

    Major Currencies \123\....... Australia dollar (AUD), Switzerland franc

    (CHF), Canada dollar (CAD), Republic of

    South Africa rand (ZAR), Republic of

    Korea won (KRW), Kingdom of Sweden krona

    (SEK), New Zealand dollar (NZD), Kingdom

    of Norway krone (NOK) and Denmark krone

    (DKK).

    Non-Major Currencies......... All other currencies.

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

    Table 5 below presents details on the sample characteristics of the

    interest rate swap data set organized by currency and tenor swap

    categories.

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

    \124\ Table 5 does not include swap categories with less than

    200 transactions in order to preserve the anonymity of the parties

    to these transactions.

    Table 5--Sample Characteristics of Proposed Interest Rate Swap Categories \124\

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

    Percent of Notional Percent of

    Currency category Tenor group Number of transactions (billions of total notional

    transactions (%) USD) (%)

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

    Super-major..................... 1 11,394 7 22,347 50

    Super-major..................... 2 2,563 2 1,813 4

    Super-major..................... 3 6,277 4 3,302 7

    Super-major..................... 4 12,395 7 3,420 8

    Super-major..................... 5 32,148 19 4,818 11

    Super-major..................... 6 42,675 26 4,220 9

    Super-major..................... 7 24,237 15 1,433 3

    Super-major..................... 8 1,857 1 56 0

    [[Page 15472]]

    Major........................... 1 2,305 1 1,818 4

    Major........................... 2 445 0 124 0

    Major........................... 3 2,113 1 302 1

    Major........................... 4 2,639 2 226 1

    Major........................... 5 5,380 3 293 1

    Major........................... 6 3,707 2 129 0

    Major........................... 7 704 0 19 0

    Major........................... 8 <200

    Non-Major....................... 1 403 0 64 0

    Non-Major....................... 2 247 0 26 0

    Non-Major....................... 3 2,073 1 165 0

    Non-Major....................... 4 3,354 2 256 1

    Non-Major....................... 5 5,873 4 116 0

    Non-Major....................... 6 3,935 2 41 0

    Non-Major....................... 7 <200 .............. .............. ..............

    Non-Major....................... 8 <200 .............. .............. ..............

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

    Table 6 below sets out the notional amounts of the interest rate

    swap data set organized by currency and tenor categories. The table

    includes the mean notional amount of each currency and tenor category,

    as well as the notional amounts in each percentile of a distribution of

    the data set.

    Table 6--Notional Amounts of Interest Rate Swap Data Set Organized by the Proposed Interest Rate Swap Categories

    [In millions of USD]

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

    Transactions percentiles

    Currency group Tenor Mean --------------------------------------------------------------

    group 5th 10th 25th 50th 75th 90th 95th

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

    Super-major.................... 1 1,961 10 36 500 1,000 2,260 4,000 6,306

    Super-major.................... 2 708 13 41 200 500 883 1,500 2,260

    Super-major.................... 3 526 47 75 150 272 565 1,179 1,809

    Super-major.................... 4 276 19 43 100 176 304 565 848

    Super-major.................... 5 150 9 21 50 100 158 301 482

    Super-major.................... 6 99 6 12 30 54 100 204 305

    Super-major.................... 7 59 1 5 14 31 63 126 200

    Super-major.................... 8 30 0 0 1 13 37 65 118

    Major.......................... 1 789 80 133 175 312 573 921 1,313

    Major.......................... 2 279 50 70 120 210 350 480 921

    Major.......................... 3 143 13 26 52 97 175 264 438

    Major.......................... 4 86 9 16 33 66 104 184 240

    Major.......................... 5 54 4 8 19 44 72 109 145

    Major.......................... 6 35 4 7 13 23 46 72 96

    Major.......................... 7 27 5 7 11 20 31 49 75

    Major.......................... 8 <200

    Non-major...................... 1 160 19 37 64 129 225 315 450

    Non-major...................... 2 106 16 23 39 72 145 233 311

    Non-major...................... 3 79 8 22 31 56 102 157 224

    Non-major...................... 4 76 6 9 16 27 50 78 108

    Non-major...................... 5 20 2 4 8 14 23 39 54

    Non-major...................... 6 10 2 2 4 8 13 21 29

    Non-major...................... 7 <200 ....... ....... ....... ....... ....... ....... .......

    Non-major...................... 8 <200 ....... ....... ....... ....... ....... ....... .......

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

    Request for Comment

    Q2. Please provide comments regarding the Commission's proposed two

    criteria (tenor and underlying currency type) for determining swap

    categories in the interest rate asset class.

    Q3. As a variation of the proposed approach, should specific

    currencies as proposed to be assigned be moved to other proposed

    currency categories?

    Q4. As a second variation to the proposed approach, the Commission

    is considering, for super-major currency interest rate swaps,

    bifurcating the less than three month tenor category into two separate

    swap categories: (1) A swap category composed of super-major currency

    interest rate swaps with a less than 21 day tenor; and (2) a swap

    category composed of super-major currency interest rate swaps with a

    greater than 21 day tenor, but less than three month tenor (107 days).

    The Commission requests comment on the appropriateness of this

    variation.\125\

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

    \125\ This approach would yield an appropriate minimum block

    size for super-major currency interest rate swaps with a less than

    21 day tenor of $13 billion based on the 67-percent notional amount

    calculation proposed in Sec. 43.6(c)(1). The appropriate minimum

    block size for interest rate swaps with a tenor of 21 days to three

    months would remain at $6.4 billion in the super-major currency swap

    category. See proposed appendix F to part 43 of the Commission's

    regulations infra.

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

    [[Page 15473]]

    Q5. As a third variation to the proposed approach, the Commission

    considered floating rate index, product type, duration equivalents,

    tenor, individual currencies,\126\ and currency categories in

    determining the economic similarities among the swaps in the interest

    rate asset class before settling on tenor and currency groupings as the

    sole criteria. Should the Commission use one or more of these other

    characteristics in addition to, or instead of, the proposed swap

    categories in the interest rate asset class?

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

    \126\ The Commission found that the precision of an approach

    utilizing the above-mentioned tenor groupings along with individual

    currencies was only marginally improved.

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

    Q6. The proposed interest rate swap categories generally resulted

    in the grouping of swaps characterized by similar market activity--

    i.e., high, medium, and low volumes and notional sizes. The Commission

    requests comment as to whether other measures of market activity or

    swap characteristics should be used to group or validate the grouping

    of swaps.

    Q7. What considerations should the Commission take into account

    related to the approach for calculating the tenor of back-dated swaps

    (i.e., those swaps in which the start date is prior to the execution

    date)? How should back-dated swaps be categorized for the purposes of

    determining the tenor?

    Q8. Should the Commission consider expanding or contracting the

    number of currency categories, and, if so, which currencies should be

    placed in each category? The Commission asks commenters to describe any

    specific recommendations and include market data in support of such

    recommendations.

    c. Credit Swap Categories

    i. Credit Swap Data Summary

    The CDS data set contained 98,931 CDS index records that would fall

    within the definition of publicly reportable swap transaction,\127\

    with a combined notional value of approximately $4.6 trillion

    dollars.\128\ The CDS data set contained transactions based on 26 broad

    credit indexes.\129\ Of those indexes, each of the iTraxx Europe Series

    and the Dow Jones North America investment grade CDS indexes

    (``CDX.NA.IG'') served as the basis for over 20 percent of the total

    number of transactions and over 33 percent of the total notional value

    in the relevant CDS data set. Table 7 sets out summary statistics of

    the CDS data set and includes those CDS indexes with greater than five

    transactions per day on average.

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

    \127\ See note 109 supra.

    \128\ The CDS index transactions in the data set made up

    approximately 33 percent of the total filtered records and 75

    percent of the CDS markets' notional amount for the three months of

    data provided. The data set contained over 250 different reference

    indexes; 400 reference index and tenor combinations; and 450

    reference index, tenor, and tranche combinations. The data set also

    contained three different currencies: USD (53%), EUR (46%), and JPY

    (1%). The Commission notes that in all but a handful of records,

    each reference index transaction was denoted in a single currency.

    \129\ Those indexes were: (1) ABX.HE; (2) CDX.EM; (3) CDX.NA.HY;

    (4) CDX.NA.IG; (5) CDX.NA.IG.HVOL; (6) CDX.NA.XO; (7) CMBX.NA; (8)

    IOS.FN30; (9) iTRAXX Asia ex-Japan HY; (10) iTRAXX Asia ex-Japan IG;

    (11) iTRAXX Australia; (12) iTRAXX Europe Series; (13) iTRAXX Europe

    Subs; (14) iTRAXX Japan 80; (15) iTRAXX Japan HiVol; (16) iTRAXX

    Japan Series; (17) iTRAXX LEVX Senior; (18) iTRAXX SOVX Asia; (19)

    iTRAXX SOVX CEEMA; (20) iTRAXX Western Europe; (21) LCDX.NA; (22)

    MCDX.NA; (23) PO.FN30; (24) PRIMEX.ARM; (25) PRIMEX.FRM; and (26)

    TRX.NA.

    Table 7--Summary Statistics by CDS Index Name

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

    Percentage of Notional

    Number of total amount (in Percentage of

    Names transactions transactions millions of total notional

    (%) USD) amount (%)

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

    ITRAXX EUROPE SERIES 13 V1...................... 18,287 18.48 1,138,362 24.83

    CDX.NA.IG.14.................................... 12,611 12.75 1,083,974 23.64

    ITRAXX EUROPE XO SERIES 13 V1................... 8,713 8.81 153,365 3.34

    CDX.NA.HY.14.................................... 7,984 8.07 172,599 3.76

    ITRAXX EUROPE SENIOR FINANCIALS SERIES 13 V1.... 4,774 4.83 187,978 4.10

    CDX.NA.IG.9..................................... 4,134 4.18 388,650 8.48

    ITRAXX EUROPE XO SERIES 13 V2................... 3,959 4.00 66,894 1.46

    CDX.NA.IG.9 TRANCHE............................. 3,357 3.39 112,411 2.45

    ITRAXX SOVX CEEMEA SERIES 3 V1.................. 3,252 3.29 32,291 0.70

    CDX.EM.13....................................... 3,052 3.08 34,952 0.76

    ITRAXX SOVX WESTERN EUROPE SERIES 3 V1.......... 2,377 2.40 74,068 1.62

    ITRAXX AUSTRALIA SERIES NUMBER 13 V1............ 2,138 2.16 31,540 0.69

    ITRAXX EUROPE SERIES 9 V1....................... 1,893 1.91 188,364 4.11

    ITRAXX EUROPE SUB FINANCIALS SERIES 13 V1....... 1,779 1.80 50,241 1.10

    ITRAXX EUROPE SERIES 9 V1 TRANCHE............... 1,577 1.59 50,269 1.10

    ITRAXX JAPAN SERIES NUMBER 13 V1................ 1,406 1.42 19,100 0.42

    ITRAXX ASIA EX-JAPAN IG SERIES NUMBER 13 V1..... 1,319 1.33 15,856 0.35

    ITRAXX SOVX ASIA PACIFIC SERIES 3 V1............ 1,001 1.01 11,666 0.25

    ITRAXX EUROPE HIVOL SERIES 13 V1................ 788 0.80 30,585 0.67

    CMBX.NA.AAA.1................................... 463 0.47 13,384 0.29

    ITRAXX EUROPE SERIES 12 V1...................... 452 0.46 71,161 1.55

    CMBX.NA.AJ.3.................................... 392 0.40 6,332 0.14

    CMBX.NA.AAA.2................................... 381 0.39 8,433 0.18

    LCDX.NA.14...................................... 380 0.38 7,063 0.15

    MCDX.NA.14...................................... 350 0.35 2,798 0.06

    CMBX.NA.AAA.4................................... 337 0.34 6,024 0.13

    CMBX.NA.A.1..................................... 332 0.34 3,834 0.08

    IOS.FN30.500.09................................. 317 0.32 7,836 0.17

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

    Total....................................... 87,805 88.75 3,970,029 86.59

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

    [[Page 15474]]

    The Commission identified the following seven terms as the most

    relevant for the purposes of the Commission's analysis: \130\ (1)

    Notional amount; (2) notional currency; (3) tranche indicator; (4)

    fixed rate; (5) tenor; (6) spread; and (7) RED code.\131\ Summary

    statistics for the relevant CDS data set included: Average notional

    amount of approximately $46 million; median notional amount of

    approximately $24 million; mode notional amount of approximately $32

    million; and skewness of 13 and kurtosis over 450, indicating that the

    sample's notional amounts were not normally distributed.\132\ After

    rounding,\133\ the smallest 25 percent of transactions had notional

    values of $9 million or less and the largest five percent of trades had

    notional values greater than $150 million. The swaps with the top ten

    most frequently traded notional sizes accounted for nearly 65 percent

    of all transactions and 40 percent of the total notional value.\134\

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

    \130\ Each transaction record contained up to 75 fields

    identifying information such as the anonymized counterparty

    identifier, trade date, submit date, transaction type, RED code

    (i.e., the particular index series, version, or vintage), notional

    amount, notional currency, fixed rate, confirm date, spread, points

    upfront and several other variables.

    \131\ The RED code is the industry standard identifier for CDS

    contracts. RED codes are nine character codes (similar to CUSIP

    codes for securities) where the first six characters refer to the

    reference entity (or index) when the last three characters refer to

    the reference obligation, that is, the version or series of an

    index, and where the first five characters refer to the reference

    entity (or index) when the last four refer to the vintage of an

    index. RED codes are used by DTCC to confirm CDS trades on the DTCC

    Deriv/SERV platform. See also Markit Credit Indices, A Primer, Nov.

    2008, 30, available at https://www.markit.com/news/Credit%20Indices%20Primer.pdf.

    \132\ Two times the ``social size'' see note 16 supra, for the

    relevant CDS data set was $93 million, covered 87 percent of the

    number of transactions, and 49 percent of the cumulative notional

    amount. Five times the social size, or $230 million, covered 97

    percent of transactions and 75 percent of the cumulative notional

    amount.

    \133\ The Commission used the rounding convention set forth in

    Sec. 43.4(g) of the Commission's regulations.

    \134\ In descending order and in millions of dollars, the ten

    most frequently traded rounded notional amounts included: 32 (the

    mode); 10; 25; 13; 50; 63; 5; 100; 6; and 20.

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

    The Commission also analyzed the CDS data set to classify the

    counterparties into broad groups.\135\ The Commission's analysis of the

    CDS data set revealed that approximately 55 percent of transactions

    were between buyers and sellers who were both identified as G-14 banks

    and that these transactions represented a combined notional amount of

    approximately $3.1 trillion, or 66 percent of the relevant CDS data

    set's total combined notional amount.\136\

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

    \135\ The Commission notes that the CDS data set was anonymized

    by The Warehouse Trust, but counterparties were identified by a

    number value and an account number in one of the following eleven

    groups: Asset managers, bank, custodian, dealer, financial services,

    G14 dealer, hedge fund, insurance, non-financial, other, and pension

    plan. Summary statistics relating to these identifiers included: (1)

    Total count of buyer account identifiers equal to approximately

    1,900; (2) total count of seller account identifiers equal to

    approximately 1,700; (3) total count of unique buyer and seller

    account identifiers equal to approximately 2,600; (4) total count of

    buyers equal to approximately 600; (5) total count of sellers equal

    to approximately 500; and (6) total count of unique buyers and

    sellers equal to approximately 700. The CDS data set identified

    counterparties as belonging to one of the eleven groups, and the

    average notional size of transactions in the eight tenor groups

    which contained more than 100 transactions ranging from

    approximately $19 million to $92 million.

    \136\ The Commission notes that the CDS data set only included

    transaction records where a G-14 bank was one of the counterparties,

    and did not include transaction records with two buy-side

    counterparties. A natural bias was present in the percentage of

    market share that G-14 banks have in the CDS market.

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

    ii. Credit Swap Data Analysis

    As noted above, the Commission is proposing to use tenor and

    conventional spread criteria to define swap categories for CDS indexes.

    The Commission anticipates that these proposed criteria would provide

    an appropriate way to group swaps with economic similarities and to

    reduce unnecessary complexity for market participants in determining

    whether their swaps are classified within a particular swap category.

    The Commission is proposing the following six broad tenor groups in the

    credit asset class: (1) Zero to two years (0-746 days); (2) over two to

    four years (747-1,476 days); (3) over four to six years (1,477-2,207

    days) (which include the five-year tenor); (4) over six to eight-and-a-

    half years (2,208-3,120 days); (5) over eight-and-a-half to 12.5 years

    (3,121-4,581 days) and (6) greater than 12.5 years (4,581 days).\137\

    The Commission added an additional 15 days to each tenor group beyond a

    multiple of one year in order to avoid ending each group on specific

    years.

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

    \137\ The Commission assessed the possibility of applying the

    tenor categories proposed for swaps in the interest rate asset class

    to the distribution of notional sizes in the CDS indexes and

    anticipates the level of granularity proposed to categorize swaps in

    the interest rate asset class by tenor would be inappropriate for

    the CDS index market. The Commission anticipates that this level of

    granularity would be inappropriate because the vast majority of CDS

    index transactions in the data set were for five years (or

    approximately 1,825 days). Based on the concentration of CDS index

    transactions in five-year tenors, the Commission is proposing a six

    tenor bands for CDS indexes.

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

    The Commission is proposing these swap categories based on the way

    transactions in the CDS data set clustered towards the center of each

    tenor band. While the majority of transactions in the CDS data set

    consisted of corporate credit default index swaps with a five-year

    tenor, the Commission found that trading of corporate credit default

    index swaps also occurred in other tenor ranges.\138\ The Commission

    believes that its proposed approach is appropriate since CDS on indexes

    other than corporate indexes (e.g., asset backed indexes, municipal

    indexes, sovereign indexes) may also trade at tenors other than five

    years.\139\

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

    \138\ For example, based on the observed CDS data set, off-the-

    run swaps (i.e., previous five-year tenor swaps for corporate credit

    default index swaps) have less than five years to maturity and

    displayed different trading patterns than the five-year, on-the-run

    swaps.

    \139\ For example, based on the observed CDS data set, the

    majority of municipal credit default index swaps traded with tenors

    of around 10 years.

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

    With respect to the conventional spread criterion, the Commission

    is proposing ranges of spread values based on the Commission's review

    of the distribution of spreads in the entire CDS data set.\140\ In

    particular, the Commission observed that the relevant CDS data set

    partitioned at the 175 basis points (``bps'') and 350 bps levels.\141\

    The Commission found that significant differences existed in the CDS

    data set between CDS indexes with spread values under 175 bps and those

    in the other two swap categories. Table 8 shows the summary statistics

    of the proposed criteria to determine swap categories for swaps in the

    credit asset class.\142\

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

    \140\ See note 102 supra for a definition of conventional

    spread.

    \141\ The Commission is proposing partition levels by a

    qualitative examination of multiple histogram distributions of the

    traded and fixed spreads from the CDS data set. This qualitative

    examination was confirmed through a partition test (using JMP

    software), including both before and after controlling for the

    effects of tenor on the distribution. The Commission observed that

    175 bps explained the greatest difference in means of the two data

    sets resulting from a single partition of the data. The Commission

    also observed that 350 bps was an appropriate partition for CDS

    index transactions with spreads over 175 bps.

    \142\ Table 8 uses tenor and spread criteria discussed above, in

    a standardized, least squared regression utilizing observed log

    notional amounts.

    [[Page 15475]]

    Table 8--CDS Index Sample Statistics by Proposed Swap Category Criteria

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

    Sum of notional

    Spread amounts (in billions Number of trades

    of USD)

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

    <175........................ 3,761 59,887

    175-to-350.................. 233 11,045

    350>........................ 577 27,998

    Tenor (in calendar days):

    0-746................... 146 1,421

    747-1,476............... 569 6,774

    1,477-2,207............. 3,490 79,357

    2,208-3,120............. 159 2,724

    3,121-4,581............. 18 497

    4,582+.................. 190 8,157

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

    Request for Comment

    Q9. The Commission seeks comment on all aspects of its proposed

    approach to define swap categories for the credit asset class for the

    purpose of setting appropriate minimum block sizes. More specifically,

    the Commission seeks comment as to whether the proposed grouping,

    alternatives or some other combination of alternatives offer the best

    means to identify swap categories.

    Q10. As an alternative to the proposed criteria, should the

    Commission use other criteria? \143\ The Commission considered the

    following alternative criteria: (1) The underlying reference CDS index

    or the more specific RED code (of which there were hundreds); \144\ (2)

    the tranche level; \145\ (3) on-the-run versus off-the-run version or

    series; \146\ and (4) the difference in the average notional amounts of

    transactions by groupings of counterparties.\147\

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

    \143\ The Commission notes that the investment grade of an

    underlying asset is a material economic term of each CDS contract.

    When reviewing the CDS data set, the Commission considered using

    investment grade as an alternative criterion through which to group

    CDS into separate swap categories. The Commission, however, is of

    the view that using this alternative criterion would be

    inappropriate in light of the statutory prohibition against

    references to credit ratings in federal regulations. This

    prohibition is set forth in section 939 of the Dodd-Frank Act.

    Section 939A(a) of the Dodd-Frank Act provides, in relevant

    part, that ``each Federal agency shall, to the extent applicable,

    review--(1) any regulation issued by such agency that requires the

    use of an assessment of the creditworthiness of a security or money

    market instrument; and (2) any references to or requirement in such

    regulations regarding credit ratings.'' In addition, section 939A(b)

    further provides that ``[e]ach such agency shall modify any such

    regulations identified by the review * * * to remove any reference

    to or requirement of reliance on credit ratings and to substitute in

    such regulations such standard of credit-worthiness as each

    respective agency shall determine as appropriate for such

    regulations.'' 15 U.S.C. 78o-7 note.

    Pursuant to the directive set forth in section 939A of the Dodd-

    Frank Act, the Commission has issued final rules removing all

    references to credit ratings in the Commission's regulations. See 76

    FR 78,776, Dec. 19, 2011; 76 FR 44,262, July 25, 2011.

    \144\ While the underlying indexes and the RED codes helped

    explain average notional size in the CDS data set, the Commission is

    of the view--based on the large number of currently offered indexes,

    the frequency with which new indexes may be created, and the large

    number of RED codes--that such an approach may not be practicable

    and may impose unnecessary complexity on market participants trying

    to determine what appropriate minimum block sizes apply to what

    transactions.

    \145\ In the CDS market, a ``tranche'' means a particular

    segment of the loss distribution of the underlying CDS index. For

    example, tranches may be specified by the loss distribution for

    equity, mezzanine (junior) debt, and senior debt on the referenced

    entities. The Commission found that the tranche-level data was even

    more granular than index-level data. Similarly, the Commission

    anticipates that grouping the relevant CDS data set in tranche

    criterion may not be practicable because it may produce too many

    swap categories and as a result would impose unnecessary complexity

    on market participants.

    \146\ An on-the-run CDS index represents the most recently

    issued version of an index. For example, every six months, Dow Jones

    selects 125 investment grade entities domiciled in North America to

    make up the Dow Jones North American investment grade index

    (``CDX.NA.IG''). Each new CDX.NA.IG index is given a new series

    number while market participants continue to trade the old or ``off-

    the-run'' CDX.NA.IG series. The Commission observed that an on-the-

    run index series was more actively traded than off-the-run index

    series. Each version or series of an index had a distinct group of

    tenors and, in most cases, the five year tenor was most active. The

    index provider determines the composition of each index though a

    defined list of reference entities. The index provider has

    discretion to change the composition of the list of reference

    entities for each new version or series of an index. In its analysis

    of the CDS data set, the Commission generally observed either no

    change or a small change (ranging from one percent to ten percent)

    of existing composition in the reference entities underlying a new

    version or series of an index. Because of these two dynamics (tenor

    and index composition), the CDS data set contained transactions

    within a given index with different versions and series that were in

    some instances identical and in others not identical across varying

    tenors. While the off-the-run transactions were generally larger on

    average than the on-the-run transactions, trading activity in the

    on-the-run indexes was more active than in the off-the-run indexes.

    The Commission decided not to use this level of detail for

    grouping CDS indexes into categories because: (i) The underlying

    components of swaps with differing versions or series based on the

    same named index are broadly similar, if not the same, indicative of

    economic substitutability across versions or series; (ii)

    differences in the average notional amount across differing versions

    or series were explained by differences in tenor; and (iii) and

    using versions or series as the criterion for defining CDS swap

    categories may result in an unnecessary level of complexity.

    \147\ Although the Commission was not able to examine non-

    anonymized data, the Commission did observe differences of

    approximately 50 percent from the average notional amount for

    transactions involving different groups based on the counterparty

    identifiers provided by The Warehouse Trust. The Commission,

    however, believes that it would be neither practical nor equitable

    to base a swap category and related appropriate minimum block size

    based on the predominant business activity of a counterparty.

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

    Q11. As another alternative, the Commission seeks comment on the

    possibility of establishing two swap categories in the credit asset

    class based on ``activity groupings'' of notional amounts of

    transactions: A ``more active group''; and a ``less active group.'' The

    more active group would be calculated by ordering, from most to least,

    the sum of non-rounded notional amounts of all swaps reported to SDRs

    by a CDS index (e.g., CDX.NA.IG) and then selecting the CDS indexes

    represented in the first 50 percent of aggregate notional amount. If

    only one index accounted for the first 50 percent of aggregate notional

    amount, then the next largest index also would be included in the more

    active group. The less active group would be comprised of the remainder

    of all credit index transactions that are not within the more active

    group. Should the Commission use this activity grouping approach to

    categorize CDS indexes? If so, how should the Commission determine

    appropriate minimum block sizes and cap sizes?

    Q12. As a third alternative, the Commission seeks comment on the

    possibility of establishing swap categories in the credit asset class

    based on sector groupings of the underlying reference entities. Under

    this alternative approach, the Commission would group the CDS index

    market into the following four sectors: Corporate; sovereign;

    municipal; and mortgage-backed security. An index with a mix of sectors

    represented in the reference entities

    [[Page 15476]]

    would be categorized by the sector representing the majority of

    entities. The Commission is of the view that in addition to these four

    distinct sectors, a fifth catch-all group (other) would be necessary to

    categorize any new swap index that either does not fall into any of

    these four enumerated sectors or is in mixed sectors not predominated

    by a single sector.

    Q13. As a fourth alternative, should the Commission consider basing

    swap categories for the credit asset class on individual CDS indexes?

    For example, CDX.NA.IG would constitute its own swap category.

    Q14. Should the Commission combine aspects of the above

    alternatives? For example, should the Commission distinguish between

    on-the-run and off-the-run series under an index grouping approach? The

    Commission seeks comment on whether distinguishing between on-the-run

    and off-the-run series and tenor would be appropriate under this

    approach, given the underlying economic similarity of swaps utilizing

    the same underlying CDS index.

    2. Swap Category in the Equity Asset Class

    The Commission is proposing a single swap category for swaps in the

    equity asset class. The Commission is proposing this approach based on:

    (1) The existence of a highly liquid underlying cash market; (2) the

    absence of time delays for reporting block trades in the underlying

    equity cash market; (3) the small relative size of the equity index

    swaps market relative to the futures, options, and cash equity index

    markets; and (4) the Commission's goal to protect the price discovery

    function of the underlying equity cash market and futures market by

    ensuring that the Commission does not create an incentive to engage in

    regulatory arbitrage among the cash, swaps, and futures markets.\148\

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

    \148\ As used in this Further Proposal, the term ``regulatory

    arbitrage'' means engaging in financial structuring or a series of

    transactions without economic substance in order to avoid unwelcome

    regulation or to exploit inconsistencies in regulations.

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

    Request for Comment

    Q15. Please provide specific comments regarding the Commission's

    proposed approach with respect to having one swap category in the

    equity asset class.

    Q16. As an alternative to the proposed approach, should the

    Commission establish one or more swap categories for swaps in the

    equity asset class based on any of the following criteria or a

    combination of such criteria: (1) Tenor; (2) publicly-listed equity

    indexes and custom equity indexes; \149\ (3) market capitalization of

    the underlying index components; \150\ and/or (4) whether a swap is

    based on an ``open market'' versus a ``closed market''? \151\

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

    \149\ Under this alternative approach, ``publicly-listed''

    equity indexes would be defined as equity swaps with reference

    prices economically related to equity indexes with publicly

    available index weightings. ``Custom equity index swaps,'' in

    contrast, would be defined as equity swaps that utilize reference

    prices that are not economically related to equity indexes with

    publicly known index weightings. This alternative approach would be

    based on the premise that a custom equity index swap would have a

    higher probability of being subject to liquidity risk.

    \150\ For example, if an equity index is composed of the

    weighted average of ten equity components, A Corp., B Corp., C

    Corp., D Corp., E Corp., F Corp., G Corp., H Corp., I Corp., and J

    Corp. corresponding to a market capitalization on the day prior to

    the related swap transaction of $100 million, $200 million, $300

    million, $400 million, $500 million, $200 million, $100 million,

    $200 million, $300 million, and $500 million, respectively, then it

    would result in an average market capitalization of $280 million.

    This alternative approach is premised on market capitalization

    serving as indicia of cash market liquidity for derivatives on the

    index.

    \151\ Under ISDA's Master Confirmation Templates, ``open

    market'' references ISDA annexes with underlying shares or indices

    in Australia, Hong Kong, New Zealand or Singapore. ``Closed market''

    references ISDA annexes with underlying shares or indices in India,

    Indonesia, Korea, Malaysia, Taiwan and Thailand. For more

    information, see ISDA, ISDA Equity Derivatives, ISDA Master

    Confirmation Templates (by region), http://www.isda.org/c_and_a/equity_der.html#defs.

    Under this alternative, other countries outside of Asia could be

    added to the list in a similar fashion.

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

    Q16.a. If the Commission follows the alternative approach to use

    tenor as a criterion to distinguish between swap categories, how should

    the Commission address the practice of long-tenured swaps that are

    terminated prior to maturity?

    3. Swap Categories in the FX Asset Class

    The Commission proposes to establish swap categories for the FX

    asset class based on unique currency combinations. The Commission bases

    this approach on the observation that FX swaps and instruments with

    identical currency combinations draw upon the same liquidity pools. The

    Commission proposes in Sec. Sec. 43.6(b)(4)(i) and (b)(4)(ii) to

    distinguish between FX swaps and instruments based on the existence of

    a related futures contract. Accordingly, the Commission would establish

    swap categories under proposed Sec. 43.6(b)(4)(i) based on the unique

    currency combinations of super-major currencies, major currencies and

    the currencies of Brazil, China, Czech Republic, Hungary, Israel,

    Mexico, New Zealand, Poland, Russia, and Turkey (e.g., euro (EUR) and

    Canadian dollar (CAD) combination would be a separate swap category;

    Swedish kronor (SEK) and U.S. dollar (USD) combination would be a

    separate swap category; etc.). These currency combinations currently

    have sufficient liquidity in the underlying futures market, which may

    suggest that there may be sufficient liquidity in the swaps market for

    these currency combinations. In proposed Sec. 43.6(b)(4)(ii), the

    Commission would establish swap categories based on unique currency

    combinations not included in proposed Sec. 43.6(b)(4)(i).

    Request for Comment

    Q17. The Commission requests specific comments, data and analysis

    in respect of its proposed approach to determining swap categories for

    the FX asset class.

    Q18. As an alternative to the proposal, should the Commission

    establish swap categories based on currency class pairings? In other

    words, swap categories that correspond to: (i) Super-major-to-super-

    major; (ii) super-major-to-major; (iii) super-major-to-non-major; (iv)

    major-to-major; (v) major-to-non-major; and (vi) non-major-to-non-major

    currency class pairings? \152\

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

    \152\ This approach would result in fewer swap categories,

    thereby easing administrative burdens related to determining the

    appropriate swap category corresponding to a swap. At the same time,

    however, this approach would require the use of a common denominator

    currency (e.g., the U.S. dollar) for determining the applicable

    notional amount. This would imply a currency conversion, thereby

    increasing administrative burdens associated with currency

    conversions.

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

    Q18.a. Should the Commission develop currency and tenor swap

    categories similar to what it is proposing for swaps in the interest

    rate asset class? The currency and tenor categories could be adjusted

    to reflect current trading activity in the FX swap and instrument

    markets.

    Q19. In the post-initial period, should the Commission include

    tenor as a criterion for distinguishing FX swap categories? For

    example, should the Commission separate FX swaps with short-dated

    tenors (e.g., less than one or three months) from those with long-dated

    tenors (e.g., greater than one or three months)? \153\

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

    \153\ This approach would be predicated on expected differing

    liquidity and notional size distributions between FX swaps with

    differing tenors.

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

    Q20. The Commission is considering as a variation of its proposed

    approach to characterize certain swap categories within the FX asset

    class as ``infrequently transacted.'' Infrequently-transacted swaps

    would exhibit all or some of the following features: (1) The

    constituent swap or swaps to which they are economically related are

    not

    [[Page 15477]]

    executed on, or pursuant to the rules of, a SEF or DCM; (2) few market

    participants have transacted in these swaps or in economically-related

    swaps; or (3) few swap transactions are executed during a historic

    period in these swaps or in economically-related swaps.\154\

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

    \154\ The Commission considered applying a methodology resulting

    in less relative transparency to such infrequently transacted swap

    categories (e.g., a 50-percent notional amount calculation).

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

    4. Swap Categories in the Other Commodity Asset Class

    The Commission proposes to determine swap categories in the other

    commodity asset class based on groupings of economically related swaps

    under proposed Sec. Sec. 43.6(b)(5)(i) and (ii) and based on groupings

    of swaps sharing a common product type under proposed Sec.

    43.6(b)(5)(iii). Swap contracts and futures contracts that are

    economically related to one another--as defined by the Commission in a

    proposed amendment to Sec. 43.2--are economic substitutes that should

    be subject to the same appropriate minimum block sizes or block trade

    rules for futures contracts, as applicable.\155\ Accordingly, the

    Commission is proposing to define ``economically related'' in Sec.

    43.2 as a direct or indirect reference to the same commodity at the

    same delivery location or locations,\156\ or with the same or

    substantially similar cash market price series.\157\ The Commission

    anticipates that this proposed definition would: (1) Ensure that swap

    contracts with shared reference price characteristics indicating

    economic substitutability (i.e., an ability to offset some or all of

    the risks across swaps in a specific category) are grouped together

    within a common swap category; and (2) provide further clarity as to

    which swaps are described in Sec. 43.4(d)(4)(ii)(B).\158\ This

    definition would apply to the use of the term ``economically related''

    throughout all of part 43 of the Commission's regulations.

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

    \155\ In the Adopting Release, the Commission explained: ``For

    the purposes of part 43, swaps are economically related, as

    described in Sec. 43.4(d)(4)(ii)(B), if such contract utilizes as

    its sole floating reference price the prices generated directly or

    indirectly from the price of a single contract described in appendix

    B to part 43.'' 77 FR 1,211. Further, the Commission explained that

    ``an `indirect' price link to an Enumerated Physical Commodity

    Contract or an Other Contract described in appendix B to part 43

    includes situations where the swap reference price is linked to

    prices of a cash-settled contract described in appendix B to part 43

    that itself is cash-settled based on a physical-delivery settlement

    price to such contract.'' Id. at n.289.

    \156\ For example, a swap utilizing the Platts Gas Daily/Platts

    IFERC reference price is economically related to the Henry Hub

    Natural Gas (NYMEX) (futures) contract because it is based on the

    same commodity at the same delivery location as that underlying the

    Henry Hub Natural Gas (NYMEX) (futures) contract.

    \157\ For example, a swap utilizing the Standard and Poor's

    (``S&P'') 500 reference price is economically related to the S&P 500

    Stock Index futures contract because it is based on the same cash

    market price series.

    \158\ The Commission is proposing to amend Sec. 43.2 to define

    ``reference price'' as a floating price series (including

    derivatives contract and cash market prices or price indices) used

    by the parties to a swap or swaption to determine payments made,

    exchanged or accrued under the terms of a swap contract. The

    Commission is proposing to use this term in connection with the

    establishment of a method through which parties to a swap

    transaction may elect to apply the lowest appropriate minimum block

    size applicable to one component swap category of such swap

    transaction.

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

    Under proposed Sec. 43.6(b)(5)(i), the Commission would establish

    separate swap categories for swaps that are economically related to one

    of the contracts listed on appendix B to part 43. Appendix B to part 43

    currently lists 28 enumerated physical commodity contracts and other

    contracts (i.e., Brent Crude Oil (ICE)) for which an SDR must ensure

    the public dissemination of the actual underlying asset for the

    applicable publicly reported swap transactions under Sec.

    43.4(d)(4)(ii) of the Commission's regulations.\159\ The Commission

    previously has identified these other commodity contracts as: (1)

    Having high levels of open interest and significant cash flow; and (2)

    serving as a reference price for a significant number of cash market

    transactions. The Commission is proposing to establish an initial

    appropriate minimum block size for the swap categories corresponding to

    each of these contracts to the extent that a DCM has set a block trade

    size for such a contract.

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

    \159\ The Commission is proposing to add 13 contracts to

    appendix B to part 43, as described in detail in section III.C.4

    infra. Each of these additional swap contracts would be categorized

    in its own other commodity swap grouping.

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

    Under proposed Sec. 43.6(b)(5)(ii), the Commission would establish

    swap categories based on swaps in the other commodity asset class that

    are: (1) Not economically related to one of the futures or swap

    contracts listed in appendix B to part 43; (2) futures related; and (3)

    economically related to the relevant futures contract that is subject

    to the block trade rules of a DCM. Proposed Sec. 43.6(b)(5)(ii) lists

    the futures contracts to which these swap categories are economically

    related; \160\ these swap categories would include any swap that is

    economically related to such contracts. The swap categories established

    by proposed Sec. 43.6(b)(5)(i) (discussed in the paragraphs above)

    differ from the swap categories established by proposed Sec.

    43.6(b)(5)(ii) in that the former may be economically related to

    futures contracts that are not subject to the block trade rules of a

    DCM, whereas the latter are economically related to futures contracts

    that are subject to the block trade rules of a DCM.\161\

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

    \160\ Specifically, these additional other commodity swap

    categories would be based on the following futures contracts: CME

    Cheese; CBOT Distillers' Dried Grain; CBOT Dow Jones-UBS Commodity

    Index Excess Return; CBOT Ethanol; CME Frost Index; CME Goldman

    Sachs Commodity Index (GSCI) (GSCI Excess Return Index); NYMEX Gulf

    Coast Gasoline; NYMEX Gulf Coast Sour Crude Oil; NYMEX Gulf Coast

    Ultra Low Sulfur Diesel; CME Hurricane Index; CME International

    Skimmed Milk Powder; NYMEX New York Harbor Ultra Low Sulfur Diesel;

    CBOT Nonfarm Payroll; CME Rainfall Index; CME Snowfall Index; CME

    Temperature Index; CME U.S. Dollar Cash Settled Crude Palm Oil; and

    CME Wood Pulp.

    \161\ This distinction is noteworthy because proposed Sec.

    43.6(e)(3) provides that ``[p]ublicly reportable swap transactions

    described in Sec. 43.6(b)(5)(i) that are economically related to a

    futures contract in appendix B to this part [43] shall not qualify

    to be treated as block trades or large notional off-facility swaps

    (as applicable) [during the initial period], if such futures

    contract is not subject to a designated contract market's block

    trading rules.'' See the discussion of this proposed provision in

    section II.D.4(a) infra.

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

    Under proposed Sec. 43.6(b)(5)(iii), the Commission would

    establish swap categories for all other commodity swaps that are not

    categorized under proposed Sec. Sec. 43.6(b)(5)(i) or (ii). These

    swaps are not economically related to one of the contracts listed in

    appendix B to part 43 or in proposed Sec. 43.6(b)(5)(ii). In

    particular, the Commission would determine the appropriate swap

    category based on the product types described in appendix D to part 43

    to which the underlying asset(s) of the swap would apply or otherwise

    relate. Proposed appendix D to part 43 establishes ``Other Commodity

    Groups'' and certain ``Individual Other Commodities'' within those

    groups. To the extent that there is an ``Individual Other Commodity''

    listed, the Commission would deem the ``Individual Other Commodity'' as

    a separate swap category. For example, regardless of whether the

    underlying asset to an off-facility swap is ``Sugar No. 16'' or ``Sugar

    No. 5,'' the underlying asset would be grouped as ``Sugar.'' The

    Commission thereafter would set the appropriate minimum block size for

    each of the swap categories listed in appendix D to part 43.

    In circumstances where a swap does not apply or otherwise relate to

    a specific ``Individual Other Commodity'' listed under the ``Other

    Commodity Group'' in appendix D to part 43, the Commission would

    categorize such swap as falling under the respective

    [[Page 15478]]

    ``Other'' swap categories. For example, an emissions swap would be

    categorized as ``Emissions,'' while a swap in which the underlying

    asset is aluminum would be categorized as ``Base Metals--Other.''

    Additionally, in circumstances where the underlying asset of swap does

    not apply or otherwise relate to an ``Individual Other Commodity'' or

    an ``Other'' swap category, the Commission would categorize such swap

    as either ``Other Agricultural'' or ``Other Non-Agricultural.''

    Request for Comment

    Q21. The Commission requests specific comments, data and analysis

    with respect to its proposed approach for determining swap categories

    for the other commodity asset class.

    Q22. Does the proposed definition of economically related

    appropriately capture swaps that are economic substitutes within a

    single swap category? Should the Commission define economically related

    to mean swaps that have historically correlated changes in daily prices

    within a swap category (e.g., a correlation coefficient of 0.95 or

    greater)? This alternative approach would be based on the notion that

    historical correlation is indicative of economic substitutability.

    Q23. In the post-initial period, should the Commission include

    tenor as a criterion for determining swap categories for the other

    commodity asset class? For example, should the Commission separate

    other commodity swaps with short-dated tenors (e.g., less than one or

    three months) from those with long-dated tenors (e.g., greater than one

    or three months)? \162\

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

    \162\ This approach would be predicated on expected differing

    liquidity and notional size distributions between other commodity

    swaps with differing tenors.

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

    Q24. As a variation of the proposal, should the Commission create

    additional product types in order to provide specific swap categories

    for commodities not specifically listed in proposed appendix D to part

    43? \163\

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

    \163\ These additional product types would allow the Commission

    to set an appropriate minimum block size for a swap category based

    on a distribution of transactions with more similar underlying

    physical commodity market characteristics. For example, swaps

    utilizing a reference price based on an aluminum or iron underlier

    would be included in the same ``other base metal'' swap category.

    Under this variation to the proposed approach, there could be

    additional specific product types corresponding to specific

    commodities not included in proposed appendix D to part 43 (e.g.,

    aluminum or iron).

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

    Q25. As a variation of the proposal, should the Commission further

    refine the swap categories in Sec. 43.6(b)(5)(iii) (i.e., those based

    on product types listed in proposed appendix D to part 43) on the basis

    of geography? If so, on what basis and for which product types?

    Q26. As a variation on the proposed approach, should the Commission

    include inflation index futures contracts in proposed Sec.

    43.6(b)(5)(ii)?

    Q27. As an alternative approach, the Commission is considering

    characterizing certain swap categories within the other commodity asset

    class as ``infrequently transacted.'' This alternative approach is

    consistent with the approach discussed in Q20 above.

    Q27.a. Should this alternative approach apply to asset classes in

    addition to the FX and other commodity asset classes?

    Q28. As another alternative, should the Commission consider

    dividing the swaps in the other commodity asset class into swap

    categories based on relative market concentration? For example, a

    variation of the Herfindahl-Hirschman Index (``HHI'') based on the

    average daily or average month-end HHI score to determine swap

    categories for the other commodity asset class? \164\ Would a daily or

    month-end average long-short swap position HHI \165\ for a three-year

    rolling window (beginning with a minimum of one year and adding one

    year of data for each calculation until a total of three years of data

    is accumulated) of lower than 2,500, 2,000, or 1,500 be indicative of a

    market that is not concentrated? \166\

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

    \164\ An ``HHI score'' would be defined as the sum of the

    squared percentages, in whole numbers, of relative positions or

    transactions on the long or short side of a grouping of swap

    positions or transactions during a specified period. This

    alternative approach would be based on the distribution of

    percentages of positions or transactions held or executed by non-

    affiliated market participants on the long and short side of a swap

    market. In addition, this alternative approach would be predicated

    on the notion that reduced market concentration is indicative of a

    degree market liquidity depth that warrants greater transparency

    because of reduced liquidity concerns, as well as reduced concerns

    with the anonymity of transactions in such swap categories.

    \165\ This figure would be the simple average of the HHI score

    on the short and long sides of a swap market based on the

    concentration of open interest on either side of such a market.

    \166\ The Commission may consider applying a methodology

    resulting in less relative transparency to concentrated swap

    categories (e.g., a 50-percent notional amount calculation).

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

    Q28.a. Should the Commission use this approach for other asset

    classes?

    D. Proposed Appropriate Minimum Block Size Methodologies for the

    Initial and Post-Initial Periods

    The Commission is proposing a tailored approach for determining

    appropriate minimum block sizes during the initial and post-initial

    periods for each asset class. In the subsections below, the Commission

    sets out a more detailed discussion of the appropriate minimum block

    methodologies for swaps within: (1) The interest rate and credit asset

    classes; (2) the single swap category in the equity asset class; (3)

    swap categories in the FX asset class; and (4) swap categories in the

    other commodity asset class. Thereafter, the Commission discusses

    special rules for determining the appropriate minimum block sizes

    across asset classes. For convenience, the chart immediately below

    summarizes swap categories and calculation methodologies that the

    Commission is proposing for each asset class.

    Proposed Approach

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

    Post-initial

    Asset class Swap category criteria Initial implementation implementation period

    period \167\

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

    Interest Rates....................... By unique currency and 67-percent notional 67-percent notional

    tenor grouping \168\. amount calculation by amount calculation by

    swap category \169\. swap category.\170\

    Credit............................... By tenor and

    conventional spread

    grouping \171\.

    FX................................... By numerated FX Based on DCM futures

    currency combinations block size by swap

    (i.e., futures category \173\.

    related) \172\.

    By non-enumerated FX All trades may be

    currency combinations treated as block

    (i.e., non-futures trades \175\.

    related) \174\.

    [[Page 15479]]

    Other Commodity...................... By economically-related Based on DCM futures

    Appendix B to part 43 block size by swap

    contract if the swap category \177\.

    is (1) futures related

    and (2) the relevant

    futures contract is

    subject to DCM block

    trade rules \176\.

    By economically-related No trades may be

    Appendix B to part 43 treated as blocks

    contract if the swap \179\.

    is: (1) futures

    related and (2) the

    relevant futures

    contract is not

    subject to DCM block

    trade rules \178\.

    By economically-related Appropriate minimum

    Appendix B to part 43 block size equal to

    contract if the swap $25 million \181\.

    is (1) a listed

    natural gas or

    electricity swap

    contract and (2) the

    relevant Appendix B

    contract is not

    futures related \180\.

    By swaps that are Based on DCM futures

    economically related block size by swap

    to the list of 18 category \183\.

    contracts listed in

    Sec. 43.6(b)(5)(ii)

    \182\.

    By Appendix D to part All trades may be

    43 commodity group, treated as block

    for swaps not trades \185\.

    economically related

    to a contract listed

    in Appendix B to part

    43 or to the list of

    18 contracts listed in

    Sec. 43.6(b)(5)(ii)

    \184\.

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

    Equity............................... All equity swaps \186\. No trades may be treated as blocks.\187\

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

    Request for Comment

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

    \167\ This post-initial implementation period would commence at

    a minimum of one year after the initial period. Thereafter, the

    Commission would determine appropriate minimum block sizes a minimum

    of once annually. See proposed Sec. 43.6(f)(1).

    \168\ See proposed Sec. 43.6(b)(1).

    \169\ See proposed Sec. 43.6(c)(1).

    \170\ See proposed Sec. 43.6(f)(2).

    \171\ See proposed Sec. 43.6(b)(2).

    \172\ See proposed Sec. 43.6(b)(4)(i).

    \173\ See proposed Sec. 43.6(e)(1).

    \174\ See proposed Sec. 43.6(b)(4)(ii).

    \175\ See proposed Sec. 43.6(e)(2).

    \176\ See proposed Sec. 43.6(b)(5)(i).

    \177\ See proposed Sec. 43.6(e)(1).

    \178\ See proposed Sec. 43.6(b)(5)(i).

    \179\ See proposed Sec. 43.6(e)(3).

    \180\ See proposed Sec. 43.6(b)(5)(i).

    \181\ See proposed Sec. 43.6(e)(3).

    \182\ See proposed Sec. 43.6(b)(5)(ii).

    \183\ See proposed Sec. 43.6(e)(1).

    \184\ See proposed Sec. 43.6(b)(5)(iii) and the product types

    groupings listed in proposed appendix D to part 43.

    \185\ See proposed Sec. 43.6(e)(2).

    \186\ See proposed Sec. 43.6(b)(3).

    \187\ See proposed Sec. 43.6(d).

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

    Q29. The Commission requests general comment regarding its proposed

    methodologies to determine appropriate minimum block sizes in both

    implementation periods.

    Q29.a. In the post-initial period, should the Commission consider

    using the previous period's appropriate minimum block size or one of

    the alternative calculation methodologies (as discussed in Q35 below)

    if the calculated appropriate minimum block size during the current

    period is extraordinarily high or low, or where the number of

    transactions in a swap category is small (e.g., less than 60

    transactions each six month period)?

    Q30. Should the updates of post-initial appropriate minimum block

    sizes and related calculations occur at regular periods of time? If so,

    is the proposed time frame for updating the appropriate minimum block

    sizes sufficient? \188\

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

    \188\ See proposed Sec. 43.6(f)(1).

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

    Q31. During the initial period, should the Commission update the

    appropriate minimum block sizes based on the methodologies or

    alternatives described in this proposed rulemaking?

    1. Methodology for Determining the Appropriate Minimum Block Sizes in

    the Interest Rate and Credit Asset Classes

    The Commission is proposing to use a 67-percent notional amount

    calculation to determine initial and post-initial appropriate minimum

    block sizes for swaps in the interest rate and credit asset classes

    pursuant to proposed Sec. Sec. 43.6(c)(1) and 43.6(e)(1).\189\ The 67-

    percent notional amount calculation is a methodology under which the

    Commission would: (step 1) Select all of the publicly reportable swap

    transactions within a specific swap category using a rolling three-year

    window of data beginning with a minimum of one year's worth of data and

    adding one year of data for each calculation until a total of three

    years of data is accumulated ;\190\ (step 2) convert to the same

    currency or units and use a ``trimmed data set;'' \191\ (step 3)

    determine the sum of the notional amounts of swaps in the trimmed data

    set; (step 4) multiply the sum of the notional amount by 67 percent;

    (step 5) rank order the observations by notional amount from least to

    greatest; (step 6) calculate the cumulative sum of the observations

    until the cumulative sum is equal to or greater than the 67-percent

    notional amount calculated in step 4; (step 7) select the notional

    amount

    [[Page 15480]]

    associated with that observation; (step 8) round the notional amount of

    that observation to two significant digits, or if the notional amount

    associated with that observation is already significant to two digits,

    increase that notional amount to the next highest rounding point of two

    significant digits \192\; and (step 9) set the appropriate minimum

    block size at the amount calculated in step 8. An example of how the

    Commission would apply this proposed methodology is set forth in

    section VII of this Further Proposal.

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

    \189\ Proposed Sec. 43.6(c)(1) describes the 67-percent

    notional amount calculation. Proposed Sec. 43.6(e)(1) provides the

    provisions relating to the methodology for determining appropriate

    minimum block sizes during the initial period for swaps in the

    interest rate and credit asset classes, inter alia.

    \190\ See note 109 supra for the definition of publicly

    reportable swap transaction. Since the Commission is proposing to

    determine all appropriate minimum block sizes based on reliable data

    for all publicly reportable swap transactions within a specific swap

    category, the Commission does not view the fact that more than one

    SDR may collect such data as raising any material concerns.

    \191\ See proposed amendment to Sec. 43.2 and the discussion

    infra in this section.

    \192\ For example, if the observed notional amount is

    $1,250,000, the amount should be increased to $1,300,000. This

    adjustment is made to assure that at least 67 percent of the total

    notional amount of transactions in a trimmed data set are publicly

    disseminated in real time.

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

    There were three swap categories in the interest rate and credit

    asset classes, which contained less than 30 transaction records that

    would meet the definition of publicly reportable swap transaction. For

    these swap categories, the Commission is proposing to use the lowest

    appropriate minimum block size for their respective asset classes based

    on the respective data set. The three swap categories are: (1) Interest

    rate swap category major currency/30 years +; (2) interest rate swap

    category non-major currency/30 years +; and (3) CDS index swap category

    350 bps/six-to-eight years and six months. If the Commission were to

    use the proposed 67-percent notional calculation method, then two of

    the three swap categories would have resulted in appropriate minimum

    block sizes higher than those proposed. The remaining swap category

    contained no data.

    The proposed 67-percent notional amount calculation is intended to

    ensure that within a swap category, approximately two-thirds of the sum

    total of all notional amounts are reported on a real-time basis. Thus,

    this approach would ensure that market participants have a timely view

    of a substantial portion of swap transaction and pricing data to assist

    them in determining, inter alia, the competitive price for swaps within

    a relevant swap category. The Commission anticipates that enhanced

    price transparency would encourage market participants to provide

    liquidity (e.g., through the posting of bids and offers), particularly

    when transaction prices moves away from the competitive price. The

    Commission also anticipates that enhanced price transparency thereby

    would improve market integrity and price discovery, while also reducing

    information asymmetries enjoyed by market makers in predominately

    opaque swap markets.\193\

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

    \193\ The proposed calculation stands in contrast to the

    proposed 95th percentile-based distribution test set out in the

    Initial Proposal. See the discussion supra in section I.B. of this

    Further Proposal.

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

    In the Commission's view, using the proposed 67-percent notional

    amount calculation also would minimize the potential impact of real-

    time public reporting on liquidity risk. The Commission views this

    calculation methodology as an incremental approach to achieve real-time

    price transparency in swap markets. The Commission believes that its

    methodology represents a more tailored and incremental step (relative

    to the approach set out in the Initial Proposal) towards achieving the

    goal of ``a vast majority'' of swap transactions becoming subject to

    real-time public reporting.\194\

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

    \194\ See note 83 supra. This phased-in approach seeks to

    improve transparency while not having a negative impact on market

    liquidity.

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

    As noted above, CEA section 2(a)(13)(E)(iv) directs the Commission

    to take into account whether the public disclosure of swap transaction

    and pricing data ``will materially reduce market liquidity.'' \195\ If

    market participants reach the conclusion that the Commission has set

    appropriate minimum block sizes for a specific swap category in a way

    that will materially reduce market liquidity, then those participants

    are encouraged to submit data in support their conclusion. In response

    to such a submission, the Commission has the legal authority to take

    action by rule or order to mitigate the potential effects on market

    liquidity with respect to swaps in that swap category. In addition, if

    through its own surveillance of swaps market activity, the Commission

    becomes aware that an appropriate minimum block size would reduce

    market liquidity for a specific swap category, then under those

    circumstances the Commission may exercise its legal authority to take

    action by rule or order to mitigate the potential effects on marketing

    liquidity with respect to swaps in that swap category.

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

    \195\ 7 U.S.C. 2(a)(13)(E)(iv).

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

    As referenced above, the Commission is proposing to amend Sec.

    43.2 of the Commission's regulations to define the term ``trimmed data

    set'' as a data set that has had extraordinarily large notional

    transactions removed by transforming the data into a logarithm with a

    base of ten (Log10), computing the mean, and excluding

    transactions that are beyond four standard deviations above the mean.

    Proposed Sec. 43.6(c) uses this term in connection with the

    calculations that the Commission would undertake in determining

    appropriate minimum block sizes and cap sizes.

    The Commission is proposing to use a trimmed data set since it

    believes that removing the largest transactions, but not the smallest

    transactions, may provide a better data set for establishing the

    appropriate minimum block size, given that the smallest transactions

    may reflect liquidity available to offset large transactions. Moreover,

    in the context of setting a block trade level (or large notional off-

    facility swap level), a method to determine relatively large swap

    transactions should be distinguished from a method to determine

    extraordinarily large transactions; the latter may skew measures of the

    central tendency of transaction size (i.e., transactions of usual size)

    away from a more representative value of the center.\196\ Therefore,

    trimming the data set increases the power of these statistical

    measures.

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

    \196\ A measure of central tendency, also known as a measure of

    location, in a distribution is a single value that represents the

    typical transaction size. Two such measures are the mean and the

    median. For a general discussion of statistical methods, see e.g.,

    Wilcox, R. R., Fundamentals of Modern Statistical Methods (Springer

    2d ed. 2010), (2010).

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

    Request for Comment

    Q32. Please provide specific comment regarding the Commission's

    proposed approach to determine appropriate minimum block sizes for

    swaps in the interest rates and credit asset classes.

    Q32.a. Is the Commission's proposed approach reasonable with

    respect to those swap categories for which there were less than 30

    transaction records? Is there another appropriate minimum block size

    (either higher or lower) that the Commission should use for these swap

    categories? If so, then why? Should the Commission continue to use this

    approach in the post-initial period by determining whether there are

    less than 30 transaction records within a six-month period?

    Q33. As a variation of the proposed approach, should the Commission

    use a 50-percent notional amount calculation methodology for

    determining the appropriate block sizes for these asset classes? If so,

    please explain why. If so, what affects would a 50-percent notional

    amount calculation have on the costs imposed on, and the benefits that

    would inure to, market participants and registered entities? \197\ Are

    there some

    [[Page 15481]]

    parts of the swaps market for which 50-percent notional amount

    calculation would be a more appropriate methodology (e.g., actively-

    traded swap categories in the interest rates and credit asset classes)?

    The following two charts compare the proposed initial appropriate

    minimum block sizes (using the 67-percent notional amount calculation)

    for swaps in the interest rate and credit asset classes with

    appropriate minimum block sizes that would result if the Commission

    were to use the 50-percent notional amount calculation.\198\

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

    \197\ The Commission is actively considering the use of a 50-

    percent notional amount calculation methodology in the initial and/

    or post-initial periods. The rule text for the 50-percent notional

    amount calculation would be nearly identical to proposed Sec.

    43.6(c)(1) and (2), except for the insertion of ``50-percent'' where

    appropriate.

    \198\ Using the ODSG data for interest rate swaps, the

    Commission notes that the proposed 67-percent notional amount

    calculation would result in 94 percent of trades being reported in

    real-time, compared with 86 percent of trades that would be reported

    in real-time under the alternative 50-percent notional amount

    calculation.

    Using the ODSG data for CDS, the Commission notes that the

    proposed 67-percent notional amount calculation would result in 94

    percent of trades being reported in real-time, compared with 85

    percent of trades that would be reported in real-time under the

    alternative 50-percent notional amount calculation.

    Comparison of Initial Appropriate Minimum Block Sizes

    [Interest rate swaps]

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

    Tenor less than or 50% Notional 67% Notional

    Currency group Tenor greater than equal to (in millions) (in millions)

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

    Super-Major....................... .................... Three months (107 3,800 6,400

    days).

    Super-Major....................... Three months (107 Six months (198 1,200 1,900

    days). days).

    Super-Major....................... Six months (198 One year (381 days). 1,100 1,600

    days).

    Super-Major....................... One year (381 days). Two years (746 days) 460 750

    Super-Major....................... Two years (746 days) Five years (1,842 240 380

    days).

    Super-Major....................... Five years (1,842 Ten years (3,668 170 290

    days). days).

    Super-Major....................... Ten years (3,668 30 years (10,973 120 210

    days). days).

    Super-Major....................... 30 years (10,973 .................... 67 130

    days).

    Major............................. .................... Three months (107 700 970

    days).

    Major............................. Three months (107 Six months (198 440 470

    days). days).

    Major............................. Six months (198 One year (381 days). 220 320

    days).

    Major............................. One year (381 days). Two years (746 days) 130 190

    Major............................. Two years (746 days) Five years (1,842 88 110

    days).

    Major............................. Five years (1,842 Ten years (3,668 49 73

    days). days).

    Major............................. Ten years (3,668 30 years (10,973 37 50

    days). days).

    Major............................. 30 years (10,973 .................... 15 22

    days).

    Non-Major......................... .................... Three months (107 230 320

    days).

    Non-Major......................... Three months (107 Six months (198 150 240

    days). days).

    Non-Major......................... Six months (198 One year (381 days). 110 160

    days).

    Non-Major......................... One year (381 days). Two years (746 days) 54 79

    Non-Major......................... Two years (746 days) Five years (1,842 27 40

    days).

    Non-Major......................... Five years (1,842 Ten years (3,668 15 22

    days). days).

    Non-Major......................... Ten years (3,668 30 years (10,973 16 24

    days). days).

    Non-Major......................... 30 years (10,973 .................... 15 22

    days).

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

    Comparison of Initial Appropriate Minimum Block Sizes

    [Credit default swaps]

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

    Traded tenor greater Traded tenor less

    Spread group (basis points) than than or equal to 50% Notional 67% Notional

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

    Less than or equal to 175......... .................... Two years (746 days) 320 510

    Less than or equal to 175......... Two years (746 days) Four years (1,477 200 300

    days).

    Less than or equal to 175......... Four years (1,477 Six years (2,207 110 190

    days). days).

    Less than or equal to 175......... Six years (2,207 Eight years and six 110 250

    days). months (3,120 days).

    Less than or equal to 175......... Eight years and six Twelve years and six 130 130

    months (3,120 days). months (4,581 days).

    Less than or equal to 175......... Twelve years and six .................... 46 110

    months (4,581 days).

    Greater than 175 and less than or .................... Two years (746 days) 140 210

    equal to 350.

    Greater than 175 and less than or Two years (746 days) Four years (1,477 82 130

    equal to 350. days).

    Greater than 175 and less than or Four years (1,477 Six years (2,207 32 36

    equal to 350. days). days).

    Greater than 175 and less than or Six years (2,207 Eight years and six 20 26

    equal to 350. days). months (3,120 days).

    Greater than 175 and less than or Eight years and six Twelve years and six 26 64

    equal to 350. months (3,120 days). months (4,581 days).

    Greater than 175 and less than or Twelve years and six .................... 63 120

    equal to 350. months (4,581 days).

    Greater than 350.................. .................... Two years (746 days) 66 110

    Greater than 350.................. Two years (746 days) Four years (1,477 41 73

    days).

    Greater than 350.................. Four years (1,477 Six years (2,207 26 51

    days). days).

    Greater than 350.................. Six years (2,207 Eight years and six 13 21

    days). months (3,120 days).

    [[Page 15482]]

    Greater than 350.................. Eight years and six Twelve years and six 13 21

    months (3,120 days). months (4,581 days).

    Greater than 350.................. Twelve years and six .................... 41 51

    months (4,581 days).

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

    Q34. As another variation of the proposed methodology, should the

    Commission change specific aspects of its methodology?

    Q34.a. For example, should the Commission define the term ``trimmed

    data set'' to exclude greater or fewer extremely large transactions

    from the data set used to determine appropriate minimum block sizes?

    Or, should the term be defined to exclude transactions that are three

    or five standard deviations beyond the mean? If so, should this be done

    for all asset classes?

    Q34.b. Should the Commission use another method for excluding

    outliers?

    Q35. As an alternative to the proposed 67-percent notional amount

    calculation methodology, should the Commission use any of the following

    in the initial and/or post-initial periods:

    Q35.a. As an alternative approach, should the Commission determine

    appropriate minimum block sizes based on a measure of market depth and

    breadth? Market depth and breadth is one of several approaches in which

    the Commission could preserve market liquidity.\199\ Under this

    alternative, market depth and breadth would be determined using the

    following methodology: (step 1) Identify swap contracts with pre-trade

    price transparency within a swap category \200\; (step 2) calculate the

    total executed notional volumes for each swap contract in the set from

    step 1 and calculate the sum total for the swap category over the look

    back period; (step 3) collect a market depth snapshot \201\ of all of

    the bids and offers once each minute for the pre-trade price

    transparency set of contracts identified in step 1 \202\; (step 4)

    identify the four 30-minute periods that contain the highest amount of

    executed notional volume each day for each contract of the pre-trade

    price transparency set identified in step 1 and retain 120 observations

    related to each 30-minute period for each day of the look-back period

    \203\; (step 5) determine the average bid-ask spread over the look-back

    period of one year by averaging the spreads observed between the

    largest bid and executed offer for all the observations identified in

    step 3; (step 6) for each of the observations 120 observations

    determined in step 4, calculate the sum of the notional amount of all

    orders collected from step 3 that fall within a range,\204\ calculate

    the average of all of these observations for the look-back period and

    divide by two; (step 7) to determine the trimmed market depth,

    calculate the sum of the market depth determined in step 6 for all swap

    contracts within a swap category; (step 8) to determine the average

    trimmed market depth, use the executed notional volumes determined in

    step 2 and calculate a notional volume weighted average of the notional

    amounts determined in step 6; (step 9) using the calculations in steps

    7 and 8, calculate the market breadth based on the following formula--

    market breadth = averaged trimmed market depth + (trimmed market depth-

    average trimmed market depth) x .75; (step 10) set the appropriate

    minimum block size equal to the lesser of the values from steps 8 and

    9. Would the Commission have to establish special swap categories for

    this approach? Would the collection of snapshots from a central limit

    order book be too burdensome (i.e., costly and time consuming) for DCMs

    and SEFs? What are the costs and benefits of adopting this approach?

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

    \199\ Although this alternative approach presents several

    limitations (e.g., the impact of collecting market depth data on a

    regular basis), the Commission considers this alternative to be a

    viable option to its proposed approach discussed above.

    \200\ Swap contracts would be determined to have pre-trade price

    transparency if they have electronically displayed and executable

    bids and offers along with displayed available volumes for

    execution.

    \201\ CEA sections 4g(b), 4g(d), 5(d)(1), 5(d)(10) and 5(d)(18)

    authorize the Commission to request this data from a DCM. CEA

    sections 5h(f)(5) and 5h(f)(10) authorize the Commission to request

    this data from a SEF. The Commission would request such data as part

    of a special call process.

    \202\ Note that this is a snapshot observation for a single

    moment in time. The Commission is not specifying which second within

    the minute would be analyzed when taking a snapshot of market depth.

    \203\ These periods may vary from day to day and from contract

    to contract and would be defined on the 48 30-minute periods set to

    the top and bottom of each hour of each day (e.g., 1-1:29 p.m. 1:30-

    1:59 p.m., etc.). In instances when tie occurs in identifying the

    four 30-minute periods based on executed notional volumes,

    preference would first be given to the period with the largest total

    notional volume for the largest bid and offer. If a tie still

    results, then preference would be given to the period with the

    smallest difference in bids minus asks. Lastly, if a tie is still

    remains, then the period of time after and nearest to 12 p.m. New

    York time would be selected.

    \204\ The range would be determined by the average of the

    largest bid and offer for that observation plus or minus three time

    the average bid-ask spread (as determined in step 5) for all 120

    observations.

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

    Q35.b. Should the Commission use a confidence interval test for

    calculating the appropriate minimum block sizes for these asset

    classes?

    The confidence interval test calculates the minimum notional value

    as the point where the publicly disseminated average notional size is

    within the 95-percent confidence interval using the following process:

    (step 1) Select the swap transaction data for a specific swap category;

    (step 2) convert to the same currency or units and determine the

    transaction distribution of notional amounts using the natural

    logarithm and trimmed data set for the swap category \205\; (step 3)

    calculate the average notional size and the 95-percent confidence

    interval around this average \206\; (step 4) drop the largest

    [[Page 15483]]

    remaining transaction from the distribution \207\; (step 5) conditional

    on the full-sample 95-percent confidence interval, calculate the sample

    average notional size using the data resulting from step 4; (step 6) if

    the sample average notional size is not outside of the 95-percent

    confidence interval, repeat steps 4 and 5 until it is just outside of

    the 95-percent confidence interval; (step 7) once the sample average

    notional size is outside the 95-percent confidence interval, set the

    minimum notional value equal to the notional value; (step 8) round the

    notional amount of that observation to two significant digits, or if

    the notional amount associated with that observation is already

    significant to two digits, increase that notional amount to the next

    highest rounding point of two significant digits; and (step 9) set the

    appropriate minimum block size equal to the largest transaction of the

    distribution for which the sample average notional size was still

    within the 95-percent confidence interval. What are the costs and

    benefits associated with using this alternative approach?

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

    \205\ In practice, the natural logarithm of the notional value

    is preferred over the nominal value to reduce the effect of skewness

    on sample statistics. In addition to classical statistical methods,

    the calculation of the confidence interval may be improved by using

    ``bootstrapping'' methods to estimate the distribution of the

    average notional trade size. See generally, Bradley Efron, Bootstrap

    Methods: Another Look at the Jackknife, Ann. Statist. Vol. 7, No. 1

    (1979), 1-26, http://projecteuclid.org/DPubS?service=UI&version=1.0&verb=Display&handle=euclid.aos/1176344552 (last visited Jan. 31, 2012).

    \206\ The confidence interval test assumes sufficient data is

    available in a swap category such that a normal distribution is a

    good approximation to compute an interval estimate. To the extent

    that the actual distribution diverges significantly from a normal

    distribution, the interval estimate may not reflect the probability

    at the desired (95 percent) confidence interval. In which case,

    other methods such as ``bootstrapping'' may be necessary to compute

    the confidence intervals around the full sample average notional

    size. The Commission notes the ODSG data sets were not normally

    distributed, but were nearly symmetric after trimming. Further,

    according to a TABB Group survey, many market participants expected

    the average notional transaction size to decline, which would have

    implied change in the distribution. See the presentation of Kevin

    McPartland, Principal, Tabb Group, CFTC Technology Advisory

    Committee Meeting, Dec. 13, 2011, available at http://www.cftc.gov/PressRoom/Events/opaevent_tac121311.

    \207\ The Commission is also considering dropping transactions

    in one-percent increments until the sample average moves outside the

    95-percent confidence interval. The Commission would then drop

    transactions within the last one-percent increment until the actual

    transaction is found that moves the sample mean outside of the

    confidence interval.

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

    Q35.c. Should the Commission use a stability test that makes use of

    ``CUSUM'' and/or ``CUSUM of Square'' methods? \208\ The Commission

    would define the stability test calculation as a process whereby the

    Commission would: (step 1) In the post-initial period, select swap

    transaction data for a specific swap category over a specified period

    (e.g., a rolling window of three years of such data at one year

    intervals) \209\; (step 2) trim the extraordinarily large notional

    transactions from the swap transaction data by converting the data

    series into natural logarithm value equivalents, determining the mean,

    and excluding transactions that are beyond four standard deviations

    above the mean; (step 3) reposition the largest transactions back into

    a time-ordered trade sequence based on the reporting delay using one-

    percent sample increments of the largest transactions; (step 4) measure

    stability of this repositioning by calculating the fraction of

    observations violating the 95-percent confidence interval in the

    ``CUSUM'' and ``CUSUM of Squares'' methods \210\; and (step 5) identify

    the increment that causes the least change in stability of the average

    notional trade size compared to a non-repositioned sequence. The

    notional size cutoff for this increment would become the appropriate

    minimum block size in that swap category. If the test above does not

    produce a disruption in the stability of the average notional trade

    size, then the Commission would use the 67-percent notional amount

    calculation methodology. What are the costs and benefits associated

    with using this alternative approach?

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

    \208\ Brown, R.L., J. Durbin, and J.M. Evans, ``Techniques for

    Testing the Constancy of Regression Relationships over Time,''

    Journal of the Royal Statistical Society, B, 37, 149-163 (1975).

    \209\ If the Commission were applying this methodology to the

    initial period, then a rolling three-year window of data, beginning

    with a minimum of one year's worth of data, may not be available. In

    that case, the Commission would use the ODSG data where applicable.

    \210\ As with the confidence interval test, this test assumes a

    normal distribution, and as such, will follow similar procedures to

    those outlined in note 206 supra.

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

    Q35.d. Should the Commission utilize a percentile-based methodology

    to determine appropriate minimum block sizes that would focus on the

    number of trades? \211\

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

    \211\ For example, the Commission would order all publicly

    reportable swap transactions in a swap category by notional amount.

    After ordering these swap transactions, the Commission would set the

    appropriate minimum block size at the notional amount that

    corresponds to the 80th percentile. See note 15 supra for a

    discussion of the distribution test, which was proposed in the

    Initial Proposal.

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

    Q35.e. Should the Commission use a measure of average volume in a

    given time period \212\ as a proxy for liquidity in order to calculate

    the appropriate minimum block size? The Commission is considering two

    alternatives for calculating appropriate minimum block size using this

    methodology: (1) Setting the initial appropriate minimum block size

    using daily volume when time-stamped transactions are not available; or

    (2) setting the post-initial block sizes once time-stamped transactions

    become available.\213\ The methodology for setting initial appropriate

    minimum block size in the swap categories in the interest rate and

    credit asset classes would use the ODSG data sets to calculate the

    minimum notional value for a block using the following procedure for a

    given swap category: (step 1) Sum the notional volume of all trades

    within the swap category for each day for the ODSG data set; (step 2)

    calculate an estimate of the average volume in a 15-minute time period

    for each day by dividing the sum from step 1 by 32 (there are 32, 15-

    minute increments in an 8-hour time period, which is the presumed

    active trading period) \214\; (step 3) calculate the daily average for

    the ODSG data set by summing each day's estimated 15-minute average

    volume calculated in step 2 and dividing it by the total number of

    business days in the ODSG data set; and (step 4) multiply the daily

    average of the 15-minute average volume in time (``AVIT'') by a factor

    of two to determine the minimum block size.

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

    \212\ The Commission is considering using a measure of the

    average volume in time (``AVIT'') to determine the minimum block

    size since liquidity may not be directly observable in the market

    and historical trading volume is one indicator of (or proxy for)

    liquidity. Incorporating a measure of liquidity into the calculation

    of block sizes is important given that section 2(a)(13)(E)(iv) of

    the CEA requires the Commission to take into account whether public

    disclosure will materially reduce market liquidity. Moreover,

    calculating the AVIT for a 15-minute time period may serve as a

    proxy for the expected volume that could normally be transacted in

    the time between a block trade being executed and being publicly

    reported. See 7 U.S.C. 2(a)(13)(E)(iv).

    \213\ The transactions in the data sets for the interest rate

    and credit asset classes which the Commission is using in the

    initial period are not time stamped. However, SDRs will receive

    time-stamped swap transactions under real time reporting rules,

    which will then be remitted to the Commission.

    \214\ In the post-initial period when time-stamped transaction

    data will be available, the Commission could use a calculation based

    on actual transaction times. For example, the average volume could

    be calculated for each clock hour (e.g., 8:00-:859 a.m.) in each

    business day by summing the notional sizes of all transactions for a

    12-month time period in each clock hour and dividing by the total

    number of business days. Thereafter, the Commission would calculate

    the 15-minute volume.

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

    Q35.f. As a variation of the AVIT methodology, should the

    Commission instead examine the volume of a portion of trades? For

    example, should the Commission examine volumes during the most active

    periods of a day, month or quarter? Or should the Commission only

    examine volume associated with a net change in position by

    counterparties during the delay period or the end of the day?

    Q35.g. Should the Commission consider using a combination of the

    proposed and alternative tests as part of a composite test? \215\ A

    composite test

    [[Page 15484]]

    would combine a number of methods to determine potential block size and

    would include switching rules to select the appropriate block size from

    among the methods. An example of a simple switching rule is to select

    the largest result from among a number of alternative methods. For

    example, a general composite test to calculate the block size would

    consist of setting the appropriate minimum block size to the greater of

    the results using (a) 50-percent distribution test,\216\ (b) AVIT

    method and (c) social size. In this example, three methods are used and

    a simple switching rule would use the largest value resulting from the

    three methods. The example composite test ensures that a minimum block

    size would be equal to the larger of the three component tests, and

    thus ensures a minimal acceptable level of transparency.\217\ The

    Commission recognizes that alternative switching rules may be more

    appropriate, such as taking the lower of two or more individual tests

    or taking the average of two or more tests to produce the appropriate

    minimum block size, and seeks comments on the use of alternative

    switching methods. The Commission invites comments on the use of a

    composite test as an alternative to a single method and on whether a

    composite test should be used to determine the appropriate minimum

    block size. If so, which methods should be included and what switching

    rule(s) should be used? Why would such an alternative be appropriate?

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

    \215\ The Commission believes a composite test may increase the

    flexibility (i.e., robustness) of setting minimum block sizes by

    using methods which are more appropriate in certain circumstances.

    For example, the Commission recognizes that certain methods may have

    limitations, including statistical breakdown points given certain

    distributions of transactions. Hence, it may be that no single test

    optimally sets block sizes under all distributions of transactions.

    A composite test may be more appropriate than any single test in

    setting block sizes across the wide variety of products that

    comprise the various swap categories and asset classes. In the event

    sample sizes are small, methods such as the social size, 50-percent

    distribution test, and AVIT may not produce results that adequately

    differentiate large swap transactions in need of block

    consideration. In addition, the 95% confidence interval test could

    be included in a composite test to ensure that the level of

    transparency provided by the real-time publicly reported tape is

    representative of the actual data.

    \216\ See note 15 supra.

    \217\ For example, shredding by market participants may cause a

    marked decrease in the average notional size of transactions as a

    participant executes numerous smaller transactions as opposed to a

    single large transaction. It is possible that even as total notional

    volume in a market increases, and by assumption liquidity increases,

    measures of average trade size fall, causing calculations based on

    the notional distribution of transactions to suggest lower block

    sizes. If shredding becomes standard practice in a market, then

    using only the social size or the 67-percent notional amount

    calculation method would result in low minimum block sizes which

    would not reflect the true size of a transaction and would not

    adequately determine what constitutes ``large notional swap

    transactions'' (i.e., block trades) in particular markets. Section

    2(a)(13)(E)(ii) of the CEA requires that the Commission ``specify

    the criteria for determining what constitutes a large notional swap

    transaction (block trade) for particular markets and contracts.'' 7

    U.S.C. 2(a)(13)(E)(ii).

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

    Q35.h. Should the Commission use a methodology that takes into

    consideration the impact of trade sizes on prices in the swap markets

    while determining post-interim minimum block sizes?

    Q35.i. Should the Commission use a variation of the multiple test,

    which was proposed in the Initial Proposal? \218\ For example, should

    the Commission remove one or more of the components of the test (i.e.,

    should the Commission remove the mean, median or mode)? Should the

    components be weighted? Should the multiplier be increased or

    decreased?

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

    \218\ See note 16 supra for a description of the multiple test.

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

    2. Treatment of Swaps Within the Equity Asset Class

    The Commission is proposing under Sec. 43.6(d) that all swaps in

    the equity asset class would not qualify for treatment as a block trade

    or large notional off-facility swap (i.e., these swaps would not be

    subject to a time delay under part 43). As noted above, the Commission

    is proposing this approach based on: (1) The existence of a highly

    liquid underlying cash market; (2) the absence of time delays for

    reporting block trades in the underlying equity cash market; (3) the

    small relative size of the equity index swaps market relative to the

    futures, options and cash equity index markets; and (4) the

    Commission's goal to protect the price discovery function of the

    underlying equity cash market and futures market by ensuring that the

    Commission does not create an incentive to engage in regulatory

    arbitrage among the cash, swaps, and futures markets.

    Request for Comment

    Q36. Please provide specific comments regarding the Commission's

    proposed approach to disallow swaps in the equity asset class from

    being eligible for treatment as a block trade or large notional off-

    facility swap.

    Q37. In the alternative, should the Commission employ a phased-in

    approach with respect to swaps in the equity asset class, whereby

    during the initial period all swaps in this asset class would be

    eligible for treatment as block trades or large notional off-facility

    swaps?

    Q37.a. If so, then on what basis would the Commission follow this

    alternative approach?

    Q38. As a second alternative, should the Commission establish post-

    initial appropriate minimum block sizes for swaps in the equity asset

    class using the 50-percent notional amount calculation?

    Q38.a. If not a 67-percent notional amount calculation, then what

    other calculation methodology could the Commission adopt? For example,

    the Commission could establish appropriate minimum block sizes for

    swaps in the equity asset class at 0.002 percent of average market

    capitalization for publicly-listed equity indexes, and at some lower

    threshold (e.g., 0.00175 percent) for custom equity indexes in

    recognition of possible marginal increased liquidity risk associated

    with these indexes.

    Q38.b. Should the Commission establish post-initial appropriate

    minimum block sizes for swaps in the equity asset class using one of

    the alternative methodologies discussed in Q35 above?

    Q39. As a third alternative, should the Commission adopt and then

    increase the 67-percent notional amount calculation over time? If so,

    why? For example, for each year after the implementation of post-

    initial appropriate minimum block sizes, should the notional amount

    calculation threshold increase by five or ten percentage points until a

    maximum of 95-percent notional amount is reached? Is this alternative

    appropriate for swaps in other asset classes?

    Q40. As a fourth alternative, should the Commission apply an

    approach that uses a different calculation methodology based on the

    underlying liquidity in a swap category to determine the calculation

    methodology used to determine the appropriate minimum block size? If

    so, what measures of liquidity should the Commission use to determine

    appropriate categorization of swap categories into low, medium, or high

    liquidity swaps within the equity asset class? Is this alternative

    appropriate for swaps in other asset classes?

    Q40.a. Would a 33, 50 and 67-percent notional amount calculation be

    appropriate for low, medium, or high liquidity swap categories

    respectively?

    3. Methodologies for Determining the Appropriate Minimum Block Sizes in

    the FX Asset Class

    The Commission is proposing to use different methodologies for the

    initial and post-initial periods to determine appropriate minimum block

    sizes for swaps categories in the FX asset class. The Commission's

    proposed approach is premised on the absence of actual market data on

    which to determine appropriate minimum block sizes in the initial

    period. Subsection a. below includes a discussion of the initial period

    methodology. Subsection b. below includes a discussion of the post-

    initial period methodology.

    [[Page 15485]]

    a. Initial Period Methodology for Determining Appropriate Minimum Block

    Sizes in the FX Asset Class

    During the initial period, the Commission is proposing under Sec.

    43.6(e)(1) to set the appropriate minimum block sizes for swaps in the

    FX asset class based on whether such swap is economically related to a

    futures contract. For futures-related swaps in the FX asset class,

    proposed Sec. 43.6(e)(1) provides that the Commission would establish

    the appropriate minimum block sizes for futures-related swaps \219\

    based on the block trade size thresholds set by DCMs for economically-

    related futures contracts.\220\ The Commission has set forth the

    initial appropriate minimum block sizes in proposed appendix F to part

    43 of the Commission's regulations.\221\ The Commission anticipates

    that this approach would encompass the most liquid FX swaps and

    instruments, including most super-major currencies combinations, as

    well as most super-major and major currencies combinations. This

    approach also would further encompass many important super-major-and-

    major combinations and super-major-and-non-major currency

    combinations.\222\ The Commission believes that this proposed approach

    is appropriate during the initial period in the absence of actual swap

    data for two reasons. First, the Commission aims to deter regulatory

    arbitrage opportunities with respect to swaps that are economically

    related to futures contracts. In the Commission's experience, futures

    and swap contracts that are economically related form one part of a

    larger derivatives market and, as such, should be subject to consistent

    block trade regulations (i.e., time delays, methodologies for

    calculating block trade sizes, etc.) in order to minimize the potential

    for regulatory arbitrage.

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

    \219\ The Commission is proposing to amend Sec. 43.2 to define

    ``futures related swap'' to mean a swap (as defined in section

    1a(47) of the Act and as further defined by the Commission in

    implementing regulations) that is economically related to a futures

    contract.

    \220\ For example, if swap A is economically related to futures

    F, and futures F is subject to the block trade rules of a DCM that

    applies at a notional amount of $1 million, then swap A would

    qualify for treatment as a block trade or large notional off-

    facility swap if the notional amount of swap A exceeds $1 million.

    \221\ In situations when two or more DCMs offer for trading

    futures contracts that are economically related, the Commission has

    selected the lowest applicable non-zero futures block size as the

    initial appropriate minimum block size. The Commission believes that

    this approach would reduce the chance that the appropriate minimum

    block size established by the Commission in the initial period would

    have an unintended adverse effect on market liquidity for the

    relevant swap category.

    \222\ See Q18 supra, which sets forth an alternative approach to

    proposed swap categories based on unique currency combinations.

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

    Second, this proposed approach during the initial period would draw

    upon the experience of DCMs in considering the potential impacts on

    liquidity risk that enhanced transparency may cause in connection with

    futures contract execution.\223\ The Commission understands that DCMs

    have set block sizes primarily in consideration of the objectives of

    enhancing pre-trade transparency and reducing liquidity risk.\224\ The

    Commission notes that DCMs are required to set block sizes for futures

    in compliance with relevant core principles (including Core Principle

    9) \225\ and part 40 of the Commission's regulations.\226\

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

    \223\ The Commission notes further that DCMs historically have

    had the appropriate incentive to balance these considerations

    because they benefit from liquidity generally (i.e., commissions

    from transaction volume in block and non-block trades provides DCMs

    with their primary source of revenue).

    \224\ The Commission is of the view that the pre-trade and post-

    trade contexts are sufficiently similar in that policies directed at

    balancing transparency and liquidity concerns in a pre-trade context

    are relevant in considering what an appropriate balance is in the

    post-trade context. In the pre-trade context, block sizes are set

    near or at the point where a trader would be able to offset the risk

    of an equally large transaction without bearing liquidity risk.

    \225\ Core Principle 9 of section 5(d) of the CEA provides that

    a DCM ``shall provide a competitive, open, and efficient market and

    mechanism for executing transactions * * *.'' 7 U.S.C. 7(d)(9).

    Current appendix B to part 38 of the Commission's regulations

    provides that in order to maintain compliance with core principle 9,

    DCMs allowing block trading ``should ensure that the block trading

    does not operate in a manner that compromises the integrity of

    prices or price discovery on the relevant market.'' See 17 CFR 38

    app. B.

    \226\ Section 40.6 of the Commission's regulations include a

    process by which registered entities may certify rules or rule

    amendments that establish or change block trade sizes for futures

    contracts. See 17 CFR 40.6.

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

    Swap contracts and futures contracts that are economically

    related--as defined by the Commission in the proposed amendment to

    Sec. 43.2--are economic substitutes for the purpose of determining an

    appropriate minimum block size.\227\ Where swap positions are

    economically related to futures positions, parties would likely have an

    incentive to conduct regulatory arbitrage by trading swaps. This

    incentive is created because swap positions provide counterparties with

    the ability to keep the nature of their trade confidential.

    Accordingly, the Commission is proposing to adopt the same block sizes

    established by DCMs in futures markets for futures-related swaps in

    order to ensure consistent levels of market transparency across futures

    and swaps markets that are economically related.

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

    \227\ Correlations among all members of a group of economically

    related swaps or futures contracts may vary, for the purpose of

    determining appropriate minimum block sizes. As a general matter,

    however, such swaps correlate closely in price. See Sec. 36.3 of

    the Commissions regulations.

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

    For non-futures related swaps in the FX asset class in the initial

    period of implementation, the Commission is proposing under Sec.

    43.6(e)(2) that all non-futures-related swaps in the FX asset class

    would qualify to be treated as block trades or large notional off-

    facility swaps (i.e., these swaps would be subject to a time delay

    under part 43 of the Commission's regulations). The Commission expects

    that this provision only would apply to the most illiquid swaps.

    Request for Comment

    Q41. Please provide specific comments regarding the Commission's

    proposed approach to prescribe initial appropriate minimum block sizes

    for swaps in the FX asset class.

    Q41.a. As a variation of the proposed approach, should the

    Commission use a ``triangulated'' approach for setting specific

    appropriate minimum block sizes in the initial period for FX swaps and

    instruments involving pairings of currencies that are not included in a

    single FX futures contract but whose currency legs can be indirectly

    paired through a common FX futures contract pairing with a third

    currency? \228\ That is, the Commission would infer an appropriate

    minimum block size for pairings not subject to a common block size by

    comparing the DCM block sizes that apply to each pair with respect to

    the U.S. dollar and choosing the lower of the two block sizes.\229\

    This approach would enable the Commission to prescribe an appropriate

    minimum block size for all pairings involving all combinations of

    super-major and major currencies (except those involving the Danish

    krone).

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

    \228\ For example, futures based on Canadian dollar (CAD) and

    Australian dollar (AUD) currency pairings are not offered on a DCM

    while Canadian dollar/U.S. dollar DCM futures contracts and

    Australian dollar/U.S. dollar futures contracts are offered on a

    DCM. Therefore, the Canadian dollar and Australian dollar can be

    indirectly paired through their common relationship with U.S.

    dollar-linked FX futures.

    \229\ For example, the Canadian dollar/U.S. dollar DCM futures

    contract is subject to a block size of 10,000,000 CAD and the

    Australian dollar/U.S. dollar is subject to a block size of

    10,000,000 AUD. The Commission would base the appropriate minimum

    block size for AUD/CAD swaps on the lower of 10,000,000 CAD and

    10,000,000 AUD.

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

    Q42. As an alternative to the proposed approach, should the

    Commission treat all FX swaps and instruments in the same manner as it

    is proposing to treat all equity swaps under Sec. 43.6(d) (i.e., all

    FX swaps and instruments would not be subject to a time delay and as a

    result

    [[Page 15486]]

    would have to be publicly disseminated as soon as technological

    practicable)? The Commission would premise this alternative on: (1) The

    existence of very liquid FX spot, futures and forwards markets; and (2)

    the absence of a centralized FX market structure.

    Q43. For longer-dated tenor transactions, should the Commission

    establish appropriate minimum block sizes at a fraction of the block

    trade sizes set by DCMs? This variation to the proposed approach would

    be based on the premise that longer-dated swaps may be less liquid.

    Q43.a. If so, then for which specific futures-related swap

    contracts? What is an appropriate fraction? For which tenors should the

    fraction apply (e.g., tenors beyond three months, one year, two years,

    etc.)?

    b. Post-Initial Methodology for Determining Appropriate Minimum Block

    Sizes in the FX Asset Class

    In the post-initial period, the Commission is proposing under Sec.

    43.6(f)(2) to utilize the 67-percent notional amount calculation to

    determine appropriate minimum block sizes for swap categories in the FX

    asset class. That is, the Commission would group all publicly

    reportable swap transactions in the FX asset class into their

    respective swap categories and then apply the 67-percent notional

    amount calculation to determine the appropriate minimum block sizes.

    Request for Comment

    Q44. Should the Commission continue to utilize the initial

    appropriate minimum block sizes for futures-related FX swaps as a

    minimum or floor appropriate minimum block size in the post-initial

    period? Should this floor level only apply to short-dated tenors? \230\

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

    \230\ For example, swaps with a tenor of less than one or three

    months.

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

    Q45. Should the Commission establish post-initial appropriate

    minimum block sizes for swaps in the FX asset class using one of the

    alternative methodologies discussed in Q35 above?

    4. Methodologies for Determining Appropriate Minimum Block Sizes in the

    Other Commodity Asset Class

    The Commission is proposing to use different methodologies for the

    initial and post-initial periods to determine appropriate minimum block

    sizes for swaps categories in the other commodity asset class. The

    proposed methodology for determining the appropriate minimum block

    sizes in the initial period differs based on the three types of other

    commodity swap categories: (1) Those swaps based on contracts listed in

    appendix B to part 43 of the Commission's regulations \231\; (2) swaps

    that are economically related to certain futures contracts \232\; and

    (3) other swaps.\233\ The Commission has set initial appropriate

    minimum block sizes for publicly reportable swap transactions in which

    the underlying asset directly references or is economically related to

    the natural gas or electricity swap contracts proposed to be listed in

    appendix B to part 43 of the Commission's regulations.\234\ The

    proposed methodology for determining the appropriate minimum block

    sizes for other commodity swaps in the post-initial period follows the

    same methodology used for determining the post-initial appropriate

    minimum block sizes in the interest rate, credit and FX asset classes.

    A more detailed description of the methodologies during the initial and

    post-initial periods, as well as the rules for the special treatment of

    listed natural gas and electricity swaps are presented in the

    subsections below.

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

    \231\ See proposed Sec. 43.6(b)(5)(i).

    \232\ These futures contracts are: CME Cheese; CBOT Distillers'

    Dried Grain; CBOT Dow Jones-UBS Commodity Index Excess Return; CBOT

    Ethanol; CME Frost Index; CME Goldman Sachs Commodity Index (GSCI)

    (GSCI Excess Return Index); NYMEX Gulf Coast Gasoline; Gulf Coast

    Sour Crude Oil; NYMEX Gulf Coast Ultra Low Sulfur Diesel; CME

    Hurricane Index; CME International Skimmed Milk Powder; NYMEX New

    York Harbor Ultra Low Sulfur Diesel; CBOT Nonfarm Payroll; CME

    Rainfall Index; CME Snowfall Index; CME Temperature Index; CME U.S.

    Dollar Cash Settled Crude Palm Oil; and CME Wood Pulp. See proposed

    Sec. 43.6(b)(5)(ii).

    \233\ See proposed Sec. 43.6(b)(5)(iii).

    \234\ The Commission notes that pursuant to proposed Sec.

    43.6(b)(5)(i), each of the listed natural gas and electricity swap

    contracts proposed to be listed in appendix B to part 43 would be

    considered its own swap category.

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

    a. Initial Period Methodology for Determining Appropriate Minimum Block

    Sizes in the Other Commodity Asset Class (Other Than Natural Gas and

    Electricity Swaps Proposed To Be Listed in Appendix B to Part 43)

    With respect to swaps that reference or are economically related to

    one of the futures contracts listed in appendix B to part 43 \235\ or

    proposed Sec. 43.6(b)(5)(ii), the Commission would set the appropriate

    minimum block size based on the block sizes for related futures

    contracts set by DCMs.\236\ For swaps that reference or are

    economically related to a futures contract listed in appendix B to part

    43 that is not subject to a DCM block trade rule, the Commission

    proposes in Sec. 43.6(e)(3) to disallow treatment as a block trade or

    large notional off-facility swap. The Commission bases this approach on

    an inference that DCMs have not set block trade rules for certain

    futures contracts because of the degree of liquidity in those futures

    markets.

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

    \235\ The futures contracts that are currently listed on

    appendix B to part 43 are the 28 Enumerated Reference Contracts plus

    Brent Crude Oil (ICE). The 13 swap contracts that the Commission is

    proposing to add to appendix B to part 43 of the Commission's

    regulations in this Further Proposal are not futures contracts.

    \236\ In situations when two or more DCMs offer for trading

    futures contracts that are economically related, the Commission has

    selected the lowest applicable non-zero futures block size among the

    DCMs as the initial appropriate minimum block size. The Commission

    believes that this approach would reduce the chance that the

    appropriate minimum block size established by the Commission in the

    initial period would have an unintended adverse effect on market

    liquidity for the relevant swap category.

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

    In the initial period, the Commission provides in proposed Sec.

    43.6(e)(2) to treat all non-futures-related swaps \237\ in the other

    commodity asset class as block trades or large notional off-facility

    swaps (i.e., these swaps would be subject to a time delay under part

    43, irrespective of notional amount). The Commission currently believes

    that non-futures-related swaps in the other commodity asset class

    generally have lower liquidity in contrast to the more liquid interest

    rate, credit and equity asset classes, as well as other commodity swaps

    that are economically related to liquid futures contracts (i.e., those

    futures contracts listed in proposed appendix B to part 43).

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

    \237\ These non-futures related swaps are not economically

    related to one of the futures contracts listed in proposed appendix

    B to part 43 or in proposed Sec. 43.6(b)(5)(ii). See proposed Sec.

    43.6(b)(5)(iii).

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

    Request for Comment

    Q46. Should the Commission allow swaps that are economically

    related to futures contracts listed on appendix B to part 43 (but are

    not subject to a DCM's block trade rules) to qualify as block trades or

    large notional off-facility swaps--i.e., should the Commission not

    finalize Sec. 43.6(e)(3) as proposed? If so, how should the Commission

    determine the initial appropriate minimum block size for such

    contracts? \238\

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

    \238\ For example, the Commission could set an appropriate

    minimum block size at $25 million or treat all of these swaps as

    block trades or large notional off-facility swaps.

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

    Q47. Please provide comment regarding the Commission's current

    belief that non-futures-related swaps in the other commodity asset

    class generally have lower liquidity in contrast to the more liquid

    interest rate, credit and equity asset classes, as well

    [[Page 15487]]

    as in contrast to other commodity swaps that are economically related

    to liquid futures contracts.

    b. Initial Period Methodology for Natural Gas and Electricity Swaps in

    the Other Commodity Asset Class Proposed To Be Listed in Appendix B to

    Part 43

    For swaps in which the underlying asset references or is

    economically related to one of the natural gas or electricity swaps

    listed in appendix B to part 43, the Commission is proposing to treat

    such natural gas and electricity swaps differently than other publicly

    reportable swap transactions in the other commodity asset class when

    setting the initial appropriate minimum block sizes. The Commission

    recognizes that traders typically offset their positions in the natural

    gas and electricity markets through trading OTC forward contracts,

    swaps, plain vanilla options, non-standard options and other customized

    arrangements since existing futures contracts listed on DCMs only cover

    a limited number of electricity delivery points.\239\ As discussed in

    section III.C.4 below, the Commission is proposing to amend appendix B

    to part 43 of the Commission's regulations to add 13 natural gas and

    electricity swap contracts, which the Commission previously has

    determined to be liquid contracts serving a price discovery function.

    Accordingly, the Commission is proposing that for all swaps that

    reference natural gas or electricity swap contracts proposed to be

    listed in appendix B to part 43 of the Commission's regulations, the

    Commission would set the initial appropriate minimum block size at $25

    million, which corresponds to the level of the interim and initial cap

    sizes.\240\ The $25 million initial appropriate minimum block size

    would be applied to natural gas and electricity swaps that reference or

    are economically related to the natural gas and electricity swap

    contracts proposed to be listed in appendix B to part 43 of the

    Commission's regulations.

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

    \239\ See, e.g., Statement of Richard McMahon, on Behalf of the

    Edison Electric Institute, the American Gas Association and the

    Electric Power Supply Association, before the Committee on

    Agriculture, U.S. House of Representatives, Mar. 31, 2011

    (``[Utilities and energy companies] need the ability to use OTC

    swaps because existing futures contracts cover limited natural gas

    and electricity delivery points. The derivatives market has proven

    to be an extremely effective tool in insulating [their] customers

    from this risk and price volatility. Utilities and energy companies

    use both exchange traded and cleared and OTC swaps for natural gas

    and electric power to hedge commercial risk. About one-half of our

    gas swaps and about one-third of our power swaps are traded on

    exchanges.'').

    \240\ For a discussion of interim and initial cap sizes, see

    section III.A supra of this Further Proposal.

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

    Request for Comment

    Q48. Please provide specific comments regarding the Commission's

    proposed approach to determine the initial appropriate minimum block

    sizes for publicly reportable swap transactions that reference or are

    economically related to natural gas or electricity swap contracts

    proposed to be listed in appendix B to part 43 of the Commission's

    regulations.

    Q49. Should the initial appropriate minimum block size for the

    publicly reportable swap transactions that reference the natural gas or

    electricity swaps proposed to be listed be greater than or lower than

    $25 million? If so, then why?

    Q50. Should the appropriate minimum block sizes for the gas and

    electricity swap contracts proposed to be listed in appendix B to part

    43 of the Commission's regulations be different based on the referenced

    underlying assets? If so, how should the appropriate minimum block

    sizes be differentiated and at what levels should the appropriate

    minimum block sizes be set? Please provide data to support your

    comment.

    Q51. Are there other swaps within the other commodity asset class

    that should be treated in a manner similar to the manner being proposed

    for the publicly reportable swap transactions that reference or are

    economically related to the natural gas and electricity swap contracts

    proposed to be listed in appendix B to part 43 of the Commission's

    regulations? If so, which underlying assets should be treated the same

    and why?

    c. Post-Initial Period Methodology for Determining Appropriate Minimum

    Block Sizes in the Other Commodity Asset Class

    In the post-initial period, the Commission provides in proposed

    Sec. 43.6(f)(3) to determine appropriate minimum block sizes for swaps

    in the other commodity asset class by using the 67-percent notional

    amount calculation set forth in proposed Sec. 43.6(c)(1). The 67-

    percent notional amount calculation would be applied to publicly

    reportable swap transactions in each swap category observed during the

    appropriate time period.

    Request for Comment

    Q52. The Commission requests specific comment regarding its

    proposed methodology to determine post-initial appropriate minimum

    block sizes for the swap categories in the other commodity asset class.

    Q53. As an alternative to the proposed methodology, should the

    Commission continue to utilize the initial appropriate minimum block

    sizes for futures-related swaps in the other commodity asset class as a

    minimum or floor in the post-initial period? If so, then should this

    floor only apply to short-dated tenors? \241\

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

    \241\ For example, swaps with a tenor of less than one or three

    months.

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

    Q54. As another alternative, for the swap categories in the other

    commodity class that fall under proposed Sec. 43.6(b)(5)(iii), should

    the Commission group these swaps under a single category and apply a

    single default appropriate minimum block size to all swaps in the

    category?

    Q54.a. If so, then should the Commission set the default

    appropriate minimum block size without regard to observed data or by

    some other mechanism?

    Q54.b. If the Commission sets the default appropriate minimum block

    size without regard to observed data, then at what levels should the

    Commission set appropriate minimum block sizes? For example, should the

    Commission set the appropriate minimum block size at $25 million?

    5. Special Provisions for the Determination of Appropriate Minimum

    Block Sizes for Certain Types of Swaps

    The Commission recognizes the complexity of the swap market may

    make it difficult to determine appropriate minimum block sizes for

    particular types of swaps under the methodologies discussed above. For

    that reason, the Commission is proposing Sec. 43.6(h), which sets out

    a series of special rules that apply to the determination of the

    appropriate minimum block sizes for particular types of swaps. The

    Commission is proposing special rules in respect of: (a) Swaps with

    optionality; (b) swaps with composite reference prices \242\; (c)

    ``physical commodity swaps'' \243\; (d) currency conversions; and (e)

    successor

    [[Page 15488]]

    currencies. Each of these special rules is discussed in the subsections

    below.

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

    \242\ The Commission is proposing to amend Sec. 43.2 to define

    ``swaps with composite reference prices'' as swaps based on

    reference prices composed of more than one reference price that are

    in differing swap categories. The Commission is proposing to use

    this term in connection with the establishment of a method through

    which parties to a swap transaction can determine whether a

    component to their swap would qualify the entire swap as a block

    trade or large notional off-facility swap.

    \243\ The Commission is proposing to amend Sec. 43.2 of the

    Commission's regulations by defining the term ``physical commodity

    swap'' as a swap in the other commodity asset class that is based on

    a tangible commodity.

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

    a. Swaps With Optionality

    A swap with optionality highlights special concerns in terms of

    determining whether the notional size of such swap would be treated as

    a block trade or large notional off-facility swap. Proposed Sec.

    43.6(h)(1) addresses these concerns and provides that the notional size

    of swaps with optionality shall equal the notional size of the swap

    component without the optional component. For example, a LIBOR 3-month

    call swaption with a calculated notional size of $9 billion for the

    swap component--regardless of option component, strike price, or the

    appropriate delta factor--would have a notional size of $9 billion for

    the purpose of determining whether the swap would qualify as a block

    trade or large notional off-facility swap.\244\

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

    \244\ In essence, this approach would assume a delta factor of

    one with respect to the underlying swap for swaptions.

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

    The Commission is proposing to take this approach with respect to

    swaps with optionality because, in the Commission's view, it provides

    an easily calculable method for market participants to ascertain

    whether their swaps with optionality features would qualify as a block

    trade or large notional off-facility swap. The Commission is aware that

    this approach does not take into account the risk profile of a swap

    with optionality compared to that of a ``plain-vanilla swap,'' but

    believes that this approach is reasonable to minimize complexity.

    b. Swaps With Composite Reference Prices

    Swaps with two or more reference prices (i.e., composite reference

    prices) raise concerns as to which reference price market participants

    should use to determine whether such swap qualifies as a block trade or

    large notional off-facility swap.\245\ Proposed Sec. 43.6(h)(2)

    provides that the parties to a swap transaction with composite

    reference prices (i.e., two or more reference prices) may elect to

    apply the lowest appropriate minimum block size applicable to any

    component swap category. This provision also would apply to: (1)

    Locational or grade-basis swaps that reflect differences between two or

    more reference prices; and (2) swaps utilizing a reference price based

    on weighted averages of component reference prices.\246\ The Commission

    is proposing Sec. 43.6(h)(2) in order to provide market participants

    with a straightforward and uncomplicated way in which determine whether

    such swap would qualify as a block trade or large notional off-facility

    swap.

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

    \245\ Swaps with composite reference prices are composed of

    reference prices that relate to one another based on the difference

    between two or more underlying reference prices--for example, a

    locational basis swap (e.g., a natural gas Rockies Basis swap) that

    utilizes a reference price based on the difference between a price

    of a commodity at one location (e.g., a Henry Hub index price) and a

    price at another location (e.g., a Rock Mountains index price)).

    \246\ In other words, swaps with a composite reference price

    composed of reference prices that relate to one another based on an

    additive relationship. This term would include swaps that are priced

    based on a weighted index of reference prices.

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

    Under proposed Sec. 43.6(h)(2), market participants would need to

    decompose their composite reference price swap transaction in order to

    determine whether their swap would qualify as a block trade or large

    notional off-facility swap. For example, assume that the appropriate

    minimum block sizes for futures A-related swaps is $3 million, for

    futures B-related swaps is $800,000, for futures C-related swaps is

    $1.2 million and for futures D-related swaps is $1 million. If a swap

    is based on a composite reference price that itself is based on the

    weighted average of futures price A, futures price B, futures price C,

    and futures price D (25% equal weightings for each), and the notional

    size of the swap is $4 million (i.e., $1 million for each component

    swap category), then the swap would qualify as a block trade or large

    notional off-facility swap based on the futures B-related swap

    appropriate minimum block size.

    c. Physical Commodity Swaps

    Block trade sizes for physical commodities are generally expressed

    in terms of notional quantities (e.g., barrels, bushels, gallons,

    metric tons, troy ounces, etc.). The Commission is proposing a similar

    convention for determining the appropriate minimum block sizes for

    block trades and large notional off-facility swaps. In particular,

    proposed Sec. 43.6(h)(3) provides that notional sizes for physical

    commodity swaps shall be expressed in terms of notional quantities

    using the notional unit measure utilized in the related futures

    contract market or the predominant notional unit measure used to

    determine notional quantities in the cash market for the relevant,

    underlying physical commodity. This approach ensures that appropriate

    minimum block size thresholds for physical commodities are not subject

    to volatility introduced by fluctuating prices. This approach also

    eliminates complications arising from converting a physical commodity

    transaction in one currency into another currency to determine

    qualification for treatment as a block trade or large notional off-

    facility swap.

    d. Currency Conversion

    Under proposed Sec. 43.6(h)(4), the Commission provides that when

    determining whether a swap transaction denominated in a currency other

    than U.S. dollars qualifies as a block trade or large notional off-

    facility swap, swap counterparties and registered entities may use a

    currency exchange rate that is widely published within the preceding

    two business days from the date of execution of the swap transaction in

    order to determine such qualification. This proposed approach would

    enable market participants to use a currency exchange rate that they

    deem to be the most appropriate or easiest to obtain.

    e. Successor Currencies

    As noted above, the Commission is proposing to use currency as a

    criterion to determine swap categories in the interest rate asset

    class.\247\ The Commission is also proposing to classify the euro (EUR)

    as a super-major currency, among other currencies.\248\ Proposed Sec.

    43.6(h)(5) provides that for currencies that succeed a super-major

    currency, the appropriate currency classification for such currency

    would be based on the corresponding nominal gross domestic product

    (``GDP'') classification (in U.S. dollars) as determined in the most

    recent World Bank World Development Indicator at the time of

    succession. This proposed provision is intended to address the possible

    removal of one or more of the 17 eurozone member states that use the

    euro.\249\

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

    \247\ See proposed Sec. 43.6(b)(1)(i) and the related

    discussion in section II.B.1. of this Further Proposal.

    \248\ See the proposed amendment to Sec. 43.2, defining

    ``super-major currencies.''

    \249\ The 17 countries that use the euro are: Austria, Belgium,

    Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy,

    Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and

    Spain.

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

    Proposed Sec. 43.6(h)(5)(i)-(iii) further specifies the manner in

    which the Commission would classify a successor currency for each

    nation that was once a part of the predecessor currency. Specifically,

    the Commission proposes to use GDP to determine how to classify a

    successor currency. For countries with a GDP greater than $2 trillion,

    the Commission would classify the successor currency to be a super-

    major currency.\250\ For countries with a GDP

    [[Page 15489]]

    greater than $500 billion but less than $2 trillion, the Commission

    would classify the successor currency as a major currency.\251\ For

    nations with a GDP less than $500 billion, the Commission would

    classify the successor currency as a non-major currency.\252\

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

    \250\ See proposed Sec. 43.6(h)(6)(i).

    \251\ See proposed Sec. 43.6(h)(6)(ii).

    \252\ See proposed Sec. 43.6(h)(6)(iii).

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

    Request for Comment

    Q55. The Commission requests general comments on its proposed

    special rules in proposed Sec. 43.6(h).

    Q56. As an alternative to the proposed method for determining

    whether a swap with optionality would qualify as a block trade or large

    notional off-facility swap (i.e., proposed Sec. 43.6(h)(1), should the

    Commission use a delta-equivalent or gamma-equivalent approach to

    determine the notional size of swaps with optionality?

    Q56.a. What are the direct and indirect costs to market

    participants of determining delta or gamma equivalents?

    Q57. As an alternative to proposed Sec. 43.6(h)(3), should the

    Commission base notional sizes for physical commodities on the notional

    amount in the applicable currency?

    Q58. As an alternative to proposed Sec. 43.6(h)(4), should the

    Commission mandate that market participants use the most recent

    currency exchange rate set at some specified time and location (e.g., 4

    p.m. London time from the preceding business day)? This alternative

    approach could provide greater certainty as to the appropriate

    conversion rates at the cost of the providing market participants with

    greater flexibility.

    Q59. As another alternative to proposed Sec. 43.6(h)(4), should

    the Commission publish a currency exchange rate on the Commission's Web

    site in connection with its regular post-initial appropriate minimum

    block size determination? If so, then how should the Commission

    determine the currency exchange rate?

    Q60. As an alternative to proposed Sec. 43.6(h)(5), should the

    Commission classify all successor currencies as major currencies?

    Q60.a. Some critics have argued that too much emphasis is currently

    placed on the importance of GDP as a measure of progress. Should the

    Commission use a measure other than GDP (e.g., the Index of Sustainable

    Economic Welfare)?

    E. Procedural Provisions

    1. Proposed Sec. 43.6(a) Commission Determination

    The Commission is proposing that it determine the appropriate

    minimum block size for any swap listed on a SEF or DCM, and for large

    notional off-facility swaps. Proposed Sec. 43.6(a) specifically

    provides that the Commission would establish the appropriate minimum

    block sizes for publicly reportable swap transactions based on the swap

    categories set forth in proposed Sec. 43.6(b) in accordance with the

    provisions set forth in proposed Sec. Sec. 43.6(c), (d), (e), (f) and

    (h), as applicable. In the Commission's view, this proposed approach

    would be the least burdensome from a cost-benefit perspective because

    it significantly reduces the direct costs imposed on SDRs and other

    registered entities. As noted above, nothing in this Further Proposal

    would prohibit SEFs and DCMs from setting block sizes for swaps at

    levels that are higher than the appropriate minimum block sizes

    determined by the Commission.

    Request for Comment

    Q61. The Commission requests specific comments on its proposal that

    the Commission determine appropriate minimum block sizes.

    Q62. In the alternative, should the Commission permit SEFs or DCMs

    to determine the appropriate minimum block size for swaps that the SEFs

    or DCMs list? Would this alternative lead to unnecessary market

    fragmentation?

    Q62.a. What would be the appropriate parameters or guidance that

    the Commission should give to SEFs or DCMs in setting appropriate

    minimum block sizes?

    Q62.b. What procedure could the Commission use to ensure that there

    are standard appropriate minimum block size determinations across all

    markets?

    2. Proposed Sec. 43.6(f)(3) and(4) Publication and Effective Date of

    Post-Initial Appropriate Minimum Block Sizes

    Proposed Sec. 43.6(f)(3) provides that the Commission would

    publish the post-initial appropriate minimum block sizes on its Web

    site. Proposed Sec. 43.6(f)(4) provides that these sizes would become

    effective on the first day of the second month following the date of

    publication. Per proposed Sec. 43.6(f)(1), the Commission would

    publish updated post-initial appropriate minimum block sizes in the

    same manner no less than once each calendar year.

    Request for Comment

    Q63. The Commission requests specific comment on proposed

    Sec. Sec. 43.6(f)(3) and (4).

    Q64. Instead of publishing initial appropriate minimum block sizes

    through proposed appendix F to part 43, should the Commission publish

    these initial appropriate minimum block sizes on the Commission's Web

    site at http://www.cftc.gov? This approach would ensure that in the

    post-initial period, no confusion arises in terms of the method for

    publication and the relevant appropriate minimum block sizes.

    3. Proposed Sec. 43.6(g) Notification of Election

    Proposed Sec. 43.6(g) sets forth the election process through

    which a qualifying swap transaction would be treated as a block trade

    or large notional off-facility swap, as applicable. Proposed Sec.

    43.6(g)(1) establishes a two-step notification process relating to

    block trades. Proposed Sec. 43.6(g)(2) establishes the notification

    process relating to large notional off-facility swaps.

    Proposed Sec. 43.6(g)(1)(i) contains the first step in the two-

    step notification process relating to block trades. In particular, this

    section provides that the parties to a publicly reportable swap

    transaction that has a notional amount at or above the appropriate

    minimum block size are required to notify the SEF or DCM (pursuant to

    the rules of such SEF or DCM) of their election to have their

    qualifying publicly reportable swap transaction treated as a block

    trade. With respect to the second step, proposed Sec. 43.6(g)(1)(ii)

    provides that the SEF or DCM, as applicable, that receives an election

    notification is required to notify the relevant SDR of such block trade

    election when transmitting swap transaction and pricing data to the SDR

    for public dissemination.

    Proposed Sec. 43.6(g)(2) is very similar to the first step set

    forth in proposed Sec. 43.6(g)(1). That is, proposed Sec. 43.6(g)(2)

    provides, in part, that a reporting party who executes an off-facility

    swap with an notional amount at or above the applicable appropriate

    minimum block size is required to notify the relevant SDR of its

    election to treat such swap as a large notional off-facility swap. This

    section provides further that the reporting party is required to notify

    the relevant SDR in connection with the reporting party's transmission

    of swap transaction and pricing data to the SDR pursuant to Sec. 43.3

    of the Commission's regulations.

    [[Page 15490]]

    Request for Comment

    Q65. The Commission requests specific comments regarding proposed

    Sec. 43.6(g), the proposed notification process for the election to

    treat a qualifying swap transaction as a block trade or large notional

    off-facility swap.

    Q66. As a variation of the proposed approach, should the Commission

    also require SEFs, DCMs and reporting parties to indicate under which

    swap category they are claiming block trade or large notional off-

    facility swap treatment in connection with the transmission of an

    election notification?

    Q67. Are there alternative methods through which a reporting party

    can elect to treat its qualifying swap transaction as a block trade or

    large notional off-facility?

    Q68. Should the Commission establish a special method of election

    for small end-users when those end users are the reporting party to a

    qualifying swap transaction?

    4. Proposed Sec. 43.7 Delegation of Authority

    Under proposed Sec. 43.7(a), the Commission would delegate the

    authority to undertake certain Commission actions to the Director of

    the Division of Market Oversight (``Director'') and to other employees

    as designated by the Director from time to time. In particular, this

    proposed delegation would grant to the Director the authority to

    determine: (1) The new swap categories as described in proposed Sec.

    43.6(b); (2) the post-initial appropriate minimum block sizes as

    described in proposed Sec. 43.6(f); and (3) the post-initial cap sizes

    as described in the proposed amendments to Sec. 43.4(h) of the

    Commission's regulations.\253\ The purpose of this proposed delegation

    provision is to facilitate the Commission's ability to respond

    expeditiously to ever-changing swap market and technological

    conditions. The Commission is of the view that this delegation would

    help ensure timely and accurate real-time public reporting of swap

    transaction and pricing data and further ensure anonymity in connection

    with the public reporting of such data. Proposed Sec. 43.7(b) provides

    that the Director may submit to the Commission for its consideration

    any matter that has been delegated pursuant to this authority. Proposed

    Sec. 43.7(c) provides that the delegation to the Director does not

    prevent the Commission, at its election, from exercising the delegated

    authority.

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

    \253\ See the discussion of post-initial cap sizes in section

    III.B. infra. As noted above, the Commission is proposing an

    amendment to Sec. 43.2 to define the term ``cap size'' as the

    maximum limit of the principal, notional amount of a swap that is

    publicly disseminated. This term applies to the cap sizes determined

    in accordance with the proposed amendments to Sec. 43.4(h) of the

    Commission's regulations.

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

    Request for Comment

    Q69. The Commission requests specific comment on its proposed

    delegation of authority to the Director of certain Commission actions.

    Q70. Should the Director be given the authority to take other

    actions not identified in proposed Sec. 43.7 on behalf of the

    Commission in connection with the calculation of post-initial

    appropriate minimum block sizes and cap sizes? If so, then what other

    actions?

    III. Further Proposal--Anonymity Protections for the Public

    Dissemination of Swap Transaction and Pricing Data

    A. Policy Goals

    Section 2(a)(13)(E)(i) of the CEA directs the Commission to protect

    the identities of counterparties to swaps subject to the mandatory

    clearing requirement, swaps excepted from the mandatory clearing

    requirement and voluntarily cleared swaps. Similarly, section

    2(a)(13)(C)(iii) of the CEA requires that the Commission prescribe

    rules that maintain the anonymity of business transactions and market

    positions of the counterparties to an uncleared swap.\254\ In proposed

    amendments to Sec. Sec. 43.4(h) and 43.4(d)(4), the Commission is

    prescribing measures to protect the identities of counterparties and to

    maintain the anonymity of their business transactions and market

    positions in connection with the public dissemination of publicly

    reportable swap transactions. The Commission is proposing to follow the

    practices used by most federal agencies when releasing to the public

    company-specific information--by removing obvious identifiers, limiting

    geographic detail (e.g., disclosing the general, non-specific

    geographical information about the delivery and pricing points) and

    masking high-risk variables by truncating extreme values for certain

    variables (e.g., capping notional values).\255\ Further details about

    the proposals to determine cap sizes and applying them to various swap

    categories are described below in section III.B of this Further

    Proposal. Further details regarding the limitations placed on SDRs in

    connection with the public disclosure of geographic details for the

    other commodity asset class are provided below in section III.C of this

    Further Proposal.

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

    \254\ This provision does not cover swaps that are ``determined

    to be required to be cleared but are not cleared.'' See 7 U.S.C.

    2(a)(13)(C)(iv).

    \255\ The Commission is following the necessary procedures for

    releasing microdata files as outlined by the Federal Committee on

    Statistical Methodology: (i) Removal of all direct personal and

    institutional identifiers, (ii) limiting geographic detail, and

    (iii) top-coding high-risk variables which are continuous. See

    Federal Committee on Statistical Methodology, Report on Statistical

    Disclosure Limitation Methodology 94 (Statistical Policy Working

    Paper 22, 2d ed. 2005), http://www.fcsm.gov/working-papers/totalreport.pdf. The report was originally prepared by the

    Subcommittee on Disclosure Limitation Methodology in 1994 and was

    revised by the Confidentiality and Data Access Committee in 2005.

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

    B. Establishing Notional Cap Sizes for Swap Transaction and Pricing

    Data To Be Publicly Disseminated in Real-Time

    1. Policy Goals for Establishing Notional Cap Sizes

    In addition to establishing appropriate minimum block sizes, the

    Commission is also proposing to amend Sec. 43.4(h) to establish cap

    sizes for notional and principal amounts that would mask the total size

    of a swap transaction if it equals or exceeds the appropriate minimum

    block size for a given swap category. For example, if the block size

    for a category of interest rate swaps was $1 billion, the cap size was

    $1.5 billion, and the actual transaction had a notional value of $2

    billion, then this swap transaction would be publicly reported with a

    delay and with a notional value of $1.5+ billion.

    The proposed cap size provisions are consistent with the two

    relevant statutory requirements in section 2(a)(13) of the CEA. First,

    the cap size provisions would help to protect the anonymity of

    counterparties' market positions and business transactions as required

    in section 2(a)(13)(C)(iii) of the CEA.\256\ Second, the masking of

    extraordinarily large positions also takes into consideration the

    requirement under section 2(a)(13)(E)(iv), which provides that the

    Commission take into account the impact that real-time public reporting

    could have in reducing market liquidity.\257\

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

    \256\ See 7 U.S.C. 2(a)(13)(C)(iii).

    \257\ See id. at 2(a)(13)(E)(iv).

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

    2. Proposed Amendments Related to Cap Sizes--Sec. 43.2 Definitions and

    Sec. 43.4 Swap Transaction and Pricing Data To Be Publicly

    Disseminated in Real-Time

    The Commission is proposing an amendment to Sec. 43.2 to define

    the term ``cap size'' as the maximum limit of the principal, notional

    amount of a swap that is publicly disseminated. This term applies to

    the cap sizes determined in accordance with the proposed

    [[Page 15491]]

    amendments to Sec. 43.4(h) of the Commission's regulations.

    Section 43.4(h) of the Commission's regulations currently

    establishes interim cap sizes for rounded notional or principal amounts

    for all publicly reportable swap transactions. In the Adopting Release,

    the Commission finalized Sec. 43.4(h) to provide that the notional or

    principal amounts shall be capped in a manner that adjusts in

    accordance with the appropriate minimum block size that corresponds to

    a publicly reportable swap transaction.\258\ Section 43.4(h) further

    provides that if no appropriate minimum block size exists, then the cap

    size on the notional or principal amount shall correspond to the

    interim cap sizes that the Commission has established for the five

    asset classes.\259\ In Sec. 43.4(h) and as described in the Adopting

    Release, the Commission notes that SDRs will apply interim cap sizes

    until such time as appropriate minimum block sizes are

    established.\260\ The Commission continues to believe that the interim

    cap sizes for each swap category should correspond with the applicable

    appropriate minimum block size, to the extent that an appropriate

    minimum block size exists.\261\

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

    \258\ See 77 FR 1,247.

    \259\ Sections 43.4(h)(1)-(5) established the following interim

    cap sizes for the corresponding asset classes: (1) Interest rate

    swaps at $250 million for tenors greater than zero up to and

    including two years, $100 million for tenors greater than two years

    up to and including 10 years, and $75 million for tenors greater

    than 10 years; (2) credit swaps at $100 million; (3) equity swaps at

    $250 million; (4) foreign exchange swaps at $250 million; and (5)

    other commodity swaps at $25 million.

    \260\ See 77 FR 1,215.

    \261\ Leading industry trade associations agree that cap sizes

    are an appropriate mechanism to ensure that price discovery remains

    intact for block trades, while also protecting post-block trade risk

    management needs from being anticipated by other market

    participants. See ISDA and SIFMA, Block Trade Reporting for Over-

    the-Counter Derivatives Market, Jan. 18, 2011.

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

    The Commission is now proposing to amend Sec. 43.4(h) both to

    establish initial cap sizes for each swap category within the five

    asset classes and also to delineate a process for the post-initial

    period through which the Commission would establish post-initial cap

    sizes for each swap category.\262\ This Further Proposal would change

    the term ``interim'' as it is used in Sec. 43.4(h) to ``initial'' in

    order to correspond with the description of the initial period in

    proposed Sec. 43.6(e).

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

    \262\ The Commission does not intend the provisions in this

    Further Proposal to prevent a SEF or DCM from sharing the exact

    notional amounts of a swaps transacted on or pursuant to the rules

    of its platform with market participants on such platform

    irrespective of the cap sizes set by the Commission. To share the

    exact notional amounts of swaps, the SEF or DCM must comply with

    Sec. 43.3(b)(3)(i) of the Commission's regulations. See 77 FR

    1,245.

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

    a. Initial Cap Sizes

    In the initial period,\263\ proposed Sec. 43.4(h)(1) sets the cap

    size for each swap category as the greater of the interim cap sizes set

    forth in the Adopting Release (existing Sec. 43.4(h)(1)-(5)) or the

    appropriate minimum block size for the respective swap category.\264\

    If such appropriate minimum block size does not exist, then the cap

    sizes shall be set at the interim cap sizes set forth in the Adopting

    Release (existing Sec. 43.4(h)(1)-(5)).

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

    \263\ The initial period is the period prior to the effective

    date of a Commission determination to establish an applicable post-

    initial cap sizes. See proposed Sec. 43.4(h)(1).

    \264\ See 77 FR 1,249.

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

    b. Post-Initial Cap Sizes and the 75-Percent Notional Amount

    Calculation

    In proposed Sec. 43.6(c)(2), the Commission would use the 75-

    percent notional amount calculation as a means to set post-initial cap

    sizes for the purpose of reporting block trades or large notional off-

    facility swaps of significant size. This calculation methodology is

    different from the 67-percent notional amount calculation methodology

    that the Commission proposes in Sec. 43.6(c)(1) for determining

    appropriate minimum block sizes. The Commission is proposing to use the

    former methodology to set post-initial cap sizes because setting cap

    sizes above appropriate minimum block sizes would provide additional

    pricing information with respect to large swap transactions, which are

    large enough to be treated as block trades (or large notional off-

    facility swaps), but small enough that they do not exceed the

    applicable post-initial cap size. This additional information may

    enhance price discovery by publicly disseminating more information

    relating to market depth and the notional sizes of publicly reportable

    swap transactions, while still protecting the anonymity of swap

    counterparties and their ability lay off risk when executing

    extraordinarily large swap transactions.

    The Commission notes that the appropriate minimum block sizes and

    the cap sizes seek to achieve the statutory goals set forth in CEA

    section 2(a)(13)(E)(iv) in different ways.\265\ Appropriate minimum

    block sizes achieve this statutory requirement by providing market

    participants transacting large notional swaps with a time delay in the

    public dissemination of swap transaction and pricing data relating to

    such swaps. As a result of these time delays, market participants are

    able to offset the risk associated with these swaps. Cap sizes achieve

    the statutory requirement of CEA section 2(a)(13)(E)(iv) by masking the

    notional size of large transactions permanently from public

    dissemination. As a result, market participants conducting

    extraordinarily large swap transactions would be able to offset risk

    since an SDR would not publicly disseminate the actual notional amount

    of such transactions.

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

    \265\ Section 2(a)(13)(E)(iv) of the CEA requires that the

    Commission ensure that public reporting does not materially reduce

    market liquidity. See 7 U.S.C. 2(a)(13)(E)(iv).

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

    While appropriate minimum block sizes and cap sizes both seek to

    achieve the statutory mandate in CEA section 2(a)(13)(E)(iv), they also

    seek to address different statutory requirements. As noted above, CEA

    sections 2(a)(13)(E)(ii) and (iii) require that the Commission specify

    criteria for determining block trades and large notional off-facility

    swaps for the purpose of subjecting those trades and swaps to a time

    delay from public dissemination. In addition, CEA sections

    2(a)(13)(C)(iii) and 2(a)(13)(E)(i) require that the Commission

    promulgate regulations ensuring that public reporting does not disclose

    the identities, business transactions and market positions of any

    person. Cap sizes primarily address the statutory requirements in CEA

    sections 2(a)(13)(C)(iii) and 2(a)(13)(E)(i), while appropriate minimum

    block sizes primarily address the statutory requirements in

    2(a)(13)(E)(ii) and (iii).

    Pursuant to proposed Sec. 43.4(h)(2)(ii), the Commission would use

    a 75-percent notional amount calculation to determine the appropriate

    post-initial cap sizes for all swap categories.\266\ For the 75-percent

    notional amount calculation, the Commission would determine the

    appropriate cap size through the following process, pursuant to

    proposed Sec. 43.6(c)(2): (step 1) Select all of the publicly

    reportable swap transactions within a specific swap category using a

    rolling three-year window of data beginning with a minimum of one

    year's worth of data and adding one year of data for each calculation

    until a total of three years of data is accumulated; (step 2) convert

    to the same currency or units and use a trimmed data set; (step 3)

    determine the sum of the notional amounts of swaps in the trimmed data

    set; (step 4) multiply the sum of the notional amount by 75 percent;

    (step 5) rank order the observations by notional amount from least to

    greatest; (step 6) calculate the cumulative sum of the

    [[Page 15492]]

    observations until the cumulative sum is equal to or greater than the

    75-percent notional amount calculated in step 4; (step 7) select the

    notional amount associated with that observation; (step 8) round the

    notional amount of that observation to two significant digits, or if

    the notional amount associated with that observation is already

    significant to two digits, increase that notional amount to the next

    highest rounding point of two significant digits; and (step 9) set the

    appropriate minimum block size at the amount calculated in step 8.

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

    \266\ See proposed Sec. 43.6(c)(2).

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

    Consistent with the Commission's proposed process to determine the

    appropriate post-initial minimum block sizes, proposed Sec. 43.4(h)(3)

    provides that the Commission would publish post-initial cap sizes on

    its Web site. Proposed Sec. 43.4(h)(4) provides that unless otherwise

    indicated on the Commission's Web site, the post-initial cap sizes

    would become effective on the first day of the second month following

    the date of publication.

    c. Alternative Cap Size Calculations

    In addition to the 75-percent notional amount calculation, the

    Commission is considering alternative calculations that it would use to

    set post-initial cap sizes. These calculations are based on common

    statistical disclosure controls used by other agencies in making data

    publicly available.\267\

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

    \267\ These are typical of statistical disclosure practices used

    by other Federal agencies as described in the Report on Statistical

    Disclosure Limitation Methodology, see note 255 supra.

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

    Specifically, the Commission is considering the following six

    alternative calculations to the 75-percent notional amount calculation

    of cap sizes during the post-initial period:

    67-percent Notional Amount Calculation with a Floor. As a

    variation of the 75-percent notional amount calculation the Commission

    is considering determining post-initial cap sizes as the greater of the

    result of the 75-percent notional amount calculation or the interim cap

    sizes described in the Adopting Release (existing Sec. Sec.

    43.4(h)(1)-(5)). The Commission recognizes that in certain markets

    ``shredding'' may result in smaller transaction sizes,\268\ thereby

    impacting the resulting cap size as determined pursuant to the 75-

    percent notional amount calculation. As a result, post-initial cap

    sizes could reach levels that are significantly lower than those

    adopted as interim cap sizes in Sec. 43.4(h). In order to ensure that

    the public and market participants are provided with meaningful data

    related to notional amounts and market depth, the Commission believes

    that requiring this variation may appropriately enhance price discovery

    consistent with the purpose of CEA section 2(a)(13)(B).

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

    \268\ The term ``shredding'' refers to the practice of breaking

    up a large swap transaction into a number of smaller ones. The

    practice is often done to avoid causing a large impact on prices or

    to conceal the existence of a large trade originating from a single

    source. When traders attempt to execute a single large trade they

    may be required to pay a liquidity or risk premium to encourage

    traders on the other side of the market to take on the trade.

    Shredding by market participants may cause a marked decrease in the

    average notional size of transactions as a participant executes

    numerous smaller transactions as opposed to a single large

    transaction. For a further discussion of shredding, see note 217

    supra.

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

    Appropriate Minimum Block Size with a Floor. The

    Commission is considering whether to set the post-initial cap sizes

    equal to the greater of the post-initial appropriate minimum block size

    or the interim cap sizes described in the Adopting Release (existing

    Sec. Sec. 43.4(h)(1)-(5)). This alternative method for determining

    post-initial cap sizes would directly link the post-initial cap sizes

    to the post-initial appropriate minimum block sizes.

    Number of Non-affiliated Markets Participant Calculation.

    The Commission is also considering whether to set post-initial cap

    sizes using a calculation that determines the minimum notional value

    cap size based on the number of non-affiliated market participants who

    have transactions with notional values greater than the cap size. This

    process would determine the post-initial cap size through the following

    process: (1) Select the swap transaction data for a specific swap

    category; (2) convert to the same currency or units and use a trimmed

    data set; (3) determine the transaction distribution of notional

    amounts using the trimmed data set for the swap category; (4) find the

    minimum notional value where, for transactions with a notional value

    greater than that value, there are 10 non-affiliated market

    participants. The Commission anticipates that under this alternative

    approach, all market participants from the same legal entity would be

    considered as one non-affiliated market participant.

    Non-affiliated Market Participants and Minimum

    Concentration Calculation. The Commission is also considering whether

    to set post-initial cap sizes using a calculation that determines the

    minimum notional value cap size based on number of market participants

    and the market concentration of transactions with notional sizes above

    the cap size. This process would determine the post-initial cap size

    through the following process: (1) Select the swap transaction data for

    a specific swap category; (2) convert to the same currency or units and

    use a trimmed data set; (3) determine the transaction distribution of

    notional amounts using the trimmed data set for the category; (4) find

    the minimum notional size such that the number of unique participants

    in a swap category with transactions greater than that value exceeds

    10, the maximum share of any one participant in trades above the

    minimum notional value is less than 25 percent, or the maximum share of

    notional value by a participant for transactions greater than the

    minimum notional value is less than 25 percent.

    Confidence Interval Test. The Commission is also

    considering whether to set post-initial cap sizes using a confidence

    interval test, which determines the point at which masking one more

    transaction causes the average notional size--calculated from the data

    for all publicly reportable swap transactions--to be outside of the

    expected range of the true notional size. This alternative test takes

    into account the impact of information loss on the transparency for

    swap transaction and pricing data. The confidence interval test

    calculates the minimum notional value as the point where the publicly

    disseminated average notional size is within the 95-percent confidence

    interval using the following process: (step 1) Select the swap

    transaction data for a specific swap category; (step 2) convert to the

    same currency or units and determine the transaction distribution of

    notional amounts using the logged \269\ and trimmed data set for the

    swap category; (step 3) calculate the average notional size and the 95-

    percent confidence interval around this average; \270\ (step 4) drop

    the largest

    [[Page 15493]]

    remaining transaction from the distribution \271\; (step 5) conditional

    on the full-sample 95-percent confidence interval, calculate the sample

    average notional size using the data resulting from step 4; (step 6) if

    the sample average notional size is not outside of the 95-percent

    confidence interval, repeat steps 4 and 5 until it is just outside of

    the 95-percent confidence interval; and (step 7) once the sample

    average notional size is outside the 95-percent confidence interval,

    set the minimum notional value equal to the notional value, rounded

    pursuant to Sec. 43.4(g), of the largest transaction of the

    distribution for which the sample average notional size was still

    within the 95-percent confidence interval.\272\

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

    \269\ In practice, the natural logarithm of the notional value

    is preferred over the nominal value to reduce the effect of skewness

    on sample statistics. In addition to classical statistical methods,

    the calculation of the confidence interval may be improved by using

    ``bootstrapping'' methods to estimate the distribution of the

    average notional trade size.

    \270\ The confidence interval test assumes sufficient data in a

    swap category such that a normal distribution is a good

    approximation to compute an interval estimate. To the extent the

    actual distribution diverges significantly from a normal

    distribution, the interval estimate may not reflect the probability

    at the desired (95 percent) confidence interval. In which case,

    other methods such as ``bootstrapping'' may be necessary to compute

    the confidence intervals around the full sample average notional

    size. The Commission notes the ODSG data sets were not normally

    distributed, but were nearly symmetric after transforming the

    notional size by the natural logarithm. Further, according to a TABB

    Group survey, many market participants expected the average notional

    transaction size to decline, which may imply a change in the

    distribution. See the presentation of Kevin McPartland, Principal,

    Tabb Group, CFTC Technology Advisory Committee Meeting, Dec. 13,

    2011, available at http://www.cftc.gov/PressRoom/Events/opaevent_tac121311.

    \271\ The Commission is also considering dropping transactions

    in one-percent increments until the sample average moves outside the

    95-percent confidence interval. The Commission would then drop

    transactions within the last one-percent increment until the actual

    transaction is found that moves the sample mean outside of the

    confidence interval.

    \272\ See Sec. 43.4(g), which provides that the notional or

    principal amount of a publicly reportable swap transaction, ``as

    described in appendix A to this part [43], shall be rounded and

    publicly disseminated by [an SDR]'' based on the range of notional

    or principal amounts.

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

    Variation of the Confidence Interval Test. The Commission

    is also considering a slightly different methodology for the confidence

    interval test. This variation still would calculate the average of the

    entire distribution using all of the available data and the 95-percent

    confidence interval for that average. However, instead of completely

    dropping the largest remaining transactions (step 4, as referenced in

    the previous alternative) and then calculating the sample average

    notional size for the publicly disseminated information without any

    information from these ``dropped'' transactions (step 5), this

    alternative methodology would use the notional value of the largest

    transaction (that would otherwise have been dropped) as though it were

    the cap size and would calculate the average notional size of the

    publicly disseminated data by setting the notional values above that

    size equal to the cap. This approach would simulate the information

    known by the public if the notional value of that last transaction was

    the notional cap size. Since the Commission would calculate the average

    of publicly disseminated transactions with an approximation of the

    notional value of such transactions above the cap size, the cap size

    would be lower than the methodology where all information about the

    size of the transaction is dropped from the estimation.

    Request for Comment

    Q71. Please provide specific comments regarding the Commission's

    proposed approach regarding cap sizes in the initial period.

    Q72. Please provide specific comments regarding the Commission's

    proposed approach to set cap sizes in the post-initial period.

    Q73. As an alternative to the proposed approach, should initial and

    post-initial cap sizes always be equal to the appropriate minimum block

    size for a particular swap category?

    Q74. Please provide comments regarding the above-described

    alternative methods for determining post-initial cap sizes.

    Q74.a. Specifically, would any of these alternatives lead to the

    unintended public disclosure of the identities, market positions and

    business transactions of swap counterparties?

    Q75. Should the Commission provide a fixed cap size for each asset

    class rather than varying the cap size by swap category?

    Q76. Should the Commission consider using linear sensitivity

    measures or other statistical disclosure controls outlined in the

    Report on Statistical Disclosure Limitation Methodology from the

    Federal Committee on Statistical Methodology to set post-initial cap

    sizes?

    Q77. Is the definition of a ``non-affiliated market participant's

    as described in the alternative methods for calculating the post-

    initial cap sizes the correct definition for the purpose of calculating

    the minimum notional amounts that are publicly disseminated?

    Q78. Are there other alternative methods for determining the post-

    initial notional cap sizes that the Commission should consider that are

    not described in this Further Proposal? If yes, please explain those

    methods, as well as any data, studies or additional information to

    support such method.

    C. Masking the Geographic Detail of Swaps in the Other Commodity Asset

    Class

    1. Policy Goals for Masking the Geographic Detail for Swaps in the

    Other Commodity Asset Class

    In the Adopting Release, the Commission sets forth general

    protections for the identities, market positions and business

    transactions of swap counterparties in Sec. 43.4(d). Section 43.4(d)

    generally prohibits an SDR from publicly disseminating swap transaction

    and pricing data in a manner that discloses or otherwise facilitates

    the identification of a swap counterparty.\273\ Notwithstanding that

    prohibition, Sec. 43.4(d)(3) provides that SDRs are required to

    publicly disseminate data that discloses the underlying asset(s) of

    publicly reportable swap transactions.

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

    \273\ See Sec. 43.4(d)(1) of the Commission's regulations.

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

    Section 43.4(d)(4) contains special provisions for swaps in the

    other commodity asset class. These swaps raise special concerns because

    the public disclosure of the underlying asset(s) may in turn reveal the

    identities, market positions and business transactions of the swap

    counterparties. To address these concerns, Sec. 43.4(d)(4) limits the

    types of swaps in the other commodity asset class that are subject to

    public dissemination. Specifically, Sec. 43.4(d)(4)(ii) of the

    Commission's regulations provides that, for publicly reportable swap

    transactions in the other commodity asset class, SDRs must publicly

    disseminate the actual underlying assets only for: (1) Those swaps

    executed on or pursuant to the rules of a SEF or DCM; (2) those swaps

    referencing one of the contracts described in appendix B to part 43;

    and (3) those swaps that are economically related to one of the

    contracts described in appendix B to part 43.\274\ Essentially, the

    Commission has determined that these three categories of swap have

    sufficient liquidity such that the disclosure of the underlying asset

    would not reveal the identities, market positions and business

    transactions of the swap counterparties.

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

    \274\ Appendix B to part 43 provides a list of 28 ``Enumerated

    Physical Commodity Contracts'' as well as one contract under the

    ``Other Contracts'' heading. See 77 FR 1,182 app. B.

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

    In its Adopting Release, the Commission included in appendix B to

    part 43 a list of contracts that, if referenced as an underlying asset,

    should be publicly disseminated in full without limiting the commodity

    or geographic detail of the asset. In this Further Proposal, the

    Commission is proposing to add 13 contracts to appendix B to part 43

    under the ``Other Contracts'' heading.\275\ The Commission believes

    that since it previously has determined that these 13 contracts have

    material liquidity and price references, among other things, the public

    dissemination of the full underlying asset for publicly reportable swap

    transactions that reference such contracts (and any underlying assets

    [[Page 15494]]

    that are economically related thereto) would not disclose the

    identities, market positions and business transactions of swap

    counterparties.

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

    \275\ Appendix B to part 43 currently lists only Brent Crude Oil

    (ICE) under the ``Other Contracts'' heading.

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

    Pursuant to the Adopting Release, any publicly reportable swap

    transaction in the other commodity asset class that is excluded under

    Sec. 43.4(d)(4)(ii) would not be subject to the reporting and public

    dissemination requirements for part 43 upon the effective date of the

    Adopting Release. The Commission noted in the Adopting Release that it

    planned to address the group of other commodity swaps that were not

    subject to the rules of part 43 in a forthcoming release.\276\

    Accordingly, the Commission is proposing rules in this Further Proposal

    to address the public dissemination of swap transaction and pricing

    data for the group of other commodity swaps that are not covered

    currently by Sec. 43.4(d)(4)(ii).

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

    \276\ See 77 FR 1,211.

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

    The Commission is of the view that given the lack of data on the

    liquidity for certain swaps in the other commodity asset class, the

    lack of data on the number of market participants in these other

    commodity swaps markets, and the statutory requirement to protect the

    anonymity of market participants,\277\ the public dissemination of less

    specific information for swaps with specific geographic or pricing

    detail may be appropriate. The Commission anticipates that the public

    dissemination of the exact underlying assets for swaps in this group of

    the other commodity asset class may subject the identities, market

    positions and business transactions of market participants to

    unwarranted public disclosure if additional protections are not

    established with respect to the geographic detail of the underlying

    asset. For that reason, the Commission is proposing that SDRs mask or

    otherwise disguise the geographic details related to the underlying

    assets of a swap in connection with the public dissemination of such

    swap transaction and pricing data.\278\

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

    \277\ See sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) of the

    CEA. 7 U.S.C. 2(a)(13)(C)(iii), (E)(i).

    \278\ Limiting the geographical detail is a typical statistical

    disclosure control used by other federal agencies as described in

    the Report on Statistical Disclosure Limitation Methodology, see

    note 255 supra.

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

    2. Proposed Amendments to Sec. 43.4

    In order to accommodate the policy goals described above, the

    Commission is proposing to add Sec. 43.4(d)(4)(iii) to part 43 to

    establish rules regarding the public dissemination of the remaining

    group of swaps in the other commodity asset class (i.e., those not

    described in Sec. 43.4(d)(4)(ii)). In the Commission's view, proposed

    Sec. 43.4(d)(4)(iii) would ensure that the public dissemination of

    swap transaction and pricing data would not unintentionally disclose

    the identities, market positions and business transactions of any swap

    counterparty to a publicly reportable swap transaction in the other

    commodity asset class. In particular, proposed Sec. 43.4(d)(4)(iii)

    provides that SDRs must publicly disseminate the details about the

    geographic location of the underlying assets of the other commodity

    swaps not described in Sec. 43.4(d)(4)(ii) (i.e., other commodity

    swaps that have a specific delivery or pricing point) pursuant to

    proposed appendix E to part 43. Proposed appendix E to part 43 is

    discussed in the next subsection to this Further Proposal.

    The Commission recognizes that requiring the public dissemination

    of less specific geographic detail for an other commodity swap may, to

    some extent, diminish the price discovery value of swap transaction and

    pricing data for such swap. The Commission anticipates, however, that

    the public dissemination of such data would continue to provide the

    market with useful information relating to market depth, trading

    activity and pricing information for similar types of swaps. Further,

    sections 2(a)(13)(C)(iii) and 2(a)(13)(E)(i) of the CEA expressly

    require that the Commission protect the identity, market positions and

    business transactions of swap counterparties.

    The Commission is also proposing to make conforming amendments to

    Sec. 43.4(d). Specifically, the Commission is proposing to amend the

    introductory language to Sec. 43.4(d)(4)(i) by deleting ``Sec.

    43.4(d)(4)(ii)'' and adding in its place ``Sec. Sec. 43.4(d)(4)(ii)

    and (iii)'' to make clear that SDRs have to publicly disseminate swaps

    data under Sec. 43.4(d)(4)(iii) in accordance with part 43.\279\

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

    \279\ In addition to proposing limitations on the geographic

    detail for public dissemination of underlying assets for certain

    swaps in the other commodity asset class, the Commission is also

    proposing to amend Sec. Sec. 43.4(g) and (h) to make conforming

    changes.

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

    3. Application of Proposed Sec. 43.4(d)(4)(iii) and Proposed Appendix

    E to Part 43--Geographic Detail for Delivery or Pricing Points

    Proposed appendix E to part 43 includes the system that SDRs must

    use to mask the specific delivery or pricing points that are a part of

    an underlying asset in connection with the public dissemination of swap

    transaction and pricing data for certain swaps in the other commodity

    asset class. To the extent that the underlying asset of a publicly

    reportable swap transaction described in proposed Sec. 43.4(d)(4)(iii)

    does not have a specific delivery or pricing point, then the provisions

    of proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part 43

    would not be applicable. Specifically, proposed appendix E to part 43

    provides top-coding for various geographic regions, both in the United

    States and internationally.

    Subsection (a) below includes a description of the top-coding U.S.

    regions. Subsection (b) below includes a description of the top-coding

    non-U.S. regions. Finally, subsection (c) below proposes a system for

    SDRs to publicly disseminate ``basis swaps''.\280\

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

    \280\ For the purposes of this Further Proposal, basis swaps are

    defined as swap transactions in which one leg of the swap references

    a contract described in appendix B to part 43 (or is economically

    related thereto) and the other leg of the swap does not.

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

    a. U.S. Delivery or Pricing Points

    Table E1 in appendix E to part 43 lists the geographic regions that

    an SDR would publicly disseminate for an off-facility swap in the other

    commodity asset class that is described in proposed Sec.

    43.4(d)(4)(iii). The Commission is proposing that an SDR publicly

    disseminate swap transaction and pricing data for certain energy and

    power swaps in the other commodity asset class, as described in more

    detail below, in a different manner than the remaining other

    commodities. In order to mask the specific delivery or pricing detail

    of these energy and power swaps, the Commission is proposing to use

    established regions or markets that are associated with these

    underlying assets.

    i. Natural Gas and Related Products

    In proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part

    43, the Commission is setting forth a method to describe the publicly

    reportable swap transactions that have natural gas or related products

    as an underlying asset and have a specific delivery or pricing point in

    the United States. In particular, this proposed section would require

    SDRs to publicly disseminate a description of the specific delivery or

    pricing point based on one of the five industry specific natural gas

    markets set forth by the Federal Energy Regulatory Commission

    (``FERC'').\281\ The FERC Natural Gas Markets reflect natural

    deviations found in the spot prices in different markets.\282\ The

    Commission

    [[Page 15495]]

    anticipates that a distinction for natural gas is necessary to enhance

    price discovery while protecting the identities of the parties,

    business transactions and market positions of market participants.

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

    \281\ See FERC, National Gas Markets--Overview, http://www.ferc.gov/market-oversight/mkt-gas/overview.asp (last viewed Jan.

    31, 2012).

    \282\ See FERC, Natural Gas Market Overview: Spot Gas Prices,

    http://www.ferc.gov/market-oversight/mkt-gas/overview/ngas-ovr-avg-spt-ng-pr.pdf (updated Jan. 1, 2012). In addition, there is evidence

    that the spot prices in these markets and the corresponding futures

    prices are highly correlated. D. Murray, Z. Zhu, ``Asymmetric price

    responses, market integration and market power: A study of the U.S.

    natural gas market,'' Energy Economics, 30 (2008) 748-765.

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

    The proposed five markets for public dissemination of delivery or

    pricing points for natural gas swaps are as follows: (i) Midwest

    (including North Dakota, South Dakota, Minnesota, Wisconsin, Michigan,

    Indiana, Illinois, Iowa, Nebraska, Kansas, Oklahoma, Missouri and

    Arkansas); (ii) Northeast (including Maine, New Hampshire, Vermont,

    Massachusetts, Rhode Island, Connecticut, New York, Pennsylvania,

    Kentucky, Ohio, West Virginia, New Jersey, Delaware, Maryland and

    Virginia) \283\ (iii) Gulf (including Louisiana and Texas); (iv)

    Southeast (including Tennessee, North Carolina, South Carolina,

    Georgia, Florida, Alabama and Mississippi); and (v) Western (including

    Montana, Wyoming, Colorado, New Mexico, Idaho, Utah, Washington,

    Oregon, California, Nevada and Arizona). For any other pricing points

    in the United States, SDRs would publicly disseminate ``Other U.S.'' in

    place of the actual pricing or delivery point for such natural gas

    swaps.

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

    \283\ The District of Columbia would be included in this region,

    if any specific delivery or pricing points existed at the time of

    this Further Proposal.

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

    The Commission is considering alternatives for how to break down

    the regions or markets with respect to the public dissemination of

    specific delivery or pricing points for natural gas. The Commission is

    considering using FERC's Natural Gas Futures Trading Markets, which are

    different from the FERC Natural Gas Markets described above. The public

    dissemination regions for delivery or pricing points for such natural

    gas swaps for this alternative would be as follows: (i) Midwest

    (including North Dakota, South Dakota, Minnesota, Wisconsin, Michigan,

    Indiana, Illinois, Iowa, Nebraska, Missouri, Ohio and Kentucky); (ii)

    Northeast (including Maine, New Hampshire, Vermont, Massachusetts,

    Rhode Island, Connecticut, Pennsylvania, West Virginia, New York, New

    Jersey, Delaware and Maryland); (iii) South Central (including Kansas,

    Oklahoma, Arkansas, Louisiana and Texas); (iv) Southeast (including

    Virginia, Tennessee, North Carolina, South Carolina, Georgia, Florida,

    Alabama and Mississippi); (v) Western (including Montana, Wyoming,

    Colorado, New Mexico, Idaho, Utah, Washington, Oregon, California,

    Nevada and Arizona).\284\ For any other pricing points in the United

    States, SDRs would publicly disseminate ``Other U.S.'' in place of the

    actual pricing or delivery point for such natural gas swaps.\285\

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

    \284\ See FERC, Gas Futures Trading, Natural Gas Futures Trading

    Markets, http://www.ferc.gov/market-oversight/mkt-gas/trading/2011/11-2011-gas-tr-fut-archive.pdf. (Nov. 2011).

    \285\ See section III.C.3.a.iv infra.

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

    Finally, the Commission is also considering whether one of the

    public dissemination methods described for the ``All Remaining Other

    Commodities'' would be appropriate with respect to the public

    dissemination for the specific delivery or pricing points related to

    natural gas swaps.

    ii. Petroleum and Products

    In proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part

    43, the Commission is setting forth a method to describe the publicly

    reportable swap transactions that have petroleum products as an

    underlying asset and have a specific delivery or pricing point in the

    United States. In particular, this proposed section would require SDRs

    to publicly disseminate a description of the specific delivery or

    pricing point based on one of the seven Petroleum Administration for

    Defense Districts (``PADD'') regions.\286\ The PADD regions indicate

    economically and geographically distinct regions for the purposes of

    administering oil allocation. The Department of Energy's Energy

    Information Administration (``EIA'') collects and publishes oil supply

    and demand data with respect to the PADD regions.\287\ Accordingly, to

    provide consistency with EIA publications and information regarding

    regional patterns, the Commission is proposing that specific delivery

    or pricing points with respect to such petroleum product swaps are

    publicly disseminated based on PADD regions.

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

    \286\ See PADD Map, Appendix A, Petroleum Administration for

    Defense Districts, http://205.254.135.24/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/paddmap.htm. (last viewed

    Jan. 31, 2012).

    \287\ See U.S. Energy Information Administration (EIA)--

    Petroleum & Other Liquids, http://www.eia.gov/petroleum/data.cfm

    (last viewed Jan. 31, 2012).

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

    The PADD regions for public dissemination of delivery or pricing

    points for such petroleum product swaps are as follows: (i) PADD 1A

    (New England); (ii) PADD 1B (Central Atlantic); (iii) PADD 1C (Lower

    Atlantic); (iv) PADD 2 (Midwest); (v) PADD 3 (Gulf Coast); (vi) PADD 4

    (Rocky Mountains); and (vii) PADD 5 (West Coast).\288\ For any other

    pricing points in the United States, SDRs would publicly disseminate

    the term ``Other U.S.'' in place of the actual pricing or delivery

    point for such petroleum product swaps.

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

    \288\ Alternatively, the Commission is considering combining the

    East Coast PADD into one category, such that any oil swap with a

    specific delivery or pricing point as PADD 1A (New England), PADD 1B

    (Central Atlantic), or PADD 1C (Lower Atlantic) would be publicly

    disseminated as PADD 1 (East Coast).

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

    The Commission is also considering whether one of the public

    dissemination methods described for the ``All Remaining Other

    Commodities'' would be appropriate with respect to the public

    dissemination for the specific delivery or pricing points related to

    petroleum product swaps.\289\

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

    \289\ See section III.C.3.a.iv infra.

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

    iii. Electricity and Sources

    In proposed Sec. 43.4(d)(4)(iii), the Commission also is setting

    forth a method to describe publicly reportable swap transactions that

    have electricity and sources as an underlying asset and have a specific

    delivery or pricing point in the United States. In particular, this

    proposed section would require SDRs to publicly disseminate the

    specific delivery or pricing point based on a description of one of the

    FERC Electric Power Markets.\290\

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

    \290\ See FERC, Electric Power Markets--Overview, http://www.ferc.gov/market-oversight/mkt-electric/overview.asp (last viewed

    Jan. 31, 2012).

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

    The markets for public dissemination of delivery or pricing points

    for such electricity swaps are as follows: (i) California (CAISO); (ii)

    Midwest (MISO); (iii) New England (ISO-NE); (iv) New York (NYISO); (v)

    Northwest; (vi) PJM; (vii) Southeast; (viii) Southwest; (ix) Southwest

    Power Pool (SPP); and (x) Texas (ERCOT). For any other pricing points

    in the United States, SDRs would publicly disseminate the term ``Other

    U.S.'' in place of the actual pricing or delivery point for such

    electricity and sources swaps.

    Alternatively, the Commission is considering using the North

    American Electric Reliability Corporation (``NERC'') regions for

    publicly disseminating delivery or pricing points for electricity swaps

    described in proposed Sec. 43.4(d)(4)(iii). The NERC regions are

    broader than the FERC regions and include much of Canada. Specifically,

    the NERC regions are as follows: (i) Florida Reliability Coordinating

    Council (FRCC); (ii) Midwest Reliability Organization (MRO); (iii)

    Northeast Power Coordinating Council (NPCC); (iv)

    [[Page 15496]]

    ReliabilityFirst Corporation (RFC); (v) SERC Reliability Corporation

    (SERC); (vi) Southwest Power Pool, RE (SPP); (vii) Texas Regional

    Entity (TRE); (viii) Western Electricity Coordinating Council

    (WECC).\291\

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

    \291\ See NERC, Key Players: Regional Entities, http://www.nerc.com/page.php?cid=1%7C9%7C119 (last visited Jan. 31, 2012).

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

    Finally, the Commission is also considering whether one of the

    public dissemination methods described below for the ``All Remaining

    Other Commodities'' would be appropriate with respect to the public

    dissemination for the specific delivery or pricing points related to

    electricity and sources swaps.

    iv. All Remaining Other Commodities

    In proposed Sec. 43.4(d)(4)(iii) and proposed appendix E to part

    43, the Commission is setting forth a method to describe any swaps in

    the other commodity asset class that do not have oil, natural gas or

    electricity as an underlying asset, but have specific delivery or

    pricing points in the United States. In particular, the Commission is

    proposing in this section that SDRs publicly disseminate information

    with respect to these swaps based on the 10 federal regions established

    by the U.S. Energy Information Administration (``EIA''). The Commission

    anticipates that the use of the 10 federal regions would provide

    consistency among different types of underlying assets in the other

    commodity asset class with respect to delivery and pricing point

    descriptions. The Commission anticipates, however, that for some

    underlying assets, the public dissemination of delivery or pricing

    points by region may still result in thinly-populated swap categories.

    The 10 federal regions that SDRs would use for public dissemination

    for all remaining other commodity swaps are as follows: (i) Region I

    (including Connecticut, Maine, Massachusetts, New Hampshire, Rhode

    Island and Vermont); (ii) Region II (including New Jersey and New

    York); (iii) Region III (including Delaware, District of Columbia,

    Maryland, Pennsylvania, Virginia and West Virginia); (iv) Region IV

    (including Alabama, Florida, Georgia, Kentucky, Mississippi, North

    Carolina, South Carolina and Tennessee); (v) Region V (including

    Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin); (vi)

    Region VI (including Arkansas, Louisiana, New Mexico, Oklahoma and

    Texas); (vii) Region VII (including Iowa, Kansas, Missouri and

    Nebraska); (viii) Region VIII (including Colorado, Montana, North

    Dakota, South Dakota, Utah and Wyoming); (ix) Region IX (including

    Arizona, California, Hawaii and Nevada); and (x) Region X (including

    Alaska, Idaho, Oregon and Washington).\292\ The Commission is also

    considering whether the use of these 10 federal regions is appropriate

    for the natural gas, oil and/or electricity swap markets as described

    above.

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

    \292\ See U.S. Energy Information Administration, U.S. Federal

    Region Map, http://www.eia.gov/cneaf/electricity/page/channel/fedregstates.html (last visited Jan. 31, 2012).

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

    Alternatively, the Commission is considering whether SDRs should

    publicly disseminate information with respect to these swaps based on

    one of the four U.S. Census regions.\293\ The Commission is also

    considering whether the use of the four U.S. Census regions is

    appropriate for the natural gas, oil and/or electricity swaps markets

    as described above. Using the U.S. Census regions, however, might

    provide fewer reporting categories and, as a result, market

    participants and the public may lose some price discovery as compared

    to a description system based on the 10 federal regions. The four U.S.

    Census regions are: (i) Midwest (including North Dakota, South Dakota,

    Minnesota, Wisconsin, Michigan, Indiana, Illinois, Iowa, Nebraska,

    Missouri, Ohio, Kentucky and Kansas); (ii) Northeast (including Maine,

    New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut, New

    York, Pennsylvania and New Jersey); (iii) South (including Oklahoma,

    Arkansas, Louisiana, Texas, West Virginia, Maryland, Delaware, District

    of Columbia, Virginia, Tennessee, North Carolina, South Carolina,

    Georgia, Florida, Alabama and Mississippi); and (iv) West (including

    Montana, Wyoming, Colorado, New Mexico, Idaho, Utah, Washington,

    Oregon, California, Nevada, Arizona, Alaska and Hawaii).\294\

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

    \293\ See U.S. Department of Commerce, Economics and Statistics

    Administration, Census Bureau, Census Regions and Divisions of the

    United States, http://www.census.gov/geo/www/us_regdiv.pdf (last

    viewed Jan. 31, 2012).

    \294\ See note 293 supra.

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

    Finally, the Commission is considering whether it is appropriate to

    publicly disseminate the specific delivery or pricing points in the

    United States for certain types of swaps in the other commodity asset

    class that are not described in proposed Sec. 43.4(d)(4)(ii).

    Specifically, the Commission is considering whether public disclosure

    of such information would disclose the identities, business

    transactions and market positions of any persons and whether price

    discovery would be enhanced by publicly disseminating more specific

    information.

    b. Non-U.S. Delivery or Pricing Points

    Table E2 in proposed appendix E to part 43 provides the appropriate

    manner for SDRs to publicly disseminate non-U.S. delivery or pricing

    points for all publicly reportable swap transactions described in the

    proposed Sec. 43.4(d)(4)(iii). The Commission is of the view that SDRs

    should not publicly disseminate the actual location for these

    international delivery or pricing points since the public disclosure of

    such information may disclose the identities of parties, business

    transactions and market positions of market participants. In Table E2,

    the Commission is proposing the countries and regions that an SDR must

    publicly disseminate. In proposing the use of these geographic

    breakdowns for the public reporting of international delivery or

    pricing points, the Commission considered world regions that have

    significant energy consumption, whether ISDA-specific documentation

    exists for a particular country, and whether public disclosure would

    compromise the anonymity of the swap counterparties.

    The Commission is proposing the following international regions for

    publicly disseminating specific delivery or pricing points of publicly

    reportable swap transactions described in Sec. 43.4(d)(4)(iii): (i)

    North America (publicly disseminate ``Canada'' or ``Mexico''); (ii)

    Central America (publicly disseminate ``Central America''); (iii) South

    America (publicly disseminate ``Brazil'' or ``Other South America'');

    (iv) Europe (publicly disseminate ``Western Europe,'' ``Northern

    Europe,'' ``Southern Europe,'' or ``Eastern Europe''); (v) Russia

    (publicly disseminate ``Russia'') \295\; (vi) Africa (publicly

    disseminate ``Northern Africa,'' ``Western Africa,'' ``Eastern

    Africa,'' ``Central Africa,'' or ``Southern Africa''); (vii) Asia-

    Pacific (publicly disseminate ``Northern Asia,'' ``Central Asia,''

    ``Eastern Asia,'' ``Western Asia,'' ``Southeast Asia'' or ``Australia/

    New Zealand/Pacific Islands''). The Commission is considering whether a

    more granular approach is necessary for certain regions in order to

    enhance price discovery while still protecting anonymity. For example,

    Mexico, Canada and Russia may benefit from a more granular public

    dissemination of delivery or pricing points given the

    [[Page 15497]]

    amount of energy production in those regions.

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

    \295\ Note that Russia is not included in ``Eastern Europe'' or

    in ``Northern Asia'' and instead should be publicly disseminated as

    ``Russia.''

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

    Alternatively, the Commission is considering a broader approach to

    the public dissemination of non-U.S. delivery or pricing points for

    swaps described in proposed Sec. 43.4(d)(4)(iii). Specifically, the

    Commission is considering public dissemination of only the top-level

    regions for certain regions (e.g., ``Africa'' instead of ``North

    Africa''). The Commission is considering this alternative approach in

    order to prevent the public disclosure of the identities, business

    transactions and market positions of swap counterparties.

    Finally, the Commission is considering whether it is appropriate to

    publicly disseminate the specific delivery or pricing points outside

    the United States for certain types of swaps in the other commodity

    asset class that are not described in Sec. 43.4(d)(4)(ii).

    Specifically, the Commission is considering whether public disclosure

    of such information would disclose the identities, business

    transactions and market positions of any persons and whether price

    discovery would be enhanced by publicly disseminating more specific

    information.

    To the extent that a publicly reportable swap transaction described

    in proposed Sec. 43.4(d)(4)(iii) references the United States as a

    whole and not a specific delivery or pricing point, proposed appendix E

    would require an SDR to publicly disseminate that reference. For

    example, an SDR would publicly disseminate a weather swap that

    references ``U.S. Heating Monthly'' as ``U.S. Heating Monthly.''

    c. Basis Swaps

    The Commission is proposing to require SDRs to ensure that specific

    underlying assets are publicly disseminated for basis swaps that

    qualify as publicly reportable swap transactions. The Commission

    recognizes that basis swaps exist in which one leg of the swap

    references a contract described in appendix B to part 43 (or is

    economically related to one such contract) and the other leg of the

    swap references an asset or pricing point not listed in appendix B to

    part 43. With respect to the leg of a basis swap that does not

    reference a contract in appendix B to part 43, the Commission is

    proposing to require SDRs to publicly disseminate the underlying asset

    of the basis swap pursuant to proposed Sec. 43.4(d)(4)(iii) and

    proposed appendix E to part 43. That is, Sec. 43.4(d)(4) currently

    requires an SDR to publicly disseminate the underlying asset of the leg

    of the basis swap that references a contract listed in appendix B to

    part 43. To the extent that a basis swap is executed on or pursuant to

    the rules of a SEF or DCM, an SDR would publicly disseminate the

    specific underlying asset (i.e., the top-coding provisions of proposed

    Sec. 43.4(d)(4)(iii) would not apply since those basis swaps are

    executed on or pursuant to the rules of a SEF or DCM).

    Request for Comment

    Q79. The Commission requests specific comment on all aspects of the

    proposed anonymity protections for the public dissemination of publicly

    reportable swap transactions in the other commodity asset class.

    Q80. As an alternative to the proposed approach, should the

    Commission narrow the limited transaction reporting detail provisions

    of proposed Sec. 43.4(d)(4)(iii) to exclude other commodity swaps

    involving many non-affiliated market participants during a sufficiently

    long observation period--for example, an observation period of at least

    one year? This alternative approach would be predicated on the notion

    that reduced market concentration is indicative of a market with very

    limited or non-existent anonymity concerns.

    Q80.a. Would this alternative approach enhance price discovery in

    other commodity swap markets by providing more granular data to the

    public? \296\

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

    \296\ See, e.g., IEA, IEF, OPEC, and IOSCO, Oil Price Reporting

    Agencies, http://www.g20.org/Documents2011/11/IOs%20Report%20on%20PRA%20Report.pdf. (Oct. 2011).

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

    Q80.b. Does this approach create a risk that SDRs would publicly

    disclose details regarding the identities of swap counterparties and

    their business transactions in these markets in light of the other

    anonymity protections (e.g., the rounded notional or principal amounts

    provisions of Sec. Sec. 43.4(g)-(h), the applicable cap size

    provisions, and any relevant reporting delay)?

    Q80.c. Should the Commission adopt a combination of the alternative

    approach and the proposed top-coding approach? If yes, then how should

    the Commission apply the combination of these two approaches?

    Q81. Would any of the alternatives in the discussion of proposed

    appendix E to part 43 above improve price discovery? Would any of these

    alternatives improve anonymity protections?

    Q82. From the standpoint of enhancing price discovery and

    protecting anonymity, would public dissemination of specific delivery

    or pricing points based on the FERC Natural Gas Futures Trading Markets

    be a better alternative than the regions established by the FERC

    Natural Gas Markets?

    Q83. Would the benefits of using the same categories or regions for

    all types of other commodities outweigh the potential loss of enhanced

    price discovery and/or the potential increased risk of disclosure?

    Q84. Would the proposal to use U.S. regions for natural gas

    products, petroleum and products, electricity and sources and other

    commodity groups enhance or limit price discovery? Would these regions

    or markets adequately protect the identities, business transactions and

    market positions of swap counterparties?

    Q85. Would the proposed international regions or markets adequately

    protect the identities, business transactions and market positions of

    swap counterparties? Is there sufficient volume to support these

    different international regions within the different types of other

    commodities?

    Q86. Should the international regions vary for each of the

    different types of commodities within the other commodities asset class

    (i.e., natural gas and related products, petroleum and products,

    electricity and sources, all remaining other commodities)? Are there

    specific regions which should be identified for each of these different

    types of other commodities?

    Q87. Should the Commission limit the proposed requirement for SDRs

    to anonymize delivery and pricing points for natural gas and related

    products to only natural gas?

    Q88. Should the Commission limit the proposed requirement for SDRs

    to anonymize specific delivery and pricing points for electricity and

    sources to only electricity?

    Q89. Should SDRs publicly disseminate the delivery or pricing point

    with respect to coal in the same manner as the ``All Remaining Other

    Commodities''?

    Q90. For thinly-traded products or illiquid markets, is a less

    specific delivery or pricing point necessary to protect anonymity? For

    example, should there only be a distinction between ``U.S.'' and

    ``International?'' Would such a broad description limit price discovery

    to market participants and the public?

    Q91. As an alternative approach, please provide comments regarding

    the use of the other commodity groupings in proposed appendix D to part

    43 of the Commission regulations as a means to top-code the public

    dissemination of the underlying commodities for swaps in

    [[Page 15498]]

    the other commodity asset class that are not described in Sec.

    43.4(d)(4)(ii). That is, an SDR would publicly disseminate the

    individual other commodity swap grouping rather than the specific

    underlying assets.

    Q91.a. Should the Commission apply this additional masking to other

    commodity swaps that are not described in Sec. 43.4(d)(4)(ii)? If yes,

    please provide specific examples.

    Q91.b. Would the public dissemination of proposed ``Individual

    Other Commodity'' groups per proposed appendix D to part 43 of the

    Commission's regulations enhance price discovery?

    Q91.c. Do the swap categories in proposed appendix D to part 43 of

    the Commission's regulations adequately mask the actual underlying

    commodity in such a way that would protect the anonymity of the

    identities, market positions and business transactions of swap

    counterparties?

    4. Further Revisions to Part 43

    a. Additional Contracts Added to Appendix B to Part 43

    Appendix B to part 43 currently lists contracts that, if referenced

    as an underlying asset, would require SDRs to publicly disseminate the

    full geographic detail of the asset. In the Adopting Release, the

    Commission provided that SDRs were required to publicly disseminate any

    underlying asset of a publicly reportable swap transaction that

    references or is economically related to any contract or contracts

    listed in appendix B to part 43 in the same manner.

    As noted above, the Commission is proposing to add 13 contracts

    under the ``Other Commodity'' heading in appendix B to part 43. The

    addition of these 13 contracts effectively would require SDRs to

    publicly disseminate these contracts the same way as the other

    contracts that are currently listed in appendix B to part 43. That is,

    an SDR would publicly disseminate the actual underlying asset (and any

    underlying asset(s) that are economically related) without any

    limitation of the geographic detail.

    The Commission previously has determined that these 13 contracts

    are significant price discovery contracts (``SPDCs'') in connection

    with trading on exempt commercial markets (``ECMs'').\297\ Each of the

    13 contracts has undergone an analysis in which the Commission

    considered the following five criteria: (i) Price linkage (the extent

    to which the contract uses or otherwise relies on a daily or final

    settlement price of a contract listed for trade on or subject to the

    rules of a DCM); (ii) arbitrage (the extent to which the price of the

    contract is sufficiently related to the price of a contract listed on a

    DCM to permit market participants to effectively arbitrage between the

    two markets); (iii) material price reference (the extent to which, on a

    frequent and recurring basis, bids, offers or transactions in a

    commodity are directly based on, or are determined by referencing, the

    prices generated by contracts being traded or executed on the ECM);

    (iv) material liquidity (the extent to which volume of the contract is

    sufficient to have a material effect on other contracts listed for

    trading); and (v) other material factors.\298\

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

    \297\ The Commission is proposing to add the following SPDC

    designated contracts to appendix B to part 43. The Commission has

    previously issued orders finding that these contracts perform a

    significant price discovery function: AECO Financial Basis Contract

    traded on the IntercontinentalExchange, Inc. (``ICE'') (See 75 FR

    23,697); NWP Rockies Financial Basis Contract traded on ICE (See 75

    FR 23,704); PG&E Citygate Financial Basis Contract traded on ICE

    (See 75 FR 23,710); Waha Financial Basis Contract traded on ICE (See

    75 FR 24,655); Socal Border Financial Basis Contract traded on ICE

    (See 75 FR 24,648); HSC Financial Basis Contract traded on ICE (See

    75 FR 24,641); ICE Chicago Financial Basis Contract traded on ICE

    (See 75 FR 24,633); SP-15 Financial Day-Ahead LMP Peak Contract

    traded on ICE (See 75 FR 42,380); SP-15 Financial Day-Ahead LMP Off-

    Peak Contract traded on ICE (See 75 FR 42,380); PJM WH Real Time

    Peak Contract traded on ICE (See 75 FR 42,390); PJM WH Real Time

    Off-Peak Contract traded on ICE (See 75 FR 42,390); Mid-C Financial

    Peak Contract traded on ICE (See 75 FR 38,469); Mid-C Financial Off-

    Peak Contract traded on ICE (See 75 FR 38,469).

    \298\ The Dodd-Frank Act deleted and replaced CEA section

    2(h)(7), which contained the five criteria for determining a SPDC.

    The Dodd-Frank Act amended CEA section 4a(a) to include CEA section

    4a(a)(4), which contains a similar version of the five criteria for

    determining a SPDC in the context of excessive speculation.

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

    The Commission anticipates that since the Commission already has

    determined these 13 contracts to have material liquidity and material

    price reference, among other things, the public dissemination of the

    full underlying asset for publicly reportable swap transactions that

    reference such contracts (and any underlying assets that are

    economically related thereto) would not disclose the identities, market

    positions and business transactions of market participants and would

    enhance price discovery in the related markets.

    The Commission notes that the Commission already has determined one

    additional contract, ``Henry Financial LD1 Fixed Price Contract,'' is a

    SPDC.\299\ The Commission, however, is not proposing to add this

    contract under the heading ``Other Contracts'' in appendix B to part

    43. This contract is economically related to the ``New York Mercantile

    Exchange Henry Hub Natural Gas,'' which is listed under ``Enumerated

    Physical Commodity Contracts'' in appendix B to part 43. Therefore,

    listing this contract again would be redundant.

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

    \299\ See 74 FR 37,988.

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

    b. Technical Revisions to Part 43

    In the Adopting Release, the Commission states that the

    transactions described Sec. Sec. 43.4(d)(4)(ii)(A)-(C) are meant to be

    exclusive of one another. Under these sections, an SDR is required to

    publicly disseminate the underlying asset(s) of a swap in the other

    commodity asset class that is executed on or pursuant to the rules of a

    SEF or DCM regardless of whether the underlying asset is listed on

    appendix B to part 43 or is economically related to such contracts.

    Accordingly, the Commission is proposing a technical clarification to

    Sec. 43.4(d)(4)(ii)(B) to clarify the intent that these elements are

    exclusive of one another, as articulated in the preamble to the

    Adopting Release.

    Request for Comment

    Q92. How would reporting the 13 contracts that the Commission is

    proposing to list in appendix B to part 43 impact price discovery and

    anonymity of those contracts and other publicly reportable swap

    transactions in the other commodity asset class? For example, does the

    exact reporting of the PJM WH Real Time Peak Contract impact the

    remaining volume of publicly reportable swap transactions in the other

    commodity asset class that would be publicly disseminated with a PJM

    delivery or pricing point?

    IV. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') was adopted in 1980 to

    address concerns that government regulations may have a significant

    and/or disproportionate effect on small businesses. To mitigate this

    risk, the RFA requires federal agencies to issue an initial and final

    regulatory flexibility analysis for each rule of general applicability

    for which the agency issues a general notice of proposed

    rulemaking.\300\ These analyses must describe: (i) The economic impact

    of the proposed rule on small entities, including a statement of the

    objectives and the legal bases for the rulemaking; (ii) an estimate of

    the number of small entities to be affected; (iii) identification of

    federal rules that may duplicate, overlap or conflict with the proposed

    [[Page 15499]]

    rules; and (iv) a description of any significant alternatives to the

    proposed rule that would minimize any significant impacts on small

    businesses.\301\ The RFA focuses on direct impact to small businesses

    and not on indirect impacts on these businesses, which may be tenuous

    and difficult to discern.\302\

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

    \300\ See 5 U.S.C. 601 et seq.

    \301\ See 5 U.S.C. 603, 604.

    \302\ See Whitman v. Am. Trucking Ass'ns, 531 U.S. 457 (2001);

    Am. Trucking Assns. v. EPA, 175 F.3d 1027, 1043 (DC Cir. 1985); Mid-

    Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327, 340 (DC Cir. 1985).

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

    As noted above, section 2(a)(13)(E)(ii) of the CEA directs the

    Commission to prescribe regulations specifying ``the criteria for

    determining what constitutes a large notional off-facility swap

    transaction (block trade) for particular markets and contracts.'' In

    general, proposed Sec. 43.6 sets out, inter alia, the criteria to

    determine swap categories and the methodologies that the Commission

    would employ in determining the appropriate minimum block sizes for

    those swap categories. In addition, the proposed amendments to Sec.

    43.4 set out a system to mask the notional amounts of swaps of relative

    large size, as well as a system to anonymize geographic and underlying

    asset detail for certain other commodity swaps. The Commission is of

    the view that these proposed provisions would impose only one direct

    requirement on businesses, including small businesses.\303\ Proposed

    43.6(a) would require reporting parties to notify an SDR of its

    election to treat a qualifying publicly reportable swap transaction as

    a large notional off-facility swap. The Commission anticipates that the

    direct impact of this requirement would not be significant for the

    purposes of the RFA.

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

    \303\ As discussed below, the Commission is of the view that

    registered entities such as SDs and MSPs are not small businesses.

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

    Indeed, proposed Sec. 43.6(g) would impose minimal notice

    requirements on market participants that are subject to part 43 of the

    Commission's regulations. A more fulsome analysis of the implications

    that proposed Sec. 43.6(g) may have on small businesses is described

    immediately below.

    A. Potential Economic Impact--Proposed Sec. 43.6(g)--Notification of

    Election

    Proposed Sec. 43.6(g) contains the provisions regarding the

    election to have a swap transaction treated as a block trade or large

    notional off-facility swap, as applicable. Proposed Sec. 43.6(g)(1)

    establishes a two-step notification process relating to block trades.

    Proposed Sec. 43.6(g)(2) establishes the notification process relating

    to large notional off-facility swaps.

    Proposed Sec. 43.6(g)(1)(i) contains the first step in the two-

    step notification process relating to block trades. In particular, this

    section provides that the reporting party to a swap that is executed at

    or above the appropriate minimum block size is required to notify the

    SEF or DCM (as applicable) of its election to have its qualifying swap

    transaction treated as a block trade. With respect to the second step,

    proposed Sec. 43.6(g)(1)(ii) provides that the SEF or DCM, as

    applicable, that receives an election notification is required to

    notify an SDR of a block trade election when transmitting swap

    transaction and pricing data to such SDR for public dissemination.

    Proposed Sec. 43.6(g)(2) is similar to the first step set forth in

    proposed Sec. 43.6(g)(1). That is, proposed Sec. 43.6(g)(2) provides,

    in part, that a reporting party who executes a bilateral swap

    transaction that is at or above the appropriate minimum block size is

    required to notify the SDR of its election to treat such swap as a

    large notional off-facility swap. This section provides further that

    the reporting party is required to notify the SDR in connection with

    the reporting party's transmission of swap transaction and pricing data

    to the SDR for public dissemination.

    The second step in the two-step process in proposed Sec.

    43.6(g)(1) imposes direct burdens on SEFs and DCMs. The Commission

    previously has determined that these entities are not small businesses

    for the purposes of the RFA.\304\

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

    \304\ See 17 CFR part 40 Provisions Common to Registered

    Entities, 75 FR 67,282 (Nov. 2, 2010); see also 47 FR 18,618,

    18,619, Apr. 30, 1982 and 66 FR 45,604, 45,609, Aug. 29, 2001.

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

    In contrast, the first step in the two-step process in proposed

    Sec. 43.6(g)(1) and the notification election in proposed Sec.

    43.6(g)(2) would impose direct burdens on parties to a swap, which the

    Commission has determined previously may include a percentage of small

    end users that are considered small businesses for the purposes of the

    RFA.\305\ Notwithstanding the imposition of this burden, however, the

    Commission anticipates that the notification requirements in proposed

    Sec. Sec. 43.6(g)(1)(i) and 43.6(g)(2) would not create significant

    economic burdens on small end users. The Commission anticipates that

    the notification requirements imposed in proposed Sec. Sec.

    43.6(g)(1)(i) and 43.6(g)(2) will likely be automated and electronic.

    Section 43.3 of the Commission's regulations already requires these

    entities to report their swap transaction and pricing data to an

    SDR.\306\ The Commission is of the view that requiring these entities

    to include an additional notification or field in conjunction with the

    reporting of such data would impose, at best, a marginal and

    incremental cost.

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

    \305\ See 77 FR 1,240 (``[T]he Commission recognized that the

    proposed rule could have an economic effect on certain single end

    users, in particular those end users that enter into swap

    transactions with another end-user. Unlike the other parties to

    which the proposed rulemaking would apply, these end users are not

    subject to designation or registration with or to comprehensive

    regulation by the Commission. The Commission recognized that some of

    these end users may be small entities.''). The term reporting party

    also includes swap dealers and major swap participants.

    The Commission previously has determined that these entities do

    fall within the definition of small business for the purpose of the

    RFA. See 75 FR at 76,170.

    \306\ See 77 FR 1,240.

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

    Moreover, as stated in prior RFA determinations, the Commission

    anticipates the percentage of end users that would fall within the

    definition of reporting party \307\ would likely be minimal since,

    according to industry data, most end users transact swaps with a swap

    dealer.\308\ Thus, the percentage of small end users that would be

    required to notify SDRs directly of their election to treat a swap as a

    block trade or large notional off-facility swap would not likely be

    significant.

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

    \307\ See 77 FR 1,244.

    \308\ See ISDA/SIFMA Jan. 18, 2011, Block trade reporting over-

    the-counter derivatives markets, 13-14. See also Costs and Benefits

    of Mandatory Electronic Execution Requirements for Interest Rate

    Products, note 75 supra. (``In contrast with the current environment

    where swap dealers are principals on every trade * * *.'').

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

    B. Identification of Duplicative, Overlapping or Conflicting Federal

    Rules

    The Commission has not identified any existing federal rules exist

    that are duplicative, overlapping or conflicting with the provisions in

    this Further Proposal, including the provisions in proposed Sec.

    43.6(g).

    C. Alternatives to Proposed Rules That Will Have an Impact

    Under the RFA, the Commission is not required to identify

    alternatives as a result of its determination that the provisions in

    proposed Sec. 43.6(g) would not have a significant economic impact on

    a significant number of small businesses.

    D. Certification

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

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

    have a

    [[Page 15500]]

    significant economic impact on a substantial number of small

    businesses. Nonetheless, the Commission specifically requests comment

    on the economic impact that this Further Proposal may have on small

    businesses.

    V. Paperwork Reduction Act

    A. Background

    The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501

    et seq. (``PRA'') are, among other things, to minimize the paperwork

    burden to the private sector, ensure that any collection of information

    by a government agency is put to the greatest possible uses, and

    minimize duplicative information collections across the

    government.\309\ The PRA applies with extraordinary breadth to all

    information, ``regardless of form or format,'' whenever the government

    is ``obtaining, causing to be obtained [or] soliciting'' information,

    and includes requires ``disclosure to third parties or the public, of

    facts or opinions,'' when the information collection calls for

    ``answers to identical questions posed to, or identical reporting or

    recordkeeping requirements imposed on ten or more persons.'' \310\ The

    PRA requirements have been determined to include not only mandatory but

    also voluntary information collections, and include both written and

    oral communications.\311\

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

    \309\ See 44 U.S.C. 3501.

    \310\ See 44 U.S.C. 3502.

    \311\ See 5 CFR 1320.3(c)(1).

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

    To effectuate the purposes of the PRA, Congress requires all

    agencies to quantify and justify the burden of any information

    collection it imposes.\312\ This requirement includes submitting each

    collection, whether or not it is contained in a rulemaking, to the

    Office of Management and Budget (``OMB'') for review. The OMB

    submission process includes completing a form 83-I and a supporting

    statement with the agency's burden estimate and justification for the

    collection. When an information collection is established within a

    rulemaking, the agency's burden estimate and justification should be

    provided in the proposed rulemaking, subjecting the proposed

    information collection to the rulemaking's public comment process.

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

    \312\ See 44 U.S.C. 3506.

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

    Proposed Sec. 43.6 and amendments to Sec. 43.4 would result in

    amendments to an existing collection of information within the meaning

    of the PRA in two respects. Accordingly, the Commission is submitting

    this Further Proposal to the OMB for review pursuant to 44 U.S.C.

    3507(d) and 5 CFR1320.11. OMB has assigned control number 3038-0070 to

    the existing collection of information, which is titled ``Part 43--

    Real-Time Public Reporting.'' If adopted, then responses to this

    amended collection of information would be mandatory.

    B. Description of the Collection

    Recently, the Commission issued the Adopting Release, which

    includes three collections of information requirements within the

    meaning of the PRA. The first collection of information requirement

    under Part 43 imposed a reporting requirement on a SEF or DCM when a

    swap is executed on a trading facility or on the parties to a swap

    transaction when the swap is executed bilaterally. The second

    collection of information requirement under Part 43 created a public

    dissemination requirement on SDRs. The third collection of information

    requirement created a recordkeeping requirement for SEFs, DCMs, SDRs

    and any reporting party (as such term is defined in part 43 of the

    Commission's regulations).

    Proposed amendments to Sec. 43.4 and proposed Sec. 43.6 would

    amend the first and second collections of information within the

    meaning of the PRA as described below. The analysis with respect to the

    amended collections as a result of proposed Sec. 43.6 is set out in

    section 1 below. The analysis with respect to the amended collections

    as a result of proposed amendments to Sec. 43.4 is set out in section

    2 below.

    1. Proposed Sec. 43.6(g)--Notification of Election

    Proposed Sec. 43.6(g) would amend the first and second collections

    of information within the meaning of the PRA. In particular, proposed

    Sec. 43.6(g) contains the provisions regarding the election to have a

    swap transaction treated as a block trade or large notional off-

    facility swap, as applicable. Proposed Sec. 43.6(g)(1) establishes a

    two-step notification process relating to block trades. Proposed Sec.

    43.6(g)(2) establishes the notification process relating to large

    notional off-facility swaps. Proposed Sec. 43.6(g) is an essential

    part of this rulemaking because it provides the mechanism through which

    market participants will be able to elect to treat their qualifying

    swap transaction as a block trade or large notional off-facility swap.

    Proposed Sec. 43.6(g)(1)(i) contains the first step in the two-

    step notification process relating to block trades. In particular, this

    section provides that the parties to a swap that are executed at or

    above the appropriate minimum block size for the applicable swap

    category are required to notify the SEF or DCM (as applicable) of their

    election to have their qualifying swap transaction treated as a block

    trade. The Commission understands that SEFs and DCMs use automated,

    electronic, and in some cases, voice processes to execute swap

    transactions; therefore, the transmission of the notification of a

    block trade election also would either be automated, electronic or

    communicated through voice.

    The Commission estimates that there are 125 SDs and MSPs, and 1,000

    other non-financial end-user parties.\313\ The Commission estimates

    that, on average, SD/MSP reporting parties would likely notify a SEF or

    DCM of a block trade election approximately 1,000 times per year while

    non-SD/MSP reporting parties likely would notify a SEF or DCM of a

    block trade election approximately five times per year.\314\ Thus, the

    Commission estimates that there would be 130,000 notifications of a

    block trade election by reporting parties under proposed Sec. 43.6(g)

    each year.\315\

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

    \313\ The Commission has previously estimated that 125 SDs and

    MSPs will register with the Commission and 1,000 non-financial end-

    users (i.e., non-SD/non-MSPs) will be required to report swap

    transactions annually. 77 FR 1,229-30.

    \314\ The Commission anticipates that these figures will change

    as a function of changes in the market structure and practices in

    the U.S. swaps markets.

    \315\ The Commission estimates the total number of notifications

    as follows: 125 SDs/MSPs x 1,000 notifications = 125,000

    notifications per year; 1,000 non-SDs/non-MSPs x 5 notifications =

    5,000 notifications per year; therefore, the total across all types

    of entities would be 130,000 notifications per year.

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

    The Commission estimates that the burden hours associated with the

    Sec. 43.6(g)(1)(i) would include: (i) 30 seconds on average for

    parties to a swap to determine whether a particular swap transaction

    qualifies as a block trade based on the appropriate minimum block size

    of the applicable swap category; and (ii) 30 seconds on average for the

    parties to electronically transmit or otherwise communicate their

    notice of election. SDs, MSPs and reporting parties would use existing

    traders (or other professionals earning similar salaries) to

    electronically transmit or otherwise communicate their notice of

    election. Based on the Securities Industry and Financial Market

    Association's 2010 Securities Industry Salary Survey, the Commission

    estimates that these block traders would earn approximately $140.93 per

    hour in total compensation.\316\ Accordingly, the

    [[Page 15501]]

    Commission estimates that the total annual burden hour costs associated

    with the first step in proposed Sec. 43.6(g)(1)(i) would be 2,167

    hours \317\ or $305,396 in total annual burden hours costs \318\ and

    $11.2 million in total start-up capital costs.\319\

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

    \316\ The Commission previously has utilized wage rate estimates

    based on average salary and average prior year bonus information for

    the securities industry compiled by SIFMA. These wage estimates are

    derived from an industry-wide survey of participants and thus

    reflect an average across entities; the Commission notes that the

    actual costs for any individual company or sector may vary from the

    average.

    The Commission estimated the dollar costs of hourly burdens for

    different types of relevant professionals using the following

    calculations:

    (1) [(2009 salary + bonus) * (salary growth per professional

    type, 2009-2010)] = Estimated 2010 total annual compensation. The

    most recent data provided by the SIFMA report describe the 2009

    total compensation (salary + bonus) by professional type, the growth

    in base salary from 2009 to 2010 for each professional type, and the

    2010 base salary for each professional type; therefore, the

    Commission estimated the 2010 total compensation for each

    professional type, but, in the absence of similarly granular data on

    salary growth or compensation from 2010 to 2011 and beyond, did not

    estimate dollar costs beyond 2010.

    (2) [(Estimated 2010 total annual compensation)/(1,800 annual

    work hours)] = Hourly wage per professional type.]

    (3) [(Hourly wage) * (Adjustment factor for overhead and other

    benefits, which the Commission has estimated to be 1.3)] = Adjusted

    hourly wage per professional type.]

    (4) [(Adjusted hourly wage) * (Estimated hour burden for

    compliance)] = Dollar cost of compliance for each hour burden

    estimate per professional type.]

    The sum of each of these calculations for all professional types

    involved in compliance with a given element of this Further Proposal

    represents the total cost for each counterparty, reporting party,

    swap dealer, major swap participant, SEF, DCM, or SDR, as applicable

    to that element of the proposal.

    \317\ To comply with the election process in proposed Sec.

    43.6(g), a market participant likely would need to provide training

    to its existing personnel and update its written policies and

    procedures to account for this new process. The total annual burden

    hours equals the total hours for swap dealers and major swap

    participants plus the total hours for non-swap dealers and non-major

    swap participants.

    \318\ The underlying adjusted labor cost estimate of $140.93 per

    hour used in this estimate is calculated based on the adjusted wages

    of swap traders. See note 316 supra.

    \319\ The estimated costs are based on the Commission's estimate

    of the incremental, non-recurring expenditures to reporting

    entities, including non-SD/non-MSPs (i.e., non-financial end-users)

    to: (1) update existing technology, including updating its OMS

    system ($6,761.20); and (2) provide training to existing personnel

    and update written policies and procedures ($3,195.00). See section

    VI(E)(2)(a)(i)-(ii) infra. The Commission believes that SDs/MSPs

    would incur similar non-recurring start-up costs. The Commission has

    previously estimated that 125 SDs and MSPs will register with the

    Commission and 1,000 non-financial end-users (i.e., non-SD/non-MSPs)

    will be required to report in a year. See 77 FR 1229-30.

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

    With respect to the second step, proposed Sec. 43.6(g)(1)(ii)

    provides that the SEF or DCM, as applicable, that receives an election

    notification is required to notify an SDR of a block trade election

    when transmitting swap transaction and pricing data to such SDR for

    public dissemination. As noted above, the Commission anticipates that

    SEFs and DCMs would use automated, electronic and, in some cases, voice

    processes to execute swap transactions. The Commission estimates that

    there will be approximately 58 SEFs and DCMs. Accordingly, the

    Commission estimates that the total annual burden associated with the

    second step in proposed Sec. 43.6(g)(1)(ii) would be approximately

    $577,460 in non-recurring annualized capital and start-up costs.\320\

    The Adopting Release already has addressed the recurring annualized

    costs for the hour burden, as well as ongoing operational and

    maintenance costs.

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

    \320\ The Commission bases this estimate on 58 projected SEFs

    and DCMs, each of which will incur costs of investing in update

    technology, including updating its OMS system ($6,761.20); and

    training existing personnel and updating written policies and

    procedures ($3,195.00). See section VI(E)(2)(a)(i)-(ii) infra.

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

    Proposed Sec. 43.6(g)(2) is similar to the first step set forth in

    proposed Sec. 43.6(g)(1). That is, proposed Sec. 43.6(g)(2) provides,

    in part, that a reporting party who executes a bilateral swap

    transaction that is at or above the appropriate minimum block size is

    required to notify the SDR of its election to treat such swap as a

    large notional off-facility swap. This section provides further that

    the reporting party is required to notify the SDR in connection with

    the reporting party's transmission of swap transaction and pricing data

    to the SDR for public dissemination. The Commission anticipates that

    reporting parties may have various methods through which they will

    transmit information to SDRs, which would include a large notional off-

    facility swap election. Most reporting parties would use automated and

    electronic methods to transmit this information; other reporting

    parties, because of the expense associated with building an electronic

    infrastructure, may contract with third parties (including their swap

    counterparty) to transmit the notification of a large notional off-

    facility swap election.

    The Commission estimates that the incremental time and cost burden

    associated with the Sec. 43.6(g)(2) would include: (i) One minute for

    a reporting party to determine whether a particular swap transaction

    qualifies as a large notional off-facility swap based on the

    appropriate minimum block size of the applicable swap category; and

    (ii) one minute for the reporting party (or its designee) to

    electronically transmit or communicate through voice processes its

    notice of election. The Commission estimates that, of the approximately

    2,255 hours incurred by 125 SDs/MSPs and 1,000 non-SD/MSPs, all of

    those hours would be spent by traders and market analysts (or

    designee).\321\ SIFMA's report states that traders and market analysts

    make $140.93 per hour in total compensation.\322\

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

    \321\ The economic costs associated with entering into a third

    party service arrangement to transmit an electronic notice to an SDR

    are difficult to determine. There are too many variables that are

    involved in determining those costs. Notwithstanding this

    difficulty, the Commission foresees that, for many reporting parties

    that infrequently trade swaps, the annualized cost of entering into

    a third-party service arrangement of this type would likely be less

    than the total annual cost of building an electronic infrastructure

    to transmit electronic notices directly to an SDR.

    \322\ See note 316 supra.

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

    The Commission estimates that, on average, each of the estimated

    125 SD/MSP counterparties would likely notify an SDR of a large

    notional off-facility swap election approximately 500 times per year

    while each of the estimated 1,000 non-SD/MSP counterparties would

    notify an SDR approximately five times per year. Accordingly, the

    Commission estimates that there are, on average, approximately 67,500

    notifications large notional off-facility swaps under proposed Sec.

    43.6 each year. Accordingly, the Commission estimates that the total

    annual burden associated with proposed Sec. 43.6(g)(2) would be

    approximately 2,255 annual labor hours or $317,797 in annual labor

    costs.\323\

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

    \323\ The labor hour estimate is calculated as follows: (125

    SDs/MSPs x 500 notifications) + (1,000 non-SDs/non-MSPs x 5

    notifications) = 67,500 notifications x 2 minutes/notification =

    135,000 minutes/60 minutes/hour = 2,255 hours. The labor cost

    estimate is calculated as follows: 2,255 labor hours x $140.93 per

    hour total compensation = $317,797.

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

    In addition, the Commission estimates that proposed Sec.

    43.6(g)(2) would result in $11.2 million in non-recurring annualized

    capital and start-up costs.\324\ The Adopting Release addressed all

    ongoing operational and maintenance costs.\325\

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

    \324\ The estimated costs are based on the Commission's estimate

    of the incremental, non-recurring expenditures to reporting

    entities, including non-SD/non-MSPs (i.e., non-financial end-users)

    to (1) update existing technology, including updating its OMS system

    ($6,761.20); and (2) provide training to existing personnel and

    update written policies and procedures ($3,195.00). See section

    VI(E)(2)(a)(i)-(ii) infra. The Commission believes that SDs/MSPs

    would incur similar non-recurring start-up costs. The Commission has

    previously estimated that 125 SDs and MSPs will register with the

    Commission and 1,000 non-financial end-users (i.e., non-SD/non-MSPs)

    will be required to report in a year. 77 FR 1,229-30.

    \325\ See 77 FR at 1,232.

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

    2. Proposed Amendments to Sec. Sec. 43.4(d)(4) and 43.4(h)

    The Commission addresses the public dissemination of certain swaps

    in the other commodity asset class in Sec. 43.4(d)(4). Section

    43.4(d)(4)(ii)

    [[Page 15502]]

    provides that for publicly reportable swaps in the other commodity

    asset class, the actual underlying assets must be publicly disseminated

    for: (1) Those swaps executed on or pursuant to the rules of a SEF or

    DCM; (2) those swaps referencing one of the contracts described in

    appendix B to part 43; and (3) any publicly reportable swap transaction

    that is economically related to one of the contracts described in

    appendix B to part 43. Pursuant to the Adopting Release, any swap that

    is in the other commodity asset class that does not fall under Sec.

    43.4(d)(4)(ii) would not be subject to reporting and public

    dissemination requirements upon the effective date of the Adopting

    Release.

    In this Further Proposal, the Commission is proposing a new

    provision (proposed Sec. 43.4(d)(4)(iii)), which would develop a

    system for the public dissemination of exact underlying assets in the

    other commodity asset class with a ``mask'' based on geographic detail.

    The Commission is proposing a new appendix to part 43, which contains

    the geographical top-codes that SDRs would use in masking certain other

    commodity swaps in connection with such swaps public dissemination of

    swap transaction and pricing data under part 43. The Commission

    anticipates that there will be approximately 50,000 additional swaps

    reported to an SDR each year in the other commodity asset class, which

    the Commission estimates would be $117,395 in annualized hour burden

    costs.\326\

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

    \326\ The Commission estimates that there will be 5 SDRs, which

    will collect swaps data in the other commodity asset class. Each SDR

    would collect swaps data on approximately 10,000 swap transactions

    in the other commodity asset class. The commission estimates that it

    will take each SDR on average approximately 1 minute to publicly

    disseminate swaps data related to these new swap transactions. The

    number of burden hours for these SDRs would be 833 hours. As

    referenced in note 318 supra, the total labor costs for a swap

    trader is $140.93. Thus, the total number of burden hour costs equal

    the total number of burden hours (833 burden hours) x $140.93.

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

    The Commission's regulations currently provide a system

    establishing cap sizes. Section 43.4(h) of the Commission's regulations

    provides that cap sizes for swaps in each asset class shall equal the

    appropriate minimum block size corresponding to such publicly

    reportable swap transaction. If no appropriate minimum block size

    exists, then Sec. 43.4(h) sets out specific interim cap sizes for each

    asset class.\327\

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

    \327\ The Adopting Release calculated and addressed the total

    ongoing burden hours and burden hour costs. See 77 FR 1,1232.

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

    This Further Proposal would amend Sec. 43.4(h) to establish new

    cap sizes in the post-initial period using a 75-percent notional amount

    calculation. Under this proposed amendment, the Commission would

    perform the calculation; however, SDRs would update their technology

    and other systems at a minimum of once per year to publicly disseminate

    swap transaction and pricing data with the cap sizes issued by the

    Commission.

    The Commission estimates that the incremental, start-up costs

    associated with proposed amendment to Sec. Sec. 43.4(d)(4) and 43.4(h)

    for an SDR would include: (1) Reprograming its technology

    infrastructure to accommodate the proposed masking system and proposed

    post-initial cap sizes methodology; (2) updating its written policies

    and procedures to ensure compliance with proposed Sec. 43.4(d)(4)(iii)

    and the proposed amendment to Sec. 43.4(h); and (3) training staff on

    the new policies and procedures.\328\ The Commission estimates that the

    total annual burden associated with proposed Sec. 43.4(d)(4)(iii) and

    the proposed amendments to 43.4(h) would be 1,000 labor hours and

    approximately $75,900.\329\

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

    \328\ The economic costs associated with entering into a third

    party service arrangement to transmit an electronic notice to an SDR

    are difficult to determine because of too many variables involved in

    determining those costs. Notwithstanding this difficulty, the

    Commission believes that, for many reporting parties that

    infrequently trade swaps, the annualized cost of entering into a

    third-party service arrangement of this type would likely be less

    than the total annual cost of building an electronic infrastructure

    to transmit electronic notices directly to an SDR.

    \329\ This estimate is calculated as follows: Senior Programmer

    cost ($81.52 adjusted hourly wage x 250 hours) + Systems Analyst

    ($54.89 adjusted hourly wage x 250 hours) + Compliance Manager

    ($77.77 adjusted hourly wage x 250 hours) + Compliance Attorney

    (i.e., Assistant General Counsel) ($89.43 adjusted hourly wage x 250

    hours).

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

    C. Request for Comments on Collection

    The Commission requests comments on the accuracy of these estimates

    provided in these proposed amendments to existing collections of

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

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

    proposed amendments to the collections of information that are

    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 amendments to the collections 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 proposed amendments to the collections of information on

    those who are to respond, including through the use of automated

    collection techniques or other forms of information technology.

    Comments may be submitted directly to the Office of Information and

    Regulatory Affairs of OMB by fax at (202) 395-6566 or by email at

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

    of the submitted comments so that all comments can be summarized and

    addressed in the final rule preamble. Refer to the ``Addresses''

    section of this Further Proposal for comment submission instructions to

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

    of information discussed above may be obtained by visiting RegInfo.gov.

    OMB is required to make a decision concerning the collection of

    information between 30 and 60 days after publication of this release.

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

    if received by OMB and the Commission within 30 days after publication

    of this Further Proposal. Nothing in this Further Proposal affects the

    deadline enumerated above for public comment to the Commission.

    VI. Cost-Benefit Considerations

    A. Introduction

    Title VII of the Dodd-Frank Act added section 2(a)(13) to the CEA

    to direct the Commission to promulgate rules requiring the real-time

    public reporting of swap transaction and pricing data, while protecting

    market liquidity for block trades and large notional off-facility

    swaps. Transaction reporting is a fundamental component of the Dodd-

    Frank Act's general objectives to reduce risk, increase transparency

    and promote market integrity within the financial system and the swaps

    market in particular.

    Four provisions in section 2(a)(13) are relevant to this Further

    Proposal. Section 2(a)(13)(E)(ii) requires the Commission to establish

    criteria for determining what constitutes a large notional off-facility

    swap or block trade for particular markets and contracts. Section

    2(a)(13)(E)(iii) requires the Commission to specify the appropriate

    time delay for reporting large notional off-facility swaps and block

    trades. Finally, sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii)

    collectively require the Commission to protect the identities of

    counterparties to swaps and to maintain the anonymity of business

    transactions

    [[Page 15503]]

    and market positions of those counterparties.

    The Commission has implemented three of the four provisions in

    section 2(a)(13). The Adopting Release issued on January 9, 2012 sets

    forth, inter alia: (i) Definitions for the terms ``large notional off-

    facility swap'' and ``block trade''; (ii) the appropriate time delay

    for reporting these swaps and trades; and (iii) a system to protect the

    anonymity of parties to a swap, including the establishment of interim

    cap sizes and the creation of an exception from the real-time public

    reporting requirement for certain swaps in the other commodity asset

    class.

    While part 43 defines the terms large notional off-facility swap

    and block trade and sets forth time delays for reporting such swaps and

    trades, part 43 as adopted does not ``specify the criteria for

    determining what constitutes a large notional [off-facility] swap

    transaction [or block trade] for particular markets and contracts.''

    \330\ Since the Commission has not yet specified criteria, by default,

    all publicly reportable swap transactions are now subject to a time

    delay. The provisions of this Further Proposal would, if adopted,

    become effective against this baseline--that is, at a point in time

    when all publicly reportable swap transactions are subject to a time

    delay and are not publicly reported in real-time (i.e., as soon as

    technologically practicable).

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

    \330\ See CEA section 2(a)(13)(E)(ii). 7 U.S.C. 2(a)(13)(E)(ii).

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

    This Further Proposal seeks to amend part 43 by establishing

    criteria to group swaps into categories and methodologies to determine

    appropriate minimum block sizes for each swap category. In addition,

    this Further Proposal seeks to establish additional measures to protect

    the identities of swap counterparties and their business transactions.

    This Further Proposal does not affect provisions relating to the

    appropriate time delay for block trades and large notional off-facility

    swaps. Similarly, this Further Proposal does not amend or further

    propose provisions that would require swap market participants to

    develop a completely new infrastructure or hire new personnel in order

    to comply with the existing provisions of part 43.\331\

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

    \331\ For a discussion of the costs and benefits of the time

    delay and development of an infrastructure for block trades and

    large notional off-facility swaps, see the Adopting Release, 77 FR

    1,232.

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

    In the sections that follow, the Commission identifies and

    considers certain costs and benefits associated with the Further

    Proposal to amend part 43 as required by section 15(a) of the CEA. The

    Commission requests comment on all aspects of its proposed

    consideration of costs and benefits, including identification and

    assessment of any costs and benefits not discussed in this analysis. In

    addition, the Commission requests that commenters provide data and any

    other information or statistics that the commenters relied on to reach

    any conclusions on the Commission's proposed consideration of costs and

    benefits.

    B. The Requirements of Section 15(a)

    Section 15(a) of the CEA \332\ requires the Commission to consider

    the costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing an order. 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. To the extent that these new regulations reflect the

    statutory requirements of the Dodd-Frank Act, they will not create

    costs and benefits beyond those resulting from Congress's statutory

    mandates in the Dodd-Frank Act. However, to the extent that the new

    regulations reflect the Commission's own determinations regarding

    implementation of the Dodd-Frank Act's provisions, such Commission

    determinations may result in other costs and benefits. It is these

    other costs and benefits resulting from the Commission's own

    determinations pursuant to and in accordance with the Dodd-Frank Act

    that the Commission considers with respect to the section 15(a)

    factors.

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

    \332\ 7 U.S.C. 19(a).

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

    C. Structure of the Commission's Analysis; Cost Estimation Methodology

    Of the two parts to this Further Proposal, ``Part One'' establishes

    block trade rules, and ``Part Two'' addresses anonymity protections.

    Part One further proposes regulations specifying criteria for

    categorizing swaps and determining the appropriate minimum block size

    for each swap category. In particular, in Part One the Commission is

    proposing: (i) The criteria for determining swap categories and the

    methodologies that it would use to determine the initial and post-

    initial appropriate minimum block sizes for large notional off-facility

    swaps and block trades; and (ii) a method by which parties to a swap,

    SEFs, and DCMs would elect to treat the parties' qualifying swap

    transactions as block trades or large notional off-facility swaps, as

    applicable. The Commission has considered the costs and benefits

    associated with Part One separately for each of the two above-specified

    groups of provisions since different parties would bear primary

    compliance obligations for each group. That is, the provisions

    establishing criteria for determining swap categories and appropriate

    minimum block size methodologies primarily impose obligations on the

    Commission, and the provisions establishing election methodology

    primarily impose obligations on parties to a swap and registered

    entities.

    Part Two provides: (i) A methodology for determining post-initial-

    period cap sizes; and (ii) a system for the public dissemination of

    swap transaction and pricing data for certain other commodity swaps

    with specific underlying assets and geographic detail in a manner that

    does not disclose the business transactions and market positions of

    swap market participants. Since Part Two's provisions would impose the

    same or similar costs (e.g., technology re-programming costs) and

    confer the same or similar benefits on swap market participants (e.g.,

    anonymity protections with respect to the identities of the parties to

    a swap and their market transactions), the Commission analyzed the

    costs and benefits of these provisions in one group section.

    Wherever reasonably feasible, the Commission has endeavored to

    quantify the costs and benefits of this Further Proposal. In a number

    of instances, however, the Commission lacks or is otherwise unaware of

    information needed as a basis for quantification. In these instances,

    the Commission has requested data from the public to aid the Commission

    in considering the quantitative effects of its rulemaking. Where it has

    not been feasible to quantify (e.g., because of the lack of accurate

    data), the Commission has considered the costs and benefits of this

    Further Proposal in qualitative terms.

    The conditions now existent under part 43--i.e., all publicly

    reportable swap transactions qualify for a time-delay--provide the

    baseline for the Commission's consideration of incremental costs and

    benefits that would arise from this Further Proposal.\333\ These

    baseline costs and benefits are discussed in the Adopting Release. As a

    reference point for estimating the incremental costs and benefits

    against this baseline, the Commission has used a non-financial

    [[Page 15504]]

    end-user that already has developed the technical capability and

    infrastructure necessary to comply with the requirements set forth in

    part 43.\334\ Relative to this reference point, however, the Commission

    anticipates that in many cases the actual costs to established market

    participants (including swap counterparties, SDRs and other registered

    entities) would be lower--perhaps significantly so, depending on the

    type, flexibility, and scalability of systems already in place.

    Moreover, the Commission anticipates that with respect to SDRs

    specifically, they may recover their incremental costs by passing them

    on as fees assessed on reporting parties--SEFs and DCMs--for use of the

    SDRs' public dissemination services.\335\ In addition, the Commission

    recognizes that its choice of an alternative method for determining

    appropriate minimum block sizes and cap sizes may alter the cost and

    benefit estimates described below.

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

    \333\ See 77 FR 1,232.

    \334\ A non-financial end-user is a new market entrant with no

    prior swaps market participation or infrastructure. This reference

    point is different from the reference point(s) used in the PRA

    analysis in section V above for the following two reasons: (1) The

    burdens in the PRA are narrower than the costs discussed in this

    section (i.e., the PRA analysis solely discusses costs relating to

    collections of information, whereas this cost-benefit analysis

    considers all costs relating to the proposed rules); and (2) as

    discussed above, the cost-benefit analysis determines costs relative

    to one market participant that presumably would bear the highest

    burdens in implementing the proposed rules, whereas the PRA analysis

    seeks to estimate the costs of the proposed rules on all market

    participants.

    \335\ See Sec. 43.3(i) of the Commission's regulations, which

    authorizes an SDR to charge fees to persons reporting swap

    transaction and pricing data for real-time public dissemination, so

    long as such fees are equitable and non-discriminatory. The

    Commission currently does not have sufficient data on which to

    estimate the fees that an SDR would charge to person reporting swap

    transaction and pricing data. 77 FR 1,246.

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

    D. Background; Objectives of This Further Proposal

    In the Adopting Release, the Commission stated that it planned to

    ``issue a separate notice of proposed rulemaking that would

    specifically address the appropriate criteria for determining

    appropriate minimum block trade sizes in light of the data and comments

    received.'' \336\ Accordingly, in this Further Proposal, the Commission

    is specifically proposing to: (1) Establish criteria by creating the

    concept of a ``swap category'' (i.e., groupings of swaps within the

    same asset class based on underlying characteristics) \337\; (2)

    prescribe initial appropriate minimum block sizes based on the

    Commission's review and analysis of swap market data across certain

    asset classes \338\; (3) establish a methodology for calculating post-

    initial appropriate minimum block sizes \339\; (4) establish an

    obligation for the Commission to calculate appropriate minimum block

    sizes; (5) provide the method through which parties to a swap may elect

    block trade or large notional off-facility swap treatment for their

    swap transaction \340\; (6) establish a system to ensure the anonymity

    of certain swaps in the other commodity asset class \341\; and (7)

    establish a methodology for the calculation of post-interim or post-

    initial cap sizes.\342\

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    \336\ See 77 FR 1,185.

    \337\ See proposed Sec. 43.6(b), which defines swap category by

    asset class.

    \338\ See proposed Sec. 43.6(e) and proposed appendix F to part

    43.

    \339\ See proposed Sec. Sec. 43.6(c) and (f).

    \340\ See proposed Sec. 43.6(g).

    \341\ See proposed amendments to Sec. 43.4(d)(4).

    \342\ See proposed Sec. Sec. 43.4(h) and 43.6(c).

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

    Items (1) through (5) referenced above are addressed in Part One of

    this Further Proposal since they relate to the proposed criteria,

    methodology and election for block sizes and large notional off-

    facility swaps. Items (6) and (7) are discussed in Part Two since they

    relate to protecting the identity of parties to a swap in accordance

    with sections 2(a)(13)(E)(i) and 2(a)(13)(C)(iii) of the CEA.

    E. Costs and Benefits Relevant to the Block Trade Rules Section of the

    Further Proposal (Sec. Sec. 43.6(a)-(f) and (h))

    The Commission has organized its cost-benefit discussion of the

    provisions within Part One of this Further Proposal as follows: (1) The

    proposed criteria for establishing swap categories and a proposed

    methodology for determining appropriate minimum block sizes; and (2)

    the proposed method through which the parties to a swap may elect to

    treat their qualifying swap transaction as a block trade or large

    notional off-facility swap, as applicable. The Commission has performed

    a separate section 15(a) analysis with respect to each group of

    provisions.

    1. Costs and Benefits Relevant to the Proposed Criteria and Methodology

    In proposed Sec. Sec. 43.6(a)-(f) and (h), the Commission

    specifies criteria for establishing swap categories and a proposed

    methodology that the Commission would use in determining appropriate

    minimum block sizes. In the subsections that follow, the Commission

    sets forth brief summaries of the relevant proposed provisions,

    followed by a discussion of associated costs and benefits.

    a. Proposed Sec. 43.6(a) Commission Determination

    Pursuant to proposed Sec. 43.6(a), the Commission would determine

    the appropriate minimum block size for any swap listed on a SEF or DCM,

    and for large notional off-facility swaps. Following an initial period

    (as described below), the Commission would calculate and publish all

    appropriate minimum block sizes across all asset classes no less than

    once each calendar year.

    b. Proposed Sec. 43.6(b) Swap Category

    The Commission is proposing a tailored approach to group swaps

    within each asset class. Section 43.6(b) proposes unique swap

    categories based on the underlying asset class, relevant economic

    indicators and the Commission's analysis of relevant swap market data.

    c. Proposed Sec. Sec. 43.6(c)-(f) and (h) Methods for Determining

    Appropriate Minimum Block Sizes

    The Commission is proposing in Sec. Sec. 43.6(c)-(f) and (h) a

    phased-in approach, with an initial period and a post-initial period,

    to determine appropriate minimum block sizes for each swap category.

    During the initial period, the Commission is proposing a schedule of

    initial appropriate minimum block sizes in appendix F to part 43. The

    Commission is proposing to determine the appropriate minimum block

    sizes for the interest rate and credit asset classes differently from

    the sizes for the equity, FX and other commodity asset classes. With

    respect to the interest rate and credit asset class, the Commission

    established the initial appropriate minimum block sizes based on data

    it had received from the Over-the-Counter Derivatives Supervisors

    Group.\343\ In calculating these sizes, the Commission has applied the

    67-percent notional amount calculation, which is set forth in proposed

    Sec. 43.6(c)(1).

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

    \343\ A discussion of the ODSG is set forth in section II.C.1 of

    this Further Proposal.

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

    In proposed Sec. 43.6(d), the Commission would disallow swaps in

    the equity asset class from being eligible for treatment as block

    trades or large notional off-facility swaps (i.e., equity swaps would

    not be subject to a time delay as provided in part 43). As noted above,

    the Commission is of the view that applying this treatment to the

    equity asset class is inappropriate given, inter alia, the depth of

    liquidity in the underlying equity cash market.

    With respect to the FX and other commodity asset classes, the

    appropriate minimum block sizes for

    [[Page 15505]]

    swaps during the initial period would be divided primarily between

    swaps that are futures-related swaps and those that are not futures

    related.\344\ Proposed appendix F to part 43 lists the proposed initial

    appropriate minimum block sizes for swap categories in the FX and other

    commodity asset classes. For those swaps in the FX and other commodity

    asset classes that are not listed in proposed appendix F to part 43,

    the Commission generally provides in proposed Sec. 43.6(e)(2) that

    these swaps would qualify as block trades or large notional off-

    facility swaps.

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

    \344\ As noted above, the Commission is of the view that the

    difference in methodology for determining initial appropriate

    minimum block sizes for swaps in the FX and other commodity asset

    classes is warranted because: (1) Swaps in these asset classes are

    closely linked to futures markets; (2) tying block sizes to their

    economically related futures contracts reduces opportunities for

    regulatory arbitrage; and (3) DCMs have experience in setting block

    sizes in such a way that maintains market liquidity.

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

    After an SDR has collected reliable data for a particular asset

    class, proposed Sec. 43.6(f)(1) provides that the Commission shall

    determine post-initial appropriate minimum block sizes for all swaps in

    the interest rate, credit, FX and other commodity asset classes based

    on the 67-percent notional amount calculation. The Commission is also

    proposing special rules for the determination of appropriate minimum

    block sizes that would apply to all asset classes.

    In the following paragraphs, the Commission estimates the costs of

    the proposed criteria and methodology and discusses their benefits,

    before considering these costs and benefits in light of the five public

    interest areas of section 15(a) of the CEA.

    d. Proposed Sec. Sec. 43.6(a)-(f) and (h) Costs Relevant to the

    Proposed Criteria and Methodology

    The Adopting Release identifies the baseline of direct,

    quantifiable costs to reporting parties, SDRs, SEFs and DCMs from

    current part 43.\345\ The Commission foresees that proposed Sec. Sec.

    43.6(a)-(f) and (h) would impose incremental direct costs on swap

    market participants and registered entities (i.e., SEFs, DCMs, or SDRs)

    through the need to reprogram and update their technology to

    accommodate the Commission's publication of post-initial appropriate

    minimum block sizes at least once each calendar year following the

    initial period. The Commission does not anticipate that proposed

    Sec. Sec. 43.6(a)-(f) and (h) would impose any direct costs on the

    general public. As noted above, proposed Sec. 43.6(a) provides that

    the Commission shall set appropriate minimum block sizes for block

    trades and large notional off-facility swaps following the procedures

    set forth in proposed Sec. Sec. 43.6(b)-(f) and (h). The Commission

    would determine these sizes both in the initial and post-initial

    periods. The Commission anticipates that the requirements proposed in

    Sec. 43.6(a) likely would mitigate new costs since the proposed

    approach seeks to build on the existing connectivity, infrastructure

    and arrangements that market participants and registered entities have

    established in complying with the requirements in part 43 of the

    Commission's regulations.\346\ The Commission anticipates that market

    participants and registered entities may have to reprogram or update

    their technology to accommodate the Commission's publication of post-

    initial appropriate minimum block sizes at least once each calendar

    year following the initial period. The Commission anticipates that

    compliance would be slightly different for market participants and

    registered entities.

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

    \345\ In the Adopting Release, the Commission noted that ``the

    direct, quantifiable costs imposed on reporting parties, SEFs and

    DCMs will take the forms of (i) non-recurring expenditures in

    technology and personnel; and (ii) recurring expenses associated

    with systems maintenance, support, and compliance.'' See 77 FR

    1,231.

    \346\ In its report, ISDA states that end-users ``will face

    significant technology and operational challenges as well as

    increased regulatory reporting requirements. Dealers will have to

    upgrade infrastructure to deal with automated trading and comply

    with increased regulatory reporting and recordkeeping.'' See Costs

    and Benefits of Mandatory Electronic Execution Requirements for

    Interest Rate Products note 75 supra, at 24.

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

    Market participants, and specifically non-financial end users,

    likely would need to provide training to their existing personnel and

    update their written policies and procedures in order to comply with

    proposed Sec. 43.6(a)-(f) and (h). The Commission estimates that

    providing training to existing personnel and updating written policies

    and procedures would impose an initial non-recurring burden of

    approximately 15 personnel hours at an approximate cost of $1,431.26

    for each non-financial end-user.\347\ This cost estimate includes the

    number of potential burden hours required to produce and design

    training materials, conduct training with existing personnel, and

    revise and circulate written policies and procedures in compliance with

    the proposed requirements.

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

    \347\ This estimate is calculated as follows: (Compliance

    Manager at 10 hours) + (Director of Compliance at 3 hours) +

    (Compliance Attorney at 2 hours) = 15 hours per non-financial end-

    user who is a reporting party. A compliance manager's adjusted

    hourly wage is $77.77. A director of compliance's hourly wage is

    $158.21. A compliance attorney's hourly wage is $89.43. See note 316

    supra.

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

    Registered entities would likely need to update their existing

    technology in order to comply with proposed Sec. 43.6(a)-(f) and (h).

    The Commission estimates that registered entities updating existing

    technology would impose an initial non-recurring burden of

    approximately 40 personnel hours at an approximate cost of $2,728 for

    each registered entity.\348\ This cost estimate includes the number of

    potential burden hours required to amend internal procedures, reprogram

    systems and implement processes to account for each swap category and

    to update appropriate minimum block sizes at least once each calendar

    year.

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

    \348\ The estimate is calculated as follows: (Senior Programmer

    at 20 hours) + (Systems Analyst at 20 hours). A senior programmer's

    adjusted hourly wage is $81.52. A systems analyst's adjusted hourly

    wage is $54.89. See note 316 supra.

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

    The Commission anticipates that the publication of swap transaction

    and pricing data may enhance market liquidity. The Commission also

    anticipates, however, that the immediate reporting of block trades and

    large notional off-facility swaps may have the potential to increase

    the costs associated with the trading of those swaps. If these costs

    increase, then market liquidity may decrease. In these circumstances,

    swap market participants may experience difficulty managing the risks

    attendant to their trading activity.

    The Commission anticipates that some market participants may face

    increased, indirect costs if block trades and large notional off-

    facility swaps are reported without a time delay (i.e., as soon as

    technologically practicable). Some market makers could experience

    higher trading costs as a result of increased liquidity risks attendant

    to the need to offset large swap positions. Market makers ultimately

    would pass those costs onto their end-user clients. The Commission

    anticipates that the proposed criteria and methodology may mitigate the

    potential increase in costs by addressing both liquidity concerns and

    enhanced price discovery. The Commission also anticipates that its

    proposed approach of establishing specific criteria for grouping swaps

    into a finite set of defined swap categories might provide a clear

    organizational framework that avoids administrative burdens for market

    participants that otherwise could arise from more numerous and/or non-

    uniform swap categories.

    The Commission anticipates that the potential costs of disruptions

    to market liquidity and trading activity are

    [[Page 15506]]

    minimized through the proposed regime. That is, the Commission

    anticipates that the phase-in approach should provide swap market

    participants with an adequate amount of time to incrementally adjust

    their trading practices, technology infrastructure and business

    arrangements to comply with the new block trade regime. This approach

    also may ensure efficient compliance with the proposal while minimizing

    the impact of implementation costs to swap market participants,

    registered entities and the general public.

    The Commission anticipates that market participants, registered

    entities and the general public may bear some indirect costs due to the

    increased degree of transparency that would result from the criteria

    and methodology in proposed Sec. Sec. 43.6(a)-(f) and (h). However,

    the Commission proposed that the appropriate minimum block trade sizes

    specified in this Further Proposal are sufficiently moderate to

    mitigate these indirect costs. The Commission also anticipates that the

    benefits of transparency would be significant relative to the costs

    occasioned by the tailored institution of appropriate minimum block

    size levels proposed in the initial period.

    e. Benefits Relevant to Proposed Sec. Sec. 43.6(a)-(f) and (h)

    The Commission anticipates that proposed Sec. Sec. 43.6(a)-(f) and

    (h) would generate several overarching, although presently

    unquantifiable, benefits to swap market participants, registered

    entities and the general public. Most notably, the Commission expects

    that the proposed criteria and methodologies for setting appropriate

    minimum block sizes would provide greater price transparency for a

    substantial portion of swap transactions in a manner modulated to

    mitigate any negative impact to swaps market liquidity. More

    specifically, the proposed regulations would provide price transparency

    by lifting the current part 43 real-time reporting time delay \349\ for

    swap transactions with notional values under specified threshold

    levels. At the same time, the Commission's proposed criteria and

    methodology--including carefully crafted block trades and large-

    notional off-facility swap categories--are designed to retain time-

    delay status for those high-notional-value transactions exceeding

    thresholds intended to avoid a negative market liquidity impact. The

    phased-in implementation proposed by the Commission is intended to

    introduce greater transparency in an incremental, measured and flexible

    manner so that appropriate minimum block sizes are responsive to

    changing markets.\350\ The Commission also intends the proposed

    approach to enhance price transparency in a manner that respects market

    participants' and registered entities' efficiency needs. Under proposed

    Sec. 43.6(a), the Commission would be required to set all appropriate

    minimum block sizes. The Commission anticipates that its proposed

    approach would impose significantly fewer direct burdens on market

    participants and registered entities than an alternative that would

    require them to engage in a more quantitative analysis to ascertain

    appropriate minimum block sizes for themselves. Such an alternative

    approach could lead to market fragmentation, adversely affect market

    liquidity, or reduce price transparency.

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

    \349\ See 77 FR 1,240.

    \350\ Proposed Sec. 43.6(f)(2) permits the Commission to set

    appropriate minimum block sizes no less than once annually during

    the post-initial period. If swap market conditions were to change

    significantly after the implementation of the provisions of this

    Further Proposal, the Commission could react to further improve

    price transparency or to mitigate adverse effects on market

    liquidity.

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

    f. Application of the Section 15(a) Factors to Proposed Sec. Sec.

    43.6(a)-(f) and (h)

    As noted above, section 15(a) directs the Commission to consider

    the following five areas in evaluating the costs and benefits of a

    particular Commission action.

    i. Protection of Market Participants and the Public

    The Commission anticipates that the criteria and methodology in

    proposed Sec. Sec. 43.6(a)-(f) and (h) would protect swap market

    participants by extending the delay for reporting for publicly

    reportable swap transactions, as appropriate, while also accommodating

    the market participant and public interest with enhanced transparency.

    By setting appropriate minimum block sizes in a thoughtful and measured

    manner as contemplated in the Further Proposal, the Commission strives

    to attain at least a near-optimal balance between transparency and

    liquidity interests. As a result, swap market participants would retain

    a means to offset risk exposures related to their swap transactions

    (including outsize swap transactions) at competitive prices. While the

    Commission notes that all publicly reportable swap transactions would

    remain subject to a time delay, the Commission foresees a resulting

    swap-market transparency counterbalance that could benefit swap market

    participants by promoting greater competition for their businesses.

    Specifically, the Commission expects that the availability of real-time

    pricing information for carefully enumerated categories of swap

    transactions could draw increased swap market liquidity through the

    competitive appeal of improved pricing efficiency that greater

    transparency affords. More liquid, competitive swap markets, in turn,

    allow businesses to offset costs more efficiently than in completely

    opaque markets, thus serving well the interests of both market

    participants and the public who should benefit through lower costs of

    goods and services.\351\

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

    \351\ There may be a de minimis cost in the form of increased

    offsetting costs, but the Commission foresees that its proposed

    criteria and methodology would likely mitigate that cost. A

    discussion of this de minimis cost is set forth above.

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

    ii. Efficiency, Competitiveness and Financial Integrity of Markets

    \352\

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

    \352\ The Commission is presently unable to identify any

    potential impact to the financial integrity of futures markets from

    the proposed criteria and methodology in its consideration of

    section 15(a)(2)(B) of the CEA. Although by its terms, section

    15(a)(2)(B) applies to futures (not swaps), the Commission finds

    this factor useful in analyzing the costs and benefits of swaps

    regulation, as well.

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

    The Commission anticipates that the proposed criteria and

    methodology would promote market efficiency, competitiveness and

    financial integrity of markets in a number of respects, including the

    following:

    They impose minimal administrative burdens on swap market

    participants as a result of Commission-specified swap categories and

    the Commission's responsibility to determine of appropriate minimum

    block sizes (as opposed to requiring registered entities to establish

    such categories and determine such sizes).

    With respect to futures-related swaps in the FX and other

    commodity asset classes, by synchronizing the appropriate minimum block

    sizes for swaps with DCM block trade sizes for futures during the

    initial period, they can be expected to reduce opportunities for

    regulatory arbitrage between the underlying cash or futures markets and

    the swap markets.

    They retain needed flexibility in light of the changes

    that the Commission anticipates will occur in swap markets following

    the implementation of part 43 and other implementing regulations. More

    specifically, the proposed methodology in Sec. Sec. 43.6(c)-(f) and

    (h) would recalibrate appropriate minimum block sizes regularly to

    ensure that those sizes remain appropriate for, and responsive to,

    these changing markets.

    [[Page 15507]]

    As discussed above with respect to the protection of

    market participants and the public, they would introduce increased

    market transparency for swaps in a careful, measured manner that seeks

    to optimize the balance between liquidity and transparency

    concerns.\353\ The Commission anticipates that this enhanced

    transparency would be introduced in a manner capable of fostering

    greater competition among swap market participants drawn to the

    improved pricing efficiency that transparency fosters.

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

    \353\ As noted above, under part 43 of the Commission's

    regulations (as now promulgated in the Adopting Release), all

    publicly reportable swap transactions are subject to a time delay

    pending further amending regulation to establish the criteria and

    methodology to distinguish block trades and large notional off-

    facility swaps from those swaps that do not meet those definitions.

    See 77 FR 1,217. As a result, SDRs as of now are not required to

    publicly disseminate publicly reportable swap transactions as soon

    as technologically practicable.

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

    iii. Price Discovery

    The Commission anticipates that the proposed criteria and

    methodology will enhance swap market price discovery by eliminating, to

    the extent appropriate, the time delays for the real-time public

    reporting of those swaps as now provided in the Adopting Release. The

    proposed criteria and methodology of this Further Proposal would ensure

    that an SDR could be able to publicly disseminate data for certain

    swaps as soon as technologically practicable. As more trades are

    published in real-time, reported prices are likely to be better

    indicators of competitive pricing.

    iv. Sound Risk Management Practices

    As discussed above, the Commission anticipates that the proposed

    criteria and methodology, if adopted, would likely result in enhanced

    price discovery since SDRs would be able to publicly disseminate some

    swaps as soon as technologically practicable. With better and more

    accurate data, valuation, and risk assessment information, swap market

    participants would likely be better able to measure risk. An ability to

    better manage risk at an entity level is likely to translate to

    improved market participant risk management generally. Improved risk

    measurement and management potential, in turn, may reduce the risk of

    another financial crisis since, presumably, it should better equip

    market participants to value their swap contracts and other assets

    during times of market instability. In addition, the proposed criteria

    and methodology may avoid higher costs that could cause some market

    participants to abandon swaps transactions in favor of more imperfect

    financial risk management tools.

    The Commission also anticipates that as the market price reflects

    more accurate economic information, volatility is likely to be reduced,

    therefore smoothing market risk for participants.

    v. Other Public Interest Considerations

    The Commission does not anticipate that the proposed criteria and

    methodology discussed above would have a material effect on public

    interest considerations other than those identified above.

    g. Specific Questions Regarding the Proposed Criteria and Methodology

    The Commission requests comments on its cost and benefit

    considerations with respect to the proposed criteria and methodology.

    While comments are welcome on all aspects of the proposal, the

    Commission notes the following specifically:

    Q93. Please provide comments regarding views on the accuracy and/or

    inaccuracy of: (1) The facts cited in support of the Commission's

    analysis of the identified considerations relating to the proposed

    criteria and methodology in proposed Sec. Sec. 43.6(a)-(f) and (h);

    and (2) the Commission's general analysis.

    Q93.a. Please provide estimates or data regarding the direct,

    quantifiable costs associated with the criteria and methodology in

    proposed Sec. Sec. 43.6(a)-(f) and (h).

    Q93.b. Please provide estimates or data regarding the indirect,

    quantifiable costs associated with the criteria and methodology in

    proposed Sec. Sec. 43.6(a)-(f) and (h).

    Q93.c. Please comment and provide data on whether the proposed

    criteria and methodology would decrease or increase liquidity in swaps

    markets.

    Q93.d. How can these costs be avoided by the use of alternative

    trading strategies (e.g., splitting larger trades into smaller trades)?

    What are the costs related to those alternative trading strategies?

    Q93.e. Please provide estimates of the fees that SDRs and other

    registered entities would charge reporting parties and other market

    participants in order to pass along the incremental costs associated

    with proposed Sec. Sec. 43.6(a)-(f) and (h).

    Q93.f. Would market participants abandon swap transactions in favor

    of more imperfect financial risk management tools?

    Q93.g. Does the 67-percent notional amount calculation meet the

    optimization goal of balancing liquidity and transparency concerns?

    Q94. Other than those public interest considerations identified

    herein, are there any other public interest considerations that the

    Commission should examine in finalizing proposed Sec. Sec. 43.6(a)-(f)

    and (h)?

    Q94.a. One of the Commission's rationales for its proposed criteria

    and methodology is the objective of deterring regulatory arbitrage as

    between swaps and futures markets. Should the Commission also be

    concerned regarding the costs and benefits related to regulatory

    arbitrage as between swaps and forwards markets?

    Q95. In a discussion paper titled ``Costs and Benefits of Mandatory

    Electronic Execution Requirements for Interest Rate Products,'' ISDA

    examined the likely costs and benefits of mandating the execution of

    interest rate swaps on DCMs and SEFs.\354\ ISDA's paper provided an

    analysis of, inter alia, liquidity and transaction costs in the

    interest futures and options markets, in addition to a review of

    liquidity and transaction costs in the OTC derivatives market. ISDA

    surveyed financial and non-financial end users to estimate the

    incremental costs resulting from the introduction of the electronic

    execution requirement in the Commission's proposal for SEFs.\355\ The

    paper identifies some potential costs that are relevant to this Further

    Proposal, such as technology costs and costs associated with

    development of algorithms for block trades. This paper also identifies

    potential costs that are either beyond the scope of this Further

    Proposal (e.g., costs necessary to establish a SEF) or are irrelevant

    to an analysis under section 15(a) of the CEA (e.g., costs to

    regulators). The Commission requests comments on the analysis and

    conclusions reached in ISDA's paper.

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

    \354\ See Costs and Benefits of Mandatory Electronic Execution

    Requirements for Interest Rate Products note 75316 supra.

    \355\ See Core Principles and Other Requirements for Swap

    Execution Facilities, 76 FR 1,214, Jan. 7, 2011.

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

    Q96. Will end users that desire to transact large trades under the

    appropriate minimum block size find it necessary to develop some form

    of algorithmic trading procedure? If so, what are the direct and

    indirect costs and benefits related to the development?

    Q97. The Commission seeks comment with respect to whether there is

    a feasible alternative approach to the one now contemplated in proposed

    Sec. 43.6(a) (i.e., the Commission would assume all responsibilities

    for determining and publishing appropriate minimum block sizes) that

    would impose less regulatory

    [[Page 15508]]

    burden on swap market participants and the general public.

    Q98. The Commission anticipates that increased bid/ask spreads

    could make it difficult for end users to obtain more competitive

    pricing for outsize swap transactions. Under this Further Proposal,

    would the price of executing outsize swap transactions be generally

    higher? Would bid/ask spreads widen in yield as a result of this

    Further Proposal?

    Q98.a. Whether, and to what extent, do market participants

    anticipate that their knowledge of bid/ask spreads or of liquidity in a

    swap market generally will improve as a result of this Further

    Proposal?

    Q98.b. Whether, and to what extent, do market participants

    anticipate that their knowledge of the competitive price for swaps will

    improve as a result of this Further Proposal?

    Q98.c. Would increased knowledge of the competitive price in a

    market encourage market participants that may not be current liquidity

    providers to provide liquidity to the market?

    Q99. On average, what are current transaction costs for standard

    size swaps in comparison to transaction costs in the futures markets?

    Would transaction costs for swap markets increase as a result of this

    Further Proposal? If so, by how much? Would the difference between

    swaps and futures transaction costs induce more market participants to

    trade futures instead of transacting swaps?

    Q100. What effects, if any, would this Further Proposal have on

    access to swaps markets? Would the Further Proposal positively or

    negatively impact access opportunities for small end users?

    2. Cost-Benefit Considerations Relevant to the Proposed Block Trade/

    Large Notional Off-Facility Swap Election Process (Proposed Sec.

    43.6(g))

    Proposed Sec. 43.6(g) contains the provisions regarding the

    election to have a swap transaction treated as a block trade or large

    notional off-facility swap, as applicable. Proposed Sec. 43.6(g)(1)

    establishes a two-step notification process relating to block trades.

    Proposed Sec. 43.6(g)(2) establishes the notification process relating

    to large notional off-facility swaps.

    Proposed Sec. 43.6(g)(1)(i) contains the first step in the two-

    step notification process relating to block trades. In particular, this

    section provides that the parties to a swap executed at or above the

    appropriate minimum block size for the applicable swap category are

    required to notify the SEF or DCM, as applicable, of their election to

    have their qualifying swap transaction treated as a block trade. The

    Commission anticipates that SEFs and DCMs will use automated,

    electronic--and in some cases voice--processes to execute swap

    transactions; and that the transmission of the notification of a block

    trade election also will be either automated, electronic or

    communicated through voice processes. A discussion of the costs and

    benefits relevant to proposed Sec. 43.6(g) is set forth in the

    subsections that follow.

    a. Costs Relevant to the Proposed Election Process (Proposed Sec.

    43.6(g))

    Non-financial end-users who are reporting parties, as well as SEFs,

    DCMs, and SDRs would likely bear the costs of complying with the

    election process in proposed Sec. 43.6(g). The Commission anticipates,

    however, that these entities already will have made non-recurring

    expenditures in technology and personnel in connection with the

    requirements set forth in part 43. In addition, these entities already

    will be required to incur recurring expenses associated with systems

    maintenance, support and compliance as described in the cost-benefit

    discussion in the Adopting Release.\356\ As such, the Commission

    assumes that these non-financial end-users, SEFs, DCMs, and SDRs would

    likely be able to leverage their existing technology, systems and

    personnel in complying with the election process in proposed Sec.

    43.6(g). Based on this assumption, the Commission anticipates that non-

    financial end-users, SEFs, DCMs and SDRs would likely have the

    following direct, quantifiable costs: (i) An incremental, non-recurring

    expenditure to update existing technology; (ii) an incremental non-

    recurring expenditure for training existing personnel and updating

    written policies and procedures for compliance with amendments to part

    43; and (iii) incremental recurring expenses associated with

    compliance, maintenance and operational support in connection with the

    proposed election process. SDRs also would have incremental, non-

    recurring expenditures to update existing technology.\357\ In the

    paragraphs that follow, the Commission discusses each of these costs.

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

    \356\ See 77 FR 1,237. As noted in the Adopting Release, non-

    financial end-users (that do not contract with a third party) will

    have initial costs consisting of: (i) Developing an internal order

    management system capable of capturing all relevant data ($26,689

    per non-financial end-user) and a recurring annual burden of

    ($27,943 per non-financial end-user); (ii) establishing connectivity

    with an SDR that accepts data ($12,824 per non-financial end-user);

    (iii) developing written policies and procedures to ensure

    compliance with part 43 ($14,793 per non-financial end-user); and

    (iv) compliance with error correction procedures ($2,063 per non-

    financial end-user). See id. With respect to recurring costs, a non-

    financial end-user will have: (i) Recurring costs for compliance,

    maintenance and operational support ($13,747 per non-financial end-

    user); (ii) recurring costs to maintain connectivity to an SDR

    ($100,000 per non-financial end-user); and (iii) recurring costs to

    maintain systems for purposes of reporting errors or omissions

    ($1,366 per non-financial end user). See id.

    SDRs (that do not enter into contracts with a third party) would

    have incremental costs related to compliance with part 43 beyond

    those costs identified in the release adopting part 49 of the

    Commission's regulations. See Swap Data Repositories: Registration

    Standards, Duties and Core Principles, 76 FR 54,538 (Sept. 1, 2011).

    In the Adopting Release, the Commission stated that each SDR would

    have: (i) A recurring burden of approximately $856,666 and an annual

    burden of $666,666 for system maintenance per SDR; (ii) non-

    recurring costs to publicly disseminate ($601,003 per SDR); and

    (iii) recurring costs to publicly disseminate ($360,602 per SDR).

    See id.

    In the Adopting Release, the Commission assumed that SEFs and

    DCMs will experience the same or lower costs as a non-financial end-

    user. See id.

    \357\ SDRs that do not enter into contracts with a third party

    would have incremental costs related to compliance with part 43 of

    the Commission's regulations beyond those costs identified in the

    release adopting part 49 of the Commission's regulations. See Swap

    Data Repositories: Registration Standards, Duties and Core

    Principles, 76 FR 54,538, Sept. 1, 2011. In the Adopting Release,

    the Commission stated that each SDR would have: (1) A recurring

    burden of approximately $856,666 and an annual burden of $666,666

    for system maintenance per SDR; (2) non-recurring costs to publicly

    disseminate ($601,003 per SDR); and (3) recurring costs to publicly

    disseminate ($360,602 per SDR). See id.

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

    i. Incremental, Non-Recurring Expenditure to a Non-Financial End-User,

    SEF or DCM to Update Existing Technology\358\

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

    \358\ For the same reasons stated in the Adopting Release, the

    Commission assumes that SEFs and DCMs would experience the same or

    less costs as a non-financial end-user. See 77 FR 1,236. Under

    proposed Sec. 43.6(g)(1), SEFs or DCMs would be required to

    transmit a block trade election to an SDR only when the SEF or DCM

    receives notice of a block trade election from a reporting party.

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

    To comply with the election process in proposed Sec. 43.6(g), a

    non-financial end-user, SEF, or DCM likely would need to: (1) Update

    its OMS system to capture the election to treat a qualifying publicly

    reportable swap transaction as a block trade or large notional off-

    facility swap. The Commission estimates that updating an OMS system to

    permit notification to an SDR of a block trade or large notional off-

    facility swap election would impose an initial non-recurring burden of

    approximately 80 personnel hours at an approximate cost of $6,761.20

    for each non-financial end-user, SEF or DCM.\359\ This cost

    [[Page 15509]]

    estimate includes an estimate of the number of potential burden hours

    required to amend internal procedures, reprogram systems and implement

    processes to permit a non-financial end-user to elect to treat their

    qualifying swap transaction as a block trade or large notional off-

    facility swap in compliance with the requirements set forth in proposed

    Sec. 43.6(g).

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

    \359\ This estimate is calculated as follows: (Compliance

    Manager at 15 hours) + (Director of Compliance at 10 hours) +

    (Compliance Attorney at 5 hours) + (Senior Systems Analyst at 30) +

    (Senior Programmer at 20) = 80 hours per non-financial end-user who

    is a reporting party. See note 316 supra.

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

    ii. Incremental, Non-Recurring Expenditure to a Non-Financial End-User,

    SEF or DCM To Provide Training to Existing Personnel and Update Written

    Policies and Procedures

    To comply with the election process in proposed Sec. 43.6(g), a

    non-financial end-user likely would need to provide training to its

    existing personnel and update its written policies and procedures to

    account for this new process. The Commission estimates that providing

    training to existing personnel and updating written policies and

    procedures would impose an initial non-recurring burden of

    approximately 39 personnel hours at an approximate cost of $3,195.00

    for each non-financial end-user.\360\ This cost estimate includes the

    number of potential burden hours required to produce design training

    materials, conduct training with existing personnel, and revise and

    circulate written policies and procedures in compliance with the

    requirements set forth in proposed Sec. 43.6(g).

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

    \360\ This estimate is calculated as follows: (Compliance

    Manager at 5 hours) + (Director of Compliance at 2 hours) +

    (Compliance Attorney at 2 hours) + (Senior Systems Analyst at 10) +

    (Senior Programmer at 20) = 39 hours per non-financial end-user who

    is a reporting party. A compliance manager has adjusted hourly wages

    of $77.77. See note 316 supra.

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

    iii. Incremental, Recurring Expenses to a Non-Financial End-User, DCM

    or SEF Associated With Incremental Compliance, Maintenance and

    Operational Support in Connection With the Proposed Election Process

    A non-financial end-user, DCM or SEF likely would incur costs on an

    annual basis in order to comply with the election process in proposed

    Sec. 43.6(g). The Commission estimates that annual compliance,

    maintenance and operation support would impose an incremental,

    recurring burden of approximately five personnel hours at an

    approximate cost of $341.60 for each non-financial end-user, DCM or

    SEF.\361\ This cost estimate includes the number of potential burden

    hours required to design training materials, conduct training with

    existing personnel, and revise and circulate written policies and

    procedures in compliance with the requirements set forth in proposed

    Sec. 43.6(g).

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

    \361\ This estimate is calculated as follows: (Director of

    Compliance at 1 hour) + (Compliance Clerk at 3 hours) + (Compliance

    Attorney at 1 hour) = 5 hours per year per non-financial end-user

    who is a reporting party. A director of compliance has adjusted

    hourly wages of $158.21. A compliance clerk (junior compliance

    advisor) has adjusted hourly wages of $31.22. A compliance attorney

    has adjusted hourly wages of 89.43. See note 316 supra.

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

    iv. Incremental, Non-Recurring Expenditure to an SDR To Update Existing

    Technology To Capture and Publicly Disseminate Swap Data for Block

    Trades and Large Notional Off-Facility Swaps

    To comply with the election process in proposed Sec. 43.6(g), an

    SDR likely would need to update its existing technology to capture

    elections and disseminate qualifying publicly reportable swap

    transactions as block trades or large notional off-facility swaps. The

    Commission estimates that updating existing technology to capture

    elections would impose an initial non-recurring burden of approximately

    15 personnel hours at an approximate cost of $1,317.58 for each

    SDR.\362\ This cost estimate includes the number of potential burden

    hours required to amend internal procedures, reprogram systems, and

    implement processes to capture and publicly disseminate swap

    transaction and pricing data for block trades and large notional off-

    facility swaps in compliance with the requirements set forth in

    proposed Sec. 43.6(g).

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

    \362\ This estimate is calculated as follows: (Sr. Programmer at

    8 hours) + (Sr. Systems Analyst at 3 hours) + (Compliance Manager at

    2 hours) + (Director of Compliance at 2 hours) = 15 hours per SDR. A

    senior programmer has adjusted hourly wages of $81.52. A senior

    systems analyst has adjusted hourly wages of $64.50. A compliance

    manager has adjusted hourly wages of $77.77. A director of

    compliance has adjusted hourly wages of $158.21. See note 316 supra.

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

    b. Benefits Relevant to the Proposed Election Process (Proposed Sec.

    43.6(g))

    The Commission has identified two overarching, although presently

    unquantifiable, benefits that the proposed election process in Sec.

    43.6(g) would confer on swap market participants, registered entities

    and the general public. First, although proposed Sec. 43.6(g) sets out

    a purely administrative process with which market participants and

    registered entities must comply, the Commission submits that this

    proposed process is an integral component of the block trade framework

    in this Further Proposal and in part 43. Consequently, this proposed

    election process would benefit market participants, registered entities

    and the general public by providing greater price transparency in swaps

    markets than currently exists under part 43.\363\

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

    \363\ See the discussion of benefits in section VI.E.1.e above

    with respect to proposed Sec. Sec. 43.6(a)-(f) and (h).

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

    Second, the Commission foresees that the election process would

    promote market efficiency by creating a standardized process in

    proposed Sec. 43.6(g) for market participants to delineate which

    publicly reportable swap transactions qualify for block trade or large

    notional off-facility swap treatment. In addition, this standardized

    process would further promote efficiency by allowing market

    participants and registered entities to leverage their existing

    technology infrastructure, connectivity, personnel and other resources

    required under parts 43 and 49 of the Commission's regulations. The

    Commission has endeavored to craft the Further Proposal in such a

    manner that its elements work together and avoid duplicative or

    conflicting obligations on market participants and registered entities.

    c. Application of the Section 15(a) Factors to Proposed Sec. 43.6(g)

    As noted above, section 15(a) directs the Commission to consider

    five particular factors in evaluating the costs and benefits of a

    particular Commission action. These factors are considered below with

    respect to proposed Sec. 43.6(g).

    i. Protection of Market Participants and the Public

    Although proposed Sec. 43.6(g) sets out a purely administrative

    process with which market participants and registered entities must

    comply, the Commission foresees this proposed process as integral to

    the effective functioning of the block trade framework in this Further

    Proposal and in part 43. Consequently, this proposed election process

    contributes to providing greater swap market transparency than what

    currently exists under part 43 of the Commission's regulations. Market

    participants, registered entities and the general public benefit from

    this enhanced swap market price transparency.

    ii. Efficiency, Competitiveness and Financial Integrity \364\

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

    \364\ Although by its terms, section 15(a)(2)(B) of the CEA

    applies to futures and not swaps, the Commission finds this factor

    useful in analyzing the costs and benefits of regulating swaps, as

    well. See 7 U.S.C. 19(a)(2)(B).

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

    As noted above, the proposed election process would promote

    efficiency by providing market participants and

    [[Page 15510]]

    registered entities with a standardized process to delineate which

    publicly reportable swap transactions are block trades or large

    notional off-facility swaps. In addition, the proposed election process

    would promote efficiency by allowing non-financial end-users, SEFs,

    DCMs and SDRs to leverage their existing technology infrastructure,

    connectivity, personnel and other resources required under part 43 and

    part 49 of the Commission's regulations. The use of existing

    technologies, connectivity, personnel and other resources would create

    efficiencies for these entities and significantly minimize costs in

    connection with implementation of, and compliance with, proposed Sec.

    43.6(g).

    The Commission has identified no potential impact on

    competitiveness and financial integrity that would result from the

    implementation of the proposed election process.

    iii. Price Discovery

    The Commission has identified no potential material impact to price

    discovery that would result from the implementation of the proposed

    election process.

    iv. Sound Risk Management Practices

    The Commission has identified no potential impact on sound risk

    management practices that would result from the implementation of the

    proposed election process.

    v. Other Public Interest Considerations

    The Commission has identified no potential impact on other public

    interest considerations (other than those identified above) that would

    result from the implementation of the proposed election process.

    d. Specific Questions Regarding the Proposed Election Process

    The Commission requests comments on its cost and benefit

    consideration with respect to the proposed election process. While

    comments are welcome on all aspects of the proposal, the Commission is

    particularly interested in the following:

    Q101. Please provide comments regarding the Commission's estimates

    of direct and indirect costs to non-financial end-users and SDRs.

    Q102. Please provide comments regarding views on the accuracy and/

    or inaccuracy of: (1) The facts cited in support of the Commission's

    analysis of the identified considerations relating to the proposed

    election process; and (2) the Commission's analysis.

    Q103. Are there any other public interest considerations that the

    Commission should examine in finalizing proposed Sec. 43.6(g)?

    Q104. Are there other alternative processes that would further

    reduce burdens on market participants and registered entities?

    F. Costs and Benefits Relevant to Proposed Anonymity Protections

    (Amendments to Sec. Sec. 43.4(d)(4) and (h))

    The Commission has organized its cost-benefit discussion of the two

    proposed amendments to Sec. 43.4 of the Commission's regulations into

    one section. Section 43.4 as now promulgated prescribes the manner in

    which SDRs must publicly disseminate swap transaction and pricing data.

    One amendment proposes to add a system for masking the geographical

    data for certain other commodity swaps, which are not currently subject

    to public dissemination. The other amendment proposes to establish a

    methodology to establish cap sizes for large swap transactions that is

    different than the methodology for determining appropriate minimum

    block sizes. Both amendments seek to protect the anonymity of the

    parties to swaps while providing increased transparency in swaps

    markets.

    A discussion of each amendment is set out immediately below,

    followed by a discussion of the costs and benefits of the amendments,

    as well as an analysis of the costs and benefits in light of the five

    factors identified in section 15(a) of the CEA.

    1. Proposed Amendments to Sec. 43.4(d)(4)

    The Commission addresses the public dissemination of certain swaps

    in the other commodity asset class in Sec. 43.4(d)(4). Section

    43.4(d)(4)(ii) provides that for publicly reportable swaps in the other

    commodity asset class, information identifying the actual underlying

    assets must be publicly disseminated for: (a) Those swaps executed on

    or pursuant to the rules of a SEF or DCM; (b) those swaps referencing

    one of the contracts described in appendix B to part 43; and (c) any

    publicly reportable swap transaction that is economically related to

    one of the contracts described in appendix B to part 43. Pursuant to

    the Adopting Release, any swap that is in the other commodity asset

    class that falls under Sec. 43.4(d)(4)(ii) would be subject to

    reporting and public dissemination requirements.

    In this Further Proposal, the Commission is proposing a new

    provision, Sec. 43.4(d)(4)(iii), which would establish develop a

    system for the public dissemination of exact underlying assets in the

    other commodity asset class with a ``mask'' that is based on commodity

    detail and geographic detail. The Commission also is proposing a new

    appendix to part 43, which contains the geographical details that SDRs

    would use in masking certain other commodity swaps in connection with

    public dissemination of swap transaction and pricing data.

    2. Proposed Amendments to Sec. 43.4(h)

    Section 43.4(h) of the Commission's regulations establishes cap

    sizes for rounded notional or principal amounts that are publicly

    disseminated for publicly reportable swap transactions. The purpose of

    establishing cap sizes is to provide anonymity to large swap

    transactions that, if the notional or principal amounts were revealed,

    would likely identify the parties to the swap or their business

    transactions. The Commission notes that the objective of cap sizes

    differs from the primary objective underlying the establishment of

    appropriate minimum block sizes. With respect to the latter, the

    objective is tied to ensuring that a block trade or large notional off-

    facility swap can be sufficiently offset during a relative short

    reporting delay.

    Section 43.4(h) currently requires SDRs to publicly disseminate the

    notional or principal amounts of a publicly reportable swap transaction

    represented by a cap size (i.e., $XX+) that adjusts in accordance with

    their respective appropriate minimum block size for the relevant swap

    category. Section 43.4(h) further provides that if no appropriate

    minimum block size exists with respect to a swap category, then the cap

    size on the notional or principal amount will correspond with interim

    cap sizes that the Commission has established for the five asset

    classes.\365\

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

    \365\ See note 259 supra, which lists the interim cap sizes set

    forth in Sec. Sec. 43.4(h)(1)-(5).

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

    The proposed amendment to Sec. 43.4(h) would continue to require

    SDRs to publicly disseminate cap sizes that correspond with their

    respective appropriate minimum block sizes during an initial period.

    However, upon publishing post-initial appropriate minimum block sizes

    in accordance with proposed Sec. 43.6(f), the Commission also would

    publish post-initial cap sizes for each swap category by applying the

    75-percent notional amount calculation on data collected by SDRs. The

    Commission would apply the 75-percent notional amount calculation on a

    three-year rolling window (i.e., beginning with a minimum of one year

    and adding one year of data for each calculation until a total of three

    years of

    [[Page 15511]]

    data is accumulated) of such data corresponding to each relevant swap

    category for each calendar year.

    3. Costs Relevant to the Proposed Amendments to Sec. Sec. 43.4(d)(4)

    and (h)

    SDRs potentially would bear the costs of complying with the

    proposed amendments to Sec. Sec. 43.4(d)(4) and (h).\366\ The

    Commission anticipates that these entities already will have made non-

    recurring expenditures in technology and personnel in connection with

    the requirements set forth in part 43 and part 49 (which contain rules

    regarding the registration and regulation of SDRs). As such, SDRs

    already will be required to pay recurring expenses associated with

    systems maintenance, support and compliance as described in the cost-

    benefit discussion in the Adopting Release.\367\ Notwithstanding these

    recurring expenses, an SDR would have additional non-recurring

    expenditures associated with the amendments to Sec. 43.4.

    Specifically, the Commission estimates that updating existing

    technology to capture elections would impose an initial non-recurring

    burden of approximately 34 personnel hours at an approximate cost of

    $3,195.00 for each SDR.\368\ This cost estimate includes an estimate of

    the number of potential burden hours required to amend internal

    procedures, reprogram systems and implement processes to capture and

    publicly disseminate swap transaction and pricing data for block trades

    and large notional off-facility swaps in compliance with the

    requirements set forth in proposed Sec. 43.6(g).

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

    \366\ The Commission anticipates that reporting parties, SEFs

    and DCMs would not incur any new costs related to the proposed

    amendments to Sec. 43.4 because this section relates to the data

    that an SDR must publicly disseminate. Section 43.3 of the

    Commission's regulations sets out the requirements for reporting

    parties, SEFs and DCMs in terms of what is transmitted to an SDR.

    \367\ See 76 FR 54,572-75. As noted in SDR final rule, SDRs

    (that do not enter into contracts with a third party) would have

    incremental costs related to compliance with part 43 beyond those

    costs identified in the release adopting part 49 of the Commission's

    regulations. See 76 FR 54,573. In the Adopting Release, the

    Commission stated that each SDR would have: (i) A recurring burden

    of approximately $856,666 and an annual burden of $666,666 for

    system maintenance per SDR; (ii) non-recurring costs to publicly

    disseminate ($601,003 per SDR); and (iii) recurring costs to

    publicly disseminate ($360,602 per SDR). See 77 FR 1,238.

    \368\ This estimate is calculated as follows: (Sr. Programmer at

    20 hours) + (Sr. Systems Analyst at 10 hours) + (Compliance Manager

    at 2 hours) + (Director of Compliance at 2 hours) = 34 hours per

    SDR. A senior programmer has adjusted hourly wages of $81.52. A

    senior systems analyst has adjusted hourly wages of $64.50. A

    compliance manager has adjusted hourly wages of $77.77. A director

    of compliance has adjusted hourly wages of $158.21. See note 316

    supra.

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

    In the Commission's view, these additional non-recurring and

    recurring costs are not likely to be significant to an SDR given the

    likelihood that it will leverage its existing technology, systems and

    personnel in complying with the proposed amendments to Sec. 43.4.

    In addition, the Commission anticipates that proposed Sec.

    43.4(d)(4)(iii) may result in some incremental, recurring costs for

    SDRs because they will be required to publicly disseminate other

    commodity swaps data that were not previously within the scope of the

    public dissemination requirement in Sec. 43.4. At this time, however,

    the Commission does not have sufficient data to quantify these costs.

    The Commission also anticipates that proposed Sec. 43.4(d)(4)(iii)

    may result in some indirect costs to the market through reduced

    information bearing on the contours of total trading in the market. The

    Commission currently lacks data to quantify the costs associated with

    the reduction of information.

    4. Benefits Relevant to the Proposed Amendments to Sec. 43.4

    The Commission anticipates that the proposed anonymity provisions

    of Sec. 43.4 would generate several overarching, although presently

    unquantifiable, benefits to swap market participants, registered

    entities and the general public. In the first instance, the Commission

    anticipates that the proposed cap size amendments to Sec. 43.4(h)

    would benefit market participants, registered entities and the general

    public by providing greater price transparency with respect to swaps

    with notional amounts that fall between the post-initial appropriate

    minimum block size and post-initial cap size for a particular swap

    category. During the post-initial period, the Commission would set

    appropriate minimum block sizes based on the 67-percent notional amount

    calculation \369\ and cap sizes based on the 75-percent notional amount

    calculation.\370\ Although swaps with notional amounts that fall

    between these two sizes would be subject to a time delay, the exact

    notional amounts of these swaps eventually would be publicly disclosed.

    The Commission is of the preliminary view that the delayed public

    disclosure of the notional amount of these swaps would provide market

    participants, registered entities and the general public with

    meaningful price transparency.

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

    \369\ See proposed Sec. 43.6(c)(1).

    \370\ See proposed Sec. 43.6(c)(2).

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

    The proposed masking provisions in the amendment to Sec.

    43.4(d)(4) and proposed appendix D to part 43 would further benefit

    market participants, registered entities and the general public by

    enhancing price discovery with respect to swaps that currently are not

    required to be publicly disclosed under part 43. Section 43.4(d)(4)

    currently requires SDRs to publicly disseminate swap transaction and

    pricing data for publicly reportable swap transactions that reference

    or are economically related to the 29 contracts identified in appendix

    B to part 43. The Commission is of the preliminary view that there are

    a significant number of swaps in the other commodity asset class that

    are not economically related to the 29 contracts identified in appendix

    to part 43. The proposed amendment creating new Sec. 43.4(d)(4)(iii)

    would require the public dissemination of data on these swaps. The

    Commission proposes that the real-time public reporting of these swaps

    would enhance price discovery in the other commodity asset class.

    Moreover, the Commission's proposed amendments to the anonymity

    provisions are intended to reduce impacts on market liquidity. As noted

    above, CEA section 2(a)(13) requires the Commission to prescribe rules

    for the real-time public reporting of all swap transactions in order to

    enhance price transparency, while taking into account the effects of

    such transparency on market liquidity. The Commission's proposed

    approach would introduce greater transparency in a flexible manner so

    that post-initial cap sizes are responsive to changing markets.

    Proposed Sec. 43.4(h) would permit the Commission to set cap sizes no

    less than once annually during the post-initial period. If swap market

    conditions change significantly after the implementation of the

    provisions of this Further Proposal, then the Commission could react in

    a timely manner to further improve price transparency or to mitigate

    adverse effects on market liquidity.\371\

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

    \371\ This benefit is consistent with one of the considerations

    for implementation identified by ISDA and SIFMA in their January 18,

    2011 report. See Block trade reporting for over-the-counter

    derivatives markets, note 54 supra.

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

    Finally, the proposed approach would promote market efficiency for

    market participants and registered entities. Under proposed Sec.

    43.4(h), Commission would be required to set all cap sizes. The

    Commission anticipates that its proposed approach would impose

    significantly fewer direct burdens on market participants and

    registered entities that they otherwise would have

    [[Page 15512]]

    in the alternative (e.g., requiring market participants and/or

    registered entities to set cap sizes for the entire swaps market). An

    alternative approach could lead to market fragmentation, adverse

    effects on market liquidity, or reduced price transparency.

    5. Application of the Section 15(a) Factors to the Proposed Amendments

    to Sec. 43.4

    As noted above, section 15(a) directs the Commission to consider

    five particular areas in evaluating the costs and benefits of a

    particular Commission action. These five areas with respect to proposed

    amendments to Sec. 43.4 are considered below.

    a. Protection of Market Participants and the Public

    The Commission anticipates that the proposed amendments to Sec.

    43.4 would ensure the protection of swap counterparty anonymity on an

    ongoing basis. While cap sizes for some transactions could exceed

    appropriate minimum block sizes in certain circumstances (resulting in

    the public dissemination of notional/principal-amount information after

    a time delay), the Commission intends and expects that for the vast

    majority of (if not all) impacted swap transactions, the proposed cap-

    size process and methodology is sufficient to distinguish correctly

    between those for which masking of notional or principal amount is

    required to maintain anonymity and those for which it is not.\372\

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

    \372\ The Commission recognizes that adoption of rules that

    delineate cap sizes insufficient to provide anonymity could cause

    prospective counterparties to forego swap transactions, thus

    adversely impacting market liquidity.

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

    b. Efficiency, Competitiveness and Financial Integrity \373\

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

    \373\ Although by its terms, section 15(a)(2)(B) applies to

    futures and not swaps, the Commission finds this factor useful in

    analyzing the costs and benefits of swaps regulation, as well. 7

    U.S.C. 19(a)(2)(B).

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

    The Commission anticipates that proposed amendments to Sec.

    43.4(h) would promote market efficiencies and competitiveness since the

    proposed approach would provide market participants with the ability to

    continue transacting swaps with the protection of anonymity, while

    promoting greater price transparency.

    The Commission has identified no potential impact on financial

    integrity that would result from the implementation of the proposed

    election process.

    c. Price Discovery

    As noted above, the Commission anticipates that the proposed cap

    size amendments to Sec. 43.4(h) would benefit market participants,

    registered entities and the general public by providing greater price

    transparency with respect to swaps with notional amounts that fall in

    between the post-initial appropriate minimum block size and post-

    initial cap size for a particular swap category. During the post-

    initial period, the Commission would set appropriate minimum block

    sizes based on the 67-percent notional amount calculation \374\ and cap

    sizes based on the 75-percent notional amount calculation.\375\

    Although swaps with notional amounts that fall in between these two

    sizes would be subject to a time delay, the exact notional amounts of

    these swaps eventually would be publicly disclosed.

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

    \374\ See proposed Sec. 43.6(c)(1).

    \375\ See proposed Sec. 43.6(c)(2).

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

    The proposed masking provisions in the amendment to Sec.

    43.4(d)(4) and proposed appendix D to part 43 could furt-er benefit

    market participants, registered entities and the general public by

    enhancing price discovery with respect to swaps that currently are not

    required to be publicly disclosed under part 43. The proposed amendment

    creating new Sec. 43.4(d)(4)(iii) would require the public

    dissemination of data on these swaps. The Commission anticipates that

    the real-time public reporting of these swaps would enhance price

    discovery in the other commodity asset class.

    d. Sound Risk Management Practices

    To the extent that the proposed amendments to Sec. 43.4 mask the

    identity, business transactions and market positions of swap

    counterparties, the Commission anticipates that the proposed amendments

    to Sec. 43.4 would preserve the viability of swaps as a risk

    management tool for those traders that otherwise might feel compelled

    to switch to a less well-suited risk management tool.

    e. Other Public Interest Considerations

    The Commission does not anticipate that the proposed amendment to

    Sec. 43.4(h) would have a material effect on public interest

    considerations other than those identified above.

    6. Specific Questions Regarding the Proposed Amendments to Sec. 43.4

    The Commission requests comments on its cost and benefit

    considerations with respect to the proposed amendments to Sec. 43.4.

    While commenters are welcome to comment on all aspects of this Further

    Proposal, the Commission is particularly interested in the following:

    Q105. Please provide comments regarding the Commission's estimates

    of direct and indirect costs to SDRs of the proposed amendments to

    Sec. 43.4.

    Q105a. Please provide comments regarding any potential direct or

    indirect costs to non-financial end-users.

    Q106. Please provide comments regarding views on the accuracy and/

    or inaccuracy of the facts cited in support of the Commission's

    analysis of the identified considerations relating to the proposed

    anonymity protections.

    Q107. Are there any other public interest considerations not

    discussed above that the Commission should examine in finalizing the

    proposed amendments to Sec. 43.4?

    Q108. Please provide comments regarding the sufficiency of the

    Commission's proposed rules to protect market participant anonymity and

    whether the rules could be expected to cause certain swap

    counterparties to forego swap transactions and, if so, the magnitude of

    any likely liquidity impact.

    VII. Example of a Post-Initial Appropriate Minimum Block Size

    Determination Using the 67-Percent Notional Amount Calculation

    The example below describes the steps necessary for the Commission

    to determine the post-initial appropriate minimum block size based on

    Sec. 43.6(c)(1) for a sample set of data in ``Swap Category Z.'' For

    the purposes of this example, Swap Category Z had 35 transactions over

    the given observation period. The observations are described in table A

    below and are ordered by time of execution (i.e., Transaction

    1 was executed prior to Transaction 2).

    [[Page 15513]]

    [GRAPHIC] [TIFF OMITTED] TP15MR12.000

    Step 1: Remove the transactions that do not fall within the

    definition of ``publicly reportable swap transactions'' as described in

    Sec. 43.2.

    In this example, assume that five of the 35 transactions in Swap

    Category Z do not fall within the definition of ``publicly reportable

    swap transaction.'' These five transactions, listed in table B below

    would be removed for the data set that will be used to determine the

    post-initial appropriate minimum block size.

    Table B--Transactions That Do Not Fall Within the Definition of ``Publicly Reportable Swap Transaction''

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

    Transaction 4 i>13 i>16 i>20 i>21

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

    1.05 25,000,000 100,000,000 50,000,000 75,000,000

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

    Step 2A: Convert the publicly reportable swap transactions in the

    swap category to the same currency or units.

    In order to accurately compare the transactions in a swap category

    and apply the appropriate minimum block size calculation, the

    transactions must be converted to the same currency or unit.

    In this example, the publicly reportable swap transactions were all

    denominated in U.S. dollars, so no conversion was necessary. If the

    notional amounts of any of the publicly reportable swap transactions in

    Swap Category Z had been denominated in a currency other than U.S.

    dollars, then the notional amounts of such publicly reportable swap

    transactions would have been adjusted by the daily exchange rates for

    the period to arrive at the U.S. dollars equivalent notional amount.

    Step 2B: Examine the remaining data set for any outliers and remove

    any such outliers, resulting in a trimmed data set.

    The publicly reportable swap transactions are examined to identify

    any outliers. If an outlier is discovered, then it would be removed

    from the data set. To conduct this analysis, the notional amounts of

    all of the publicly reportable swap transactions remaining after step 1

    and step 2A are transformed by Log10. The average and

    standard deviation (``STDEV'') of these transformed notional amounts

    would then be calculated. Any transformed notional amount of a publicly

    reportable swap transaction that is larger than the average of all

    transformed notional amounts plus four times the standard deviation

    would be omitted from the data set as an outlier.

    In the data set used in this example, none of the observations were

    large enough to qualify as an outlier, as shown in the calculations

    described in Table C.

    [GRAPHIC] [TIFF OMITTED] TP15MR12.001

    Step 3: Sum the notional amounts of the remaining publicly

    reportable swap transactions in the data set resulting after step 2B.

    Note: The notional amounts being summed in this step are the original

    amounts following step 2A

    [[Page 15514]]

    and not the Log10 transformed amounts used for the process

    in step 2B used to identify and omit any outliers.

    Using the equation described immediately below, the notional

    amounts are added to determine the sum total of all notional amounts

    remaining in the data set for a particular swap category. In this

    example, the notional amounts of the 30 remaining publicly reportable

    swap transactions in Swap Category Z are added together to come up with

    a net value of 2,989,706,421.

    [GRAPHIC] [TIFF OMITTED] TP15MR12.002

    Step 4: Calculate the 67 Percent Notional Amount.

    Using the resulting amount from step 2B, a 67-percent notional

    amount value would be calculated by using the equation:

    PRSTNV * 0.67 = G

    G = 67 percent of the sum total of the notional amounts of all

    remaining publicly reportable swap transactions in the set

    G = 2,003,103,302

    Step 5: Order and rank the observations based on notional amount of

    the publicly reportable swap transaction from least to greatest.

    The remaining publicly reportable swap transactions having

    previously been converted to U.S. dollar equivalents must be ranked,

    based on the notional sizes of such transactions, from least to

    greatest. The resulting ranking yields the PRSTt. Table D below

    reflects the ranking of the remaining publicly reportable swap

    transactions based on their notional amount sizes for this example.

    PRSTt = a publicly reportable swap transaction in the data set

    ranked from least to greatest based on the notional amounts of such

    transactions.

    Step 6A: Calculate the running sum of all PRSTt.

    A running sum would be calculated by adding together the ranked and

    ordered publicly reportable swap transactions from step 5 (PRSTt) in

    least to greatest order. The calculations of running sum values with

    respect to this example are reflected in Table D below.

    [[Page 15515]]

    [GRAPHIC] [TIFF OMITTED] TP15MR12.003

    Step 6B: Select first RS Value that is greater than or equal to G.

    In this example, G is equal to 2,003,103,302, meaning that the RS

    Value that must be selected would have to be greater than that number.

    The first RS Value that is greater than or equal to G can be found in

    the observation that corresponds to Rank Order 28 (see Table

    D). The RS Value of the Rank Order 28 observation is

    2,024,706,421.

    Step 7: Select the PRSTt that corresponds to the observation

    determined in step 6B.

    In this example, the PRSTt that corresponds to the RS Value

    determined in step 6B (Rank Order 28) is 265,000,000.

    Step 8: Determine the rounded notional amount.

    Calculate the rounded notional amount under the process described

    in the proposed amendment to Sec. 43.2. The 265,000,000 amount would

    be rounded to the nearest 10 million for public dissemination, or

    270,000,000.

    Step 9: Set the appropriate minimum block size at the amount

    calculated in step 8.

    In this example, the appropriate minimum block size for swap

    category Z would be 270,000,000 for the observation period.

    Post-Initial Appropriate Minimum Block Size = $270,000,000

    VIII. List of Commenters Who Responded to the Initial Proposal

    1. Markit.

    2. Asset Management Group of the Securities Industry and Financial

    Markets Association (``SIFMA AMG'').

    3. Managed Funds Association (``MFA'').

    4. Argus Media, Inc. (``Argus'').

    5. J.P. Morgan (``JP Morgan'').

    6. Gibson Dunn on behalf of the Coalition for Derivatives End-Users

    (``Coalition for Derivatives End-Users'').

    7. Committee on Capital Markets Regulation (``CCMR'').

    8. Goldman Sachs & Co. (``Goldman'').

    9. Barclays Capital, Inc. (``Barclays'').

    10. Air Transport Association (``ATA'').

    11. Pacific Investment Management Company, LLC (``PIMCO'').

    12. Committee on the Investment of Employee Benefit Assets & American

    Benefits Council (``ABC/CIEBA'').

    13. Better Markets, Inc. (``Better Markets'').

    14. Investment Company Institute (``ICI'').

    15. MarkitSERV.

    16. Coalition of Physical Energy Companies (``COPE'').

    17. International Options Markets Association/World Federation of

    Exchanges (``World Federation of Exchanges'').

    18. UBS Securities LLC (``UBS'').

    19. Global Foreign Exchange Division of Association for Financial

    Markets in Europe (``AFME''), the Securities Industry and Financial

    Markets Association (``SIFMA'') and the Asia Securities Industry and

    Financial Markets Association (``ASIFMA'') (collectively, ``SIFMA/AFME/

    ASIFMA'').

    20. CME Group, Inc. (``CME'').

    21. Coalition of Energy End-Users.

    22. International Swaps and Derivatives Association & Securities

    Industry and Financial Markets Association (``ISDA/SIFMA'').

    23. Morgan Stanley.

    24. Hunton & Williams LLP on behalf of the Working Group of Commercial

    Energy Firms (``Hunton & Williams'').

    25. Freddie Mac.

    26. Vanguard.

    27. TriOptima.

    28. BlackRock, Inc. (``BlackRock'').

    29. Dominion Resources, Inc. (``Dominion'').

    30. Sadis & Goldberg LLP (``Sadis & Goldberg'').

    31. Metlife, Inc. (``Metlife'').

    32. Wholesale Markets Brokers' Association, Americas (``WMBAA'').

    [[Page 15516]]

    33. Depository Trust & Clearing Corporation (``DTCC'').

    34. Cleary Gottlieb on behalf of Bank of America Merrill Lynch, BNP

    Paribas, Citi; Credit Agricole Corporate and Investment Bank; Credit

    Suisse Securities (USA), Deutsche Bank AG, Morgan Stanley, Nomura

    Securities International, In., PNC Bank, National Association,

    Soci[eacute]t[eacute] G[eacute]n[eacute]rale, UBS Securities LLC, Wells

    Fargo & Company (``Cleary Gottlieb'').

    35. Financial Industry Regulatory Authority (``FINRA'').

    36. International Swaps and Derivatives Association (``ISDA'').

    37. Association of Institutional Investors (``AII'').

    38. Swaps & Derivatives Market Association (``SDMA'').

    List of Subjects in 17 CFR Part 43

    Real-time public reporting; Block trades; Large notional off-

    facility swaps; Reporting and recordkeeping requirements.

    Accordingly, 17 CFR Part 43, as proposed to be added at 77 FR

    1,243, January 9, 2012, is proposed to be further amended as follows.

    PART 43--REAL-TIME PUBLIC REPORTING

    1. The authority citation for part 43 shall continue to read as

    follows:

    Authority: 7 U.S.C. 2(a), 12a(5) and 24a, amended by Pub. L.

    111-203, 124 Stat. 1376 (2010).

    2. Amend Sec. 43.2 by adding the following definitions in

    alphabetical order to read as follows:

    Sec. 43.2 Definitions.

    * * * * *

    Cap size means, for each swap category, the maximum notional or

    principal amount of a publicly reportable swap transaction that is

    publicly disseminated.

    * * * * *

    Economically related means a direct or indirect reference to the

    same commodity at the same delivery location or locations, or with the

    same or a substantially similar cash market price series.

    * * * * *

    Futures-related swap means a swap (as defined in section 1a(47) of

    the Act and as further defined by the Commission in implementing

    regulations) that is economically related to a futures contract.

    Major currencies means the currencies, and the cross-rates between

    the currencies, of Australia, Canada, Denmark, New Zealand, Norway,

    South Africa, South Korea, Sweden, and Switzerland.

    Non-major currencies means all other currencies that are not super-

    major currencies or major currencies.

    * * * * *

    Physical commodity swap means a swap in the other commodity asset

    class that is based on a tangible commodity.

    * * * * *

    Reference price means a floating price series (including

    derivatives contract prices and cash market prices or price indices)

    used by the parties to a swap or swaption to determine payments made,

    exchanged or accrued under the terms of a swap contract.

    * * * * *

    Super-major currencies means the currencies of the European

    Monetary Union, Japan, United Kingdom, and United States.

    * * * * *

    Swaps with composite reference prices means swaps based on

    reference prices that are composed of more than one reference price

    from more than one swap category.

    Trimmed data set means a data set that has had extraordinarily

    large notional transactions removed by transforming the data into a

    logarithm with a base of 10, computing the mean, and excluding

    transactions that are beyond four standard deviations above the mean.

    * * * * *

    3. Revise section 43.4(h) to read as follows:

    Sec. 43.4 Swap transaction and pricing data to be publicly

    disseminated in real-time.

    * * * * *

    (h) Cap sizes. (1) Initial cap sizes. Prior to the effective

    date of a Commission determination to establish an applicable post-

    initial cap size for a swap category as determined pursuant to

    paragraph (h)(2), the initial cap sizes for each swap category shall

    be equal to the greater of the initial appropriate minimum block

    size for the respective swap category in appendix F to this part or

    the respective cap sizes in paragraphs (h)(1)(i) through (v) of this

    section. If appendix F to this part does not provide an initial

    appropriate minimum block size for a particular swap category, the

    initial cap size for such swap category shall be equal to the

    appropriate cap size as set forth in paragraphs (h)(1)(i) through

    (v) of this section.

    (i) For swaps in the interest rate asset class, the publicly

    disseminated notional or principal amount for an interest rate swap

    subject to the rules in this part 43 the cap size shall be:

    (A) USD 250 million swaps with a tenor greater than zero up to and

    including two years;

    (B) USD 100 million for swaps with a tenor greater than two years

    up to and including ten years; and

    (C) USD 75 million for swaps with a tenor greater than ten years;

    (ii) For swaps in the credit asset class, the publicly disseminated

    notional or principal amount for a credit swap subject to the rules in

    this part 43 shall be USD 100 million;

    (iii) For swaps in the equity asset class, the publicly

    disseminated notional or principal amount for an equity swap subject to

    the rules in this part 43 shall be USD 250 million;

    (iv) For swaps in the foreign exchange asset class, the publicly

    disseminated notional or principal amount for a foreign exchange swap

    subject to the rules in this part 43 shall be USD 250 million; and

    (v) For swaps in the other commodity asset class, the publicly

    disseminated notional or principal amount for any other commodity swap

    subject to the rules in this part 43 shall be USD 25 million.

    (2) Post-initial cap sizes. Pursuant to the process described in

    Sec. 43.6(f)(1), the Commission shall establish post-initial cap sizes

    using reliable data collected by registered swap data repositories, as

    determined by the Commission, based on the following:

    (i) A three-year rolling window (beginning with a minimum of one

    year and adding one year of data for each calculation until a total of

    three years of data is accumulated) of swap transaction and pricing

    data corresponding to each relevant swap category recalculated no less

    than once each calendar year; and

    (ii) The 75-percent notional amount calculation described in

    paragraph (c)(2) of this section applied to the swap transaction and

    pricing data described in paragraph (h)(2)(i) of this section.

    (3) Commission publication of post-initial cap sizes. The

    Commission shall publish post-initial cap sizes on its Web site at

    http://www.cftc.gov.

    (4) Effective date of post-initial cap sizes. Unless otherwise

    indicated on the Commission's Web site, the post-initial cap sizes

    shall be effective on the first day of the second month following the

    date of publication. * * *

    4. Amend Sec. 43.4(d)(4)(i) by deleting ``Sec. 43.4(d)(4)(ii).''

    and replacing it with ``Sec. Sec. 43.4(d)(4)(ii) and (iii).''

    5. Amend Sec. 43.4(d)(4)(ii)(B) by deleting ``; and'' and

    replacing it with ``; or''; and

    6. Add Sec. 43.4(d)(4)(iii) to read as follows:

    [[Page 15517]]

    (iii) The underlying assets of swaps in the other commodity asset

    class that are not described in 43.4(d)(4)(ii) shall be publicly

    disseminated by limiting the geographic detail of the underlying

    assets. The identification of any specific delivery point or pricing

    point associated with the underlying asset of such other commodity swap

    shall be publicly disseminated pursuant to appendix E to this part.

    7. Add section 43.6 to part 43 to read as follows:

    Sec. 43.6 Block trades and large notional off-facility swaps.

    (a) Commission determination. The Commission shall establish the

    appropriate minimum block size for publicly reportable swap

    transactions based on the swap categories set forth in Sec. 43.6(b) in

    accordance with the provisions set forth in Sec. Sec. 43.6(c), (d),

    (e), (f) or (h), as applicable.

    (b) Swap categories. Swap categories shall be established for all

    swaps, by asset class, in the following manner:

    (1) Interest rates asset class. Interest rate asset class swap

    categories shall be based on unique combinations of the following:

    (i) Currency by:

    (A) Super-major currency;

    (B) Major currency; or

    (C) Non-major currency; and

    (ii) Tenor of swap as follows:

    (A) Zero to three months (0 to 107 days);

    (B) Three months to six months (108 to 198 days);

    (C) Greater than six months to one year (199 to 381 days);

    (D) Greater one to two years (382 to 746 days);

    (E) Greater than two to five years (747 to 1,842 days);

    (F) Greater than five to ten years (1,843 to 3,668 days);

    (G) Greater than ten to 30 years (3,669 to 10,973 days); or

    (H) Greater than 30 years (10,974 days and above).

    (2) Credit asset class. Credit asset class swap categories shall be

    based on unique combinations of the following:

    (i) Traded Spread rounded to the nearest basis point (0.01) as

    follows:

    (A) 0 to 175 points;

    (B) 176 to 350 points; or

    (C) 351 points and above; and

    (ii) Tenor of swap as follows:

    (A) Zero to two years (0-746 days);

    (B) Greater than two to four years (747-1,476 days);

    (C) Greater than four to six years (1,477-2,207 days)

    (D) Greater than six to eight-and-a-half years (2,208-3,120 days);

    (E) Greater than eight-and-a-half to 12.5 years (3,121-4,581 days);

    and

    (F) Greater than 12.5 years (4,581 days and above).

    (3) Equity asset class. There shall be one swap category consisting

    of all swaps in the equity asset class.

    (4) Foreign exchange asset class. Swap categories in the foreign

    exchange asset class shall be grouped as follows:

    (i) By the unique currency combinations of super-major currencies,

    major currencies and the currencies of Brazil, China, Czech Republic,

    Hungary, Israel, Mexico, Poland, Russia, and Turkey; or

    (ii) By unique currency combinations not included in subparagraph

    (i) of this section.

    (5) Other commodity asset class. Swap contracts in the other

    commodity asset class shall be grouped into swap categories as follows:

    (i) For swaps that are economically related to contracts in

    appendix B to this part, by the relevant contract as referenced in

    appendix B to this part; or

    (ii) For swaps that are not economically related to contracts in

    appendix B to this part, by the following futures-related swaps--

    (A) CME Cheese;

    (B) CBOT Distillers' Dried Grain;

    (C) CBOT Dow Jones-UBS Commodity Index Excess Return;

    (D) CBOT Ethanol;

    (E) CME Frost Index;

    (F) CME Goldman Sachs Commodity Index (GSCI), (GSCI Excess Return

    Index);

    (G) NYMEX Gulf Coast Gasoline;

    (H) NYMEX Gulf Coast Sour Crude Oil;

    (I) NYMEX Gulf Coast Ultra Low Sulfur Diesel;

    (J) CME Hurricane Index;

    (K) CME International Skimmed Milk Powder;

    (L) NYMEX New York Harbor Ultra Low Sulfur Diesel;

    (M) CME Nonfarm Payroll;

    (N) CME Rainfall Index;

    (O) CME Snowfall Index;

    (P) CME Temperature Index;

    (Q) CME U.S. Dollar Cash Settled Crude Palm Oil; or

    (R) CME Wood Pulp; or

    (iii) For swaps that are not covered in subparagraphs (i) and (ii)

    of this section, the relevant product type as referenced in appendix D

    to this part.

    (c) Methodologies to determine appropriate minimum block sizes and

    cap sizes. In determining appropriate minimum block sizes and cap sizes

    for publicly reportable swap transactions, the Commission shall utilize

    the following statistical calculations--

    (1) 67-percent notional amount calculation. The Commission shall

    use the following procedure in determining the 67-percent notional

    amount calculation: (i) Select all of the publicly reportable swap

    transactions within a specific swap category using a rolling three-year

    window of data beginning with a minimum of one year's worth of data and

    adding one year of data for each calculation until a total of three

    years of data is accumulated; (ii) convert to the same currency or

    units and use a trimmed data set; (iii) determine the sum of the

    notional amounts of swaps in the trimmed data set; (iv) multiply the

    sum of the notional amount by 67 percent; (v) rank order the

    observations by notional amount from least to greatest; (vi) calculate

    the cumulative sum of the observations until the cumulative sum is

    equal to or greater than the 67-percent notional amount calculated in

    (iv); (vii) select the notional amount associated with that

    observation; (viii) round the notional amount of that observation to

    two significant digits, or if the notional amount associated with that

    observation is already significant to two digits, increase that

    notional amount to the next highest rounding point of two significant

    digits; and (ix) set the appropriate minimum block size at the amount

    calculated in (viii).

    (2) 75-percent notional amount calculation. The Commission shall

    use the following procedure in determining the 75-percent notional

    amount calculation: (i) Select all of the publicly reportable swap

    transactions within a specific swap category using a rolling three-year

    window of data beginning with a minimum of one year's worth of data and

    adding one year of data for each calculation until a total of three

    years of data is accumulated; (ii) convert to the same currency or

    units and use a trimmed data set; (iii) determine the sum of the

    notional amounts of swaps in the trimmed data set; (iv) multiply the

    sum of the notional amount by 75 percent; (v) rank order the

    observations by notional amount from least to greatest; (vi) calculate

    the cumulative sum of the observations until the cumulative sum is

    equal to or greater than the 75-percent notional amount calculated in

    (iv); (vii) select the notional amount associated with that

    observation; (viii) round the notional amount of that observation to

    two significant digits, or if the notional amount associated with that

    observation is already significant to two digits, increase that

    notional amount to the next highest rounding point of two significant

    digits; and (ix) set the appropriate minimum block size at the amount

    calculated in (viii).

    (d) No appropriate minimum block sizes for swaps in the equity

    asset class.

    [[Page 15518]]

    Publicly reportable swap transactions in the equity asset class shall

    not be treated as block trades or large notional off-facility swaps.

    (e) Initial appropriate minimum block sizes. Prior to the

    Commission making a determination as described in paragraph (f)(1) of

    this section, the following initial appropriate minimum block sizes

    shall apply:

    (1) Prescribed appropriate minimum block sizes. Except as otherwise

    provided in paragraph (e)(1) of this section, for any publicly

    reportable swap transaction that falls within the swap categories

    described in Sec. Sec. 43.6(b)(1), (b)(2), (b)(4)(i), (b)(5)(i) and

    (b)(5)(ii), the initial appropriate minimum block size for such

    publicly reportable swap transaction shall be the appropriate minimum

    block size that is in appendix F to this part.

    (2) Certain swaps in the foreign exchange and other commodity asset

    classes. All swaps or instruments in the swap categories described in

    Sec. Sec. 43.6(b)(4)(ii) and (b)(5)(iii) shall be eligible to be

    treated as a block trade or large notional off-facility swap, as

    applicable.

    (3) Exception. Publicly reportable swap transactions described in

    Sec. 43.6(b)(5)(i) that are economically related to a futures contract

    in appendix B to this part shall not qualify to be treated as block

    trades or large notional off-facility swaps (as applicable), if such

    futures contract is not subject to a designated contract market's block

    trading rules.

    (f) Post-initial process to determine appropriate minimum block

    sizes.

    (1) Post-initial period. After a registered swap data repository

    has collected at least one year of reliable data for a particular asset

    class, as determined by Commission, the Commission shall establish by

    swap categories, the post-initial appropriate minimum block sizes as

    described in this subsection. No less than once each calendar year

    thereafter, the Commission shall update the post-initial appropriate

    minimum block sizes.

    (2) Post-initial appropriate minimum block sizes certain swaps. The

    Commission shall determine post-initial appropriate minimum block sizes

    for the swap categories described in Sec. Sec. 43.6(b)(1), (b)(2),

    (b)(4) and (b)(5) by utilizing a three-year rolling window (beginning

    with a minimum of one year and adding one year of data for each

    calculation until a total of three years of data is accumulated) of

    swap transaction and pricing data corresponding to each relevant swap

    category reviewed no less than once each calendar year, and by applying

    the 67-percent notional amount calculation to such data.

    (3) Commission publication of post-initial appropriate minimum

    block sizes. The Commission shall publish the appropriate minimum block

    sizes determined pursuant to Sec. 43.6(f)(1) on its Web site at http://www.cftc.gov.

    (4) Effective date of post-initial appropriate minimum block sizes.

    Unless otherwise indicated on the Commission's Web site, the post-

    initial appropriate minimum block sizes described in Sec. 43.6(f)(1)

    shall be effective on the first day of the second month following the

    date of publication.

    (g) Required notification.

    (1) Block trade election. (i) The parties to a publicly reportable

    swap transaction that has a notional amount at or above the appropriate

    minimum block size shall notify the registered swap execution facility

    or designated contract market, as applicable, pursuant to the rules of

    such registered swap execution facility or designated contract market,

    of its election to have the publicly reportable swap transaction

    treated as a block trade.

    (ii) The registered swap execution facility or designated contract

    market, as applicable, pursuant to the rules of which a block trade is

    executed shall notify the registered swap data repository of such a

    block trade election when transmitting swap transaction and pricing

    data to such swap data repository in accordance with Sec. 43.3(b)(1).

    (2) Large notional off-facility swap election. A reporting party

    who executes an off-facility swap that has a notional amount at or

    above the appropriate minimum block size shall notify the applicable

    registered swap data repository that such swap transaction qualifies as

    a large notional off-facility swap concurrent with the transmission of

    swap transaction and pricing data in accordance with part 43.

    (h) Special provisions relating to appropriate minimum block sizes

    and cap sizes. The following special rules shall apply to the

    determination of appropriate minimum block sizes and cap sizes--

    (1) Swaps with optionality. The notional amount of swaps with

    optionality shall equal the notional amount of the component of the

    swap that does not include the option component.

    (2) Swaps with composite reference prices. The parties to a swap

    transaction with composite reference prices may elect to apply the

    lowest appropriate minimum block size or cap size applicable to one

    component swap category of such publicly reportable swap transaction.

    (3) Notional amounts for physical commodity swaps. Unless otherwise

    specified in this part, the notional amount for a physical commodity

    swap shall be based on the notional unit measure utilized in the

    related futures contract market or the predominant notional unit

    measure used to determine notional quantities in the cash market for

    the relevant, underlying physical commodity.

    (4) Currency conversion. Unless otherwise specified in this part

    43, when the appropriate minimum block size or cap size for a publicly

    reportable swap transaction is denominated in a currency other than

    U.S. dollars, parties to a swap and registered entities may use a

    currency exchange rate that is widely published within the preceding

    two business days from the date of execution of the swap transaction in

    order to determine such qualification.

    (5) Successor currencies. For currencies that succeed a super-major

    currency, the appropriate currency classification for such currency

    shall be based on the corresponding nominal gross domestic product

    classification (in U.S. dollars) as determined in the most recent World

    Bank, World Development Indicator at the time of succession. If the

    gross domestic product of the country or nation utilizing the successor

    currency is:

    (i) Greater than $2 trillion, then the successor currency shall be

    included among the super-major currencies;

    (ii) Greater than $500 billion but less than $2 trillion, then the

    successor currency shall be included among the major currencies; or

    (iii) Less than $500 billion, then the successor currency shall be

    included among the non-major currencies.

    8. Add section 43.7 to part 43 to read as follows:

    Sec. 43.7 Delegation of authority.

    (a) Authority. The Commission hereby delegates, until it orders

    otherwise, to the Director of the Division of Market Oversight or such

    other employee or employees as the Director may designate from time to

    time, the authority:

    (1) To determine whether swaps fall within specific swap categories

    as described in Sec. 43.6(b);

    (2) To determine post-initial, appropriate minimum block sizes as

    described in Sec. 43.6(f); and

    (3) To determine post-initial cap sizes as described in Sec.

    43.4(h).

    (b) Submission for Commission consideration. The Director of the

    Division of Market Oversight may submit to the Commission for its

    [[Page 15519]]

    consideration any matter that has been delegated pursuant to this

    section.

    (c) Commission reserves authority. Nothing in this section

    prohibits the Commission, at its election, from exercising the

    authority delegated in this section. * * *

    9. Amend appendix B to part 43 to add the following after ``Brent

    Crude Oil (ICE)'':

    SP-15 Financial Day-Ahead LMP Peak Contract

    SP-15 Financial Day-Ahead LMP Off-Peak Contract

    PJM WH Real Time Peak Contract

    PJM WH Real Time Off-Peak Contract

    Mid-C Financial Peak Contract

    Mid-C Financial Off-Peak Contract

    ICE Chicago Financial Basis Contract

    HSC Financial Basis Contract

    Socal Border Financial Basis Contract

    Waha Financial Basis Contract

    AECO Financial Basis Contract

    NWP Rockies Financial Basis Contract

    PG&E Citygate Financial Basis Contract

    10. Add ``Appendix D to Part 43--Other Commodity Swap Categories''

    after ``Appendix C to Part 43--Time Delays for Public Dissemination''

    to read as follows:

    Appendix D--Other Commodity Swap Categories

    Other Commodity Group

    Individual Other Commodity

    GRAINS

    OATS

    WHEAT

    CORN

    RICE

    GRAINS--OTHER

    LIVESTOCK/MEAT PRODUCTS

    LIVE CATTLE

    PORK BELLIES

    FEEDER CATTLE

    LEAN HOGS

    LIVESTOCK/MEAT PRODUCTS-OTHER

    DAIRY PRODUCTS

    MILK

    BUTTER

    CHEESE

    DAIRY PRODUCTS--OTHER

    OILSEED AND PRODUCTS

    SOYBEAN OIL

    SOYBEAN MEAL

    SOYBEANS

    OILSEED AND PRODUCTS--OTHER

    FIBER

    COTTON

    FIBER--OTHER

    FOODSTUFFS/SOFTS

    COFFEE

    FROZEN CONCENTRATED ORANGE JUICE

    SUGAR

    COCOA

    FOODSTUFFS/SOFTS--OTHER

    PETROLEUM AND PRODUCTS

    JET FUEL

    ETHANOL

    BIODIESEL

    FUEL OIL

    HEATING OIL

    GASOLINE

    NAPHTHA

    CRUDE OIL

    DIESEL

    PETROLEUM AND PRODUCTS--OTHER

    NATURAL GAS AND RELATED PRODUCTS

    NATURAL GAS LIQUIDS

    NATURAL GAS

    NATURAL GAS AND RELATED PRODUCTS--OTHER

    ELECTRICITY AND SOURCES

    COAL

    ELECTRICITY

    URANIUM

    ELECTRICITY AND SOURCES--OTHER

    PRECIOUS METALS

    PALLADIUM

    PLATINUM

    SILVER

    GOLD

    PRECIOUS METALS--OTHER

    BASE METALS

    STEEL

    COPPER

    BASE METALS--OTHER

    WOOD PRODUCTS

    LUMBER

    PULP

    WOOD PRODUCTS--OTHER

    REAL ESTATE

    REAL ESTATE

    CHEMICALS

    CHEMICALS

    PLASTICS

    PLASTICS

    EMISSIONS

    EMISSIONS

    WEATHER

    WEATHER

    MULTIPLE COMMODITY INDEX

    MULTIPLE COMMODITY INDEX

    OTHER AGRICULTURAL

    OTHER AGRICULTURAL

    OTHER NON-AGRICULTURAL

    OTHER NON-AGRICULTURAL

    11. Add ``Appendix E to Part 43--Other Commodity Geographic

    Identification for Public Dissemination Pursuant to Sec.

    43.4(d)(4)(iii)'' after ``Appendix D to Part 43--Other Commodity

    Product Swap Categories'' to read as follows:

    Appendix E--Other Commodity Geographic Identification for Public

    Dissemination Pursuant to Sec. 43.4(d)(4)(iii)

    Registered swap data repositories shall publicly disseminate any

    specific delivery point or pricing point associated with publicly

    reportable swap transactions in the ``other commodity'' asset class

    (as described in Sec. 43.4(d)(4)(iii)) pursuant to Tables E1 and

    E2. If the underlying asset of a publicly reportable swap

    transaction described in Sec. 43.4(d)(4)(iii) has a delivery or

    pricing point that is located in the United States, such information

    shall be publicly disseminated pursuant to the regions described in

    Table E1. If the underlying asset of a publicly reportable swap

    transaction described in Sec. 43.4(d)(4)(iii) has a delivery or

    pricing point that is not located in the United States, such

    information shall be publicly disseminated pursuant to the countries

    or sub-regions, or if no country or sub-region, by the other

    commodity region, described in Table E2.

    Table E1--U.S. Delivery or Pricing Points

    Other Commodity Group

    Region

    NATURAL GAS AND RELATED PRODUCTS

    MIDWEST

    NORTHEAST

    GULF

    SOUTHEAST

    WESTERN

    OTHER--U.S.

    PETROLEUM AND PRODUCTS

    NEW ENGLAND (PADD 1A)

    CENTRAL ATLANTIC (PADD 1B)

    LOWER ATLANTIC (PADD 1C)

    MIDWEST (PADD 2)

    GULF COAST (PADD 3)

    ROCKY MOUNTAINS (PADD 4)

    WEST COAST (PADD 5)

    OTHER--U.S.

    ELECTRICITY AND SOURCES

    CALIFORNIA (CAISO)

    MIDWEST (MISO)

    NEW ENGLAND (ISO-NE)

    NEW YORK (NYISO)

    NORTHWEST

    PJM

    SOUTHEAST

    SOUTHWEST

    SOUTHWEST POWER TOOL (SPP)

    TEXAS (ERCOT)

    OTHER--U.S.

    ALL REMAINING OTHER COMMODITIES (PUBLICLY DISSEMINATE THE REGION. IF

    PRICING OR DELIVERY POINT IS NOT REGION SPECIFIC, INDICATE ``U.S.'')

    REGION 1--(INCLUDES CONNECTICUT, MAINE, MASSACHUSETTS, NEW

    HAMPSHIRE, RHODE ISLAND, VERMONT)

    REGION 2--(INCLUDES NEW JERSEY, NEW YORK)

    REGION 3--(INCLUDES DELAWARE, DISTRICT OF COLUMBIA, MARYLAND,

    PENNSYLVANIA, VIRGINIA, WEST VIRGINIA)

    REGION 4--(INCLUDES ALABAMA, FLORIDA, GEORGIA, KENTUCKY,

    MISSISSIPPI, NORTH CAROLINA, SOUTH CAROLINA, TENNESSEE)

    REGION 5--(INCLUDES ILLINOIS, INDIANA, MICHIGAN, MINNESOTA,

    OHIO, WISCONSIN)

    REGION 6--(INCLUDES ARKANSAS, LOUISIANA, NEW MEXICO, OKLAHOMA,

    TEXAS)

    REGION 7--(INCLUDES IOWA, KANSAS, MISSOURI, NEBRASKA)

    REGION 8--(INCLUDES COLORADO, MONTANA, NORTH DAKOTA, SOUTH

    DAKOTA, UTAH, WYOMING)

    REGION 9--(INCLUDES ARIZONA, CALIFORNIA, HAWAII, NEVADA)

    REGION 10--(INCLUDES ALASKA, IDAHO, OREGON, WASHINGTON)

    Table E2--Non-U.S. Delivery or Pricing Points

    Other Commodity Regions With Countries or Sub-Regions

    NORTH AMERICA (OTHER THAN U.S.)

    [[Page 15520]]

    CANADA

    MEXICO

    CENTRAL AMERICA

    SOUTH AMERICA

    BRAZIL

    OTHER SOUTH AMERICA

    EUROPE

    WESTERN EUROPE

    NORTHERN EUROPE

    SOUTHERN EUROPE

    EASTERN EUROPE (EXCLUDING RUSSIA)

    RUSSIA

    AFRICA

    NORTHERN AFRICA

    WESTERN AFRICA

    EASTERN AFRICA

    CENTRAL AFRICA

    SOUTHERN AFRICA

    ASIA-PACIFIC

    NORTHERN ASIA (EXCLUDING RUSSIA)

    CENTRAL ASIA

    EASTERN ASIA

    WESTERN ASIA

    SOUTHEAST ASIA

    AUSTRALIA/NEW ZEALAND/PACIFIC ISLANDS

    12. Add ``Appendix F to Part 43--Initial Appropriate Minimum Sizes

    for Block Trades and Large Notional Off-facility Swaps'' after

    ``Appendix E to Part 43--Other Commodity Geographic Identification for

    Public Dissemination Pursuant to Sec. 43.4(d)(4)(iii)(B)'' to read as

    follows:

    Appendix F--Initial Appropriate Minimum Block Sizes by Asset Class

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

    Currency group Currencies

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

    Super-Major Currencies....... United States dollar (USD), European

    Union Euro Area euro (EUR), United

    Kingdom pound sterling (GBP), and Japan

    yen (JPY).

    Major Currencies............. Australia dollar (AUD), Switzerland franc

    (CHF), Canada dollar (CAD), Republic of

    South Africa rand (ZAR), Republic of

    Korea won (KRW), Kingdom of Sweden krona

    (SEK), New Zealand dollar (NZD), Kingdom

    of Norway krone (NOK), and Denmark krone

    ( DKK).

    Non-Major Currencies......... All other currencies.

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

    Interest Rate Swaps

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

    Tenor less than or equal 67% Notional (in

    Currency group Tenor greater than to millions)

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

    Super-Major............................ .......................... Three months (107 days).. 6,400

    Super-Major............................ Three months (107 days)... Six months (198 days).... 1,900

    Super-Major............................ Six months (198 days)..... One year (381 days)...... 1,600

    Super-Major............................ One year (381 days)....... Two years (746 days)..... 750

    Super-Major............................ Two years (746 days)...... Five years (1,842 days).. 380

    Super-Major............................ Five years (1,842 days)... Ten years (3,668 days)... 290

    Super-Major............................ Ten years (3,668 days).... 30 years (10,973 days)... 210

    Super-Major............................ 30 years (10,973 days).... ......................... 130

    Major.................................. .......................... Three months (107 days).. 970

    Major.................................. Three months (107 days)... Six months (198 days).... 470

    Major.................................. Six months (198 days)..... One year (381 days)...... 320

    Major.................................. One year (381 days)....... Two years (746 days)..... 190

    Major.................................. Two years (746 days)...... Five years (1,842 days).. 110

    Major.................................. Five years (1,842 days)... Ten years (3,668 days)... 73

    Major.................................. Ten years (3,668 days).... 30 years (10,973 days)... 50

    Major.................................. 30 years (10,973 days).... ......................... 22

    Non-Major.............................. .......................... Three months (107 days).. 320

    Non-Major.............................. Three months (107 days)... Six months (198 days).... 240

    Non-Major.............................. Six months (198 days)..... One year (381 days)...... 160

    Non-Major.............................. One year (381 days)....... Two years (746 days)..... 79

    Non-Major.............................. Two years (746 days)...... Five years (1,842 days).. 40

    Non-Major.............................. Five years (1,842 days)... Ten years (3,668 days)... 22

    Non-Major.............................. Ten years (3,668 days).... 30 years (10,973 days)... 24

    Non-Major.............................. 30 years (10,973 days).... ......................... 22

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

    Credit Swaps

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

    Traded tenor less than or 67% Notional (in

    Spread group (basis points) Traded tenor greater than equal to millions)

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

    Less than or equal to 175.............. .......................... Two years (746 days)..... 510

    Less than or equal to 175.............. Two years (746 days)...... Four years (1,477 days).. 300

    Less than or equal to 175.............. Four years (1,477 days)... Six years (2,207 days)... 190

    Less than or equal to 175.............. Six years (2,207 days).... Eight years and six 250

    months (3,120 days).

    Less than or equal to 175.............. Eight years and six months Twelve years and six 130

    (3,120 days). months (4,581 days).

    Less than or equal to 175.............. Twelve years and six ......................... 110

    months (4,581 days).

    Greater than 175 and less than or equal .......................... Two years (746 days)..... 210

    to 350.

    Greater than 175 and less than or equal Two years (746 days)...... Four years (1,477 days).. 130

    to 350.

    Greater than 175 and less than or equal Four years (1,477 days)... Six years (2,207 days)... 36

    to 350.

    [[Page 15521]]

    Greater than 175 and less than or equal Six years (2,207 days).... Eight years and six 26

    to 350. months (3,120 days).

    Greater than 175 and less than or equal Eight years and six months Twelve years and six 64

    to 350. (3,120 days). months (4,581 days).

    Greater than 175 and less than or equal Twelve years and six ......................... 120

    to 350. months (4,581 days).

    Greater than 350....................... .......................... Two years (746 days)..... 110

    Greater than 350....................... Two years (746 days)...... Four years (1,477 days).. 73

    Greater than 350....................... Four years (1,477 days)... Six years (2,207 days)... 51

    Greater than 350....................... Six years (2,207 days).... Eight years and six 21

    months (3,120 days).

    Greater than 350....................... Eight years and six months Twelve years and six 21

    (3,120 days). months (4,581 days).

    Greater than 350....................... Twelve years and six ......................... 51

    months (4,581 days).

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

    BILLING CODE 6351-01-P

    [[Page 15522]]

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    [[Page 15523]]

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    [[Page 15524]]

    [GRAPHIC] [TIFF OMITTED] TP15MR12.006

    [[Page 15525]]

    [GRAPHIC] [TIFF OMITTED] TP15MR12.007

    [[Page 15526]]

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    [[Page 15527]]

    [GRAPHIC] [TIFF OMITTED] TP15MR12.009

    BILLING CODE 6351-01-C

    Issued in Washington, DC, on February 23, 2012, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to Procedures To Establish Appropriate Minimum Block Sizes

    for Large Notional Off-Facility Swaps and Block Trades--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 Chilton and

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

    voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the block rule proposal, which promotes both pre-trade

    and post-trade transparency. The derivatives reforms in the Dodd-

    Frank Wall Street Reform and Consumer Protection Act, including

    bringing transparency to the swaps market, will lead to significant

    benefits for the real economy--that which makes up over 94 percent

    of private sector jobs in America. Transparency also helps all

    Americans who depend on pension funds, mutual funds, community banks

    and insurance companies.

    [FR Doc. 2012-5950 Filed 3-14-12; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: March 15, 2012



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