2011-18663

Federal Register, Volume 76 Issue 143 (Tuesday, July 26, 2011)[Federal Register Volume 76, Number 143 (Tuesday, July 26, 2011)]

[Rules and Regulations]

[Pages 44464-44475]

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

[FR Doc No: 2011-18663]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 39 and 140

RIN 3038-AD00

Process for Review of Swaps for Mandatory Clearing

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

is adopting regulations to implement certain provisions of the Dodd-

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

These regulations establish the process by which the Commission will

review swaps to determine whether the swaps are required to be cleared.

DATES: Effective September 26, 2011.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Special Counsel,

202-418-5096, [email protected], Division of Clearing and Intermediary

Oversight, Commodity Futures Trading Commission, Three Lafayette

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

SUPPLEMENTARY INFORMATION:

I. Background

On November 2, 2010, the Commission published proposed regulations

to implement certain provisions of the Dodd-Frank Act regarding the

mandatory clearing of swaps.\1\ The Commission is hereby adopting

Regulation 39.5 \2\ to establish procedures for: (1) Determining the

eligibility of a DCO to clear swaps; (2) the submission of swaps by a

DCO to the Commission for a mandatory clearing determination; (3)

Commission-initiated reviews of swaps; and (4) staying a clearing

requirement.

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\1\ See 75 FR 67277 (Nov. 2, 2010).

\2\ Commission regulations referred to herein are found at 17

CFR Ch. 1.

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Section 723(a)(3) of the Dodd-Frank Act provides that ``it shall be

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

such swap

[[Page 44465]]

for clearing to a derivatives clearing organization [(DCO)] that is

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

under [the CEA] if the swap is required to be cleared.'' \3\ The

Commission's final regulations implement Section 723(a)(3), which also

requires the Commission to adopt rules for the review of a swap, or

group, category, type, or class of swaps (collectively, ``swaps'') to

make a determination as to whether the swaps are required to be

cleared. The final regulations also implement Section 745(b) of the

Dodd-Frank Act, insofar as it directs the Commission to prescribe

criteria, conditions, or rules under which the Commission will

determine the initial eligibility or the continuing qualification of a

DCO to clear swaps.\4\

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

\4\ See Section 5c(c)(5)(C)(iii) of the CEA, 7 U.S.C. 7a-

2(c)(5)(C)(iii).

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II. Comments on the Notice of Proposed Rulemaking

The Commission received eighteen comments during the 60-day public

comment period following publication of the notice of proposed

rulemaking, and eight additional comments during the 30-day reopened

public comment period that covered many of the Commission's rulemakings

under the Dodd-Frank Act. The Commission considered each of these

comments in formulating the final regulations.\5\

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\5\ The Commission also reviewed the proposed rule of the

Securities and Exchange Commission concerning the process for

submissions for review of security-based swaps for mandatory

clearing. See 75 FR 82490 (Dec. 30, 2010).

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A. Swaps Listed for Clearing by a DCO Prior to the Enactment of the

Dodd-Frank Act

Section 723(a)(3) of the Dodd-Frank Act provides that swaps listed

for clearing by a DCO as of the date of enactment of the Dodd-Frank Act

(referred to hereinafter as ``pre-enactment swaps'') shall be

considered submitted to the Commission.\6\ Once a swap is submitted to

the Commission, the Commission must review it within 90 days to

determine whether it is required to be cleared. Accordingly, Section

723(a)(3) required a Commission determination on pre-enactment swaps

within 90 days after July 21, 2010, the date of enactment of the Dodd-

Frank Act. However, before the deadline was reached, each DCO that was

clearing pre-enactment swaps agreed to an extension of the deadline

until after the Commission had adopted the regulations discussed

herein.

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\6\ See Section 2(h)(2)(B)(ii) of the CEA, 7 U.S.C.

2(h)(2)(B)(ii).

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In its comment letter, the American Federation of State, County and

Municipal Employees (AFSCME) recommended that the Commission provide

for public notice and comment for pre-enactment swaps in a manner

similar to that put forward in the proposed regulations for the swaps

that DCOs will submit going forward. CME Group, Inc. (CME) recommended

that a DCO not be required to make any submission to the Commission for

pre-enactment swaps or for swaps that a DCO cleared before the

effective date of the clearing requirement. Sungard Energy &

Commodities (Sungard) inquired as to whether pre-enactment swaps being

considered submitted means that the DCO is not required to submit the

supporting information required in proposed Regulation 39.5(b)(3), that

the DCO is automatically eligible to clear the swap, and that the DCO

is permitted to continue clearing while the Commission conducts its

review.

In response to these comments, the Commission notes its intention

to apply the final regulations to all swaps submitted or considered

submitted to the Commission, including the pre-enactment swaps. Shortly

after the enactment of the Dodd-Frank Act, Commission staff contacted

those DCOs identified as clearing swaps and requested that they submit

information similar to that which will be required under Regulation

39.5(b)(3). After the final regulations take effect and the Commission

has verified that the previously submitted information is accurate and

complete, the Commission will post the submissions for public comment

as required. The Commission confirms that a DCO that is clearing pre-

enactment swaps may continue to clear them and does not have to wait

for a determination from the Commission as to whether the swaps are

required to be cleared.

B. Eligibility of a DCO To Clear Swaps

Under Regulation 39.5(a), a DCO would be presumed eligible to

accept for clearing any swap that is within a group, category, type, or

class of swaps that the DCO already clears. This presumption of

eligibility would be subject to Commission review, and if the

Commission determines that the swap is not within a group, category,

type, or class of swaps that the DCO already clears, the DCO would be

required to request a determination by the Commission of its

eligibility to clear the swap. A DCO that plans to accept for clearing

any swap that is not within a group, category, type, or class of swaps

that the DCO already clears also would be required to request a

determination by the Commission of its eligibility to clear the swap. A

swap generally would be considered to be ``within a group, category,

type, or class of swaps that the DCO already clears'' if the terms of

the swap are substantially similar to the terms of a swap, group,

category, type or class of swaps that the DCO already clears, and

clearing the swap will not require any changes to the DCO's risk

management framework.

The Financial Services Roundtable (FSR) commented that a DCO's

authority to clear swaps transactions should not be conditioned on its

ability to clear the entire market volume of such swaps transactions,

and therefore the reference to mandatory clearing should be deleted

from Regulation 39.5(b)(3)(i). As proposed, Regulation 39.5 (b)(3)(i)

required the DCO's submission to the Commission to include ``[a]

statement that the [DCO] is eligible to accept the swap, or group,

category, type or class of swaps for clearing and, if the Commission

determines that the swap, or group, category, type, or class of swaps

is required to be cleared, the [DCO] will be able to maintain

compliance with section 5b(c)(2) of the Act.'' \7\ Therefore, as FSR

noted, the DCO would be required to have the ability to clear the

entire market volume for any swap, or group, category, type or class of

swaps that it planned to accept for clearing. In the final regulation,

the Commission is maintaining the reference to mandatory clearing but

revising Regulation 39.5(b)(3)(i) as follows (added text in italics):

``A statement that the [DCO] is eligible to accept the swap, or group,

category, type or class of swaps for clearing and describes the extent

to which, if the Commission were to determine that the swap, or group,

category, type, or class of swaps is required to be cleared, the [DCO]

will be able to maintain compliance with section 5b(c)(2) of the Act.''

The revised regulation would not require the Commission to find a DCO

ineligible to clear a swap if the DCO is unable to clear the entire

market volume of such swap transactions, but the Commission would take

the DCO's inability to clear the entire market into consideration in

determining whether the swap must be cleared.

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\7\ Section 5b(c)(2) sets out the core principles with which a

DCO must comply to maintain its registration with the Commission.

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The International Swaps and Derivatives Association (ISDA) asked

the Commission to confirm that it

[[Page 44466]]

intends for a DCO eligibility review to be separate from and precede a

swap review, and that the intent is not to commence both reviews

simultaneously. LCH.Clearnet Group (LCH) urged the Commission to de-

couple the determination that a DCO may clear a swap from the

determination that a swap should be subject to a mandatory clearing

obligation. Similarly, Sungard asked for clarification as to whether a

DCO can begin accepting a new swap for clearing once eligibility for

clearing is established, independent of the review for mandatory

clearing.

The Commission confirms that it intends for a DCO eligibility

review to be separate from and precede a review of swaps that the DCO

plans to accept for clearing. The Commission also confirms that a DCO

may begin accepting a new swap for clearing once the DCO's eligibility

for clearing is established and the submission requirements of

Regulation 39.5(b) have been met, as discussed further below.

Michael Greenberger recommended that a DCO be required to state

with specificity in its written request the sufficiency of its

financial resources and its ability to manage the risks associated with

clearing the swap. Chris Barnard stated that sufficient evidence

indicating that the DCO would be able to maintain compliance with the

requirements of section 5b(c)(2) of the CEA, or a CFTC review to

determine the DCO's ability, should be required for all DCOs planning

to accept swaps for clearing.

The Commission notes that it has proposed separate regulations that

will impose new requirements on DCOs, including financial resources and

risk management requirements, for maintaining compliance with the core

principles applicable to DCOs set out in section 5b(c)(2).\8\

Therefore, even if a DCO is presumed eligible, or determined to be

eligible, to accept swaps for clearing, the Commission will be

monitoring the DCO's eligibility on an ongoing basis through the

requirements of those regulations.

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\8\ See 75 FR 63113 (Oct. 14, 2010) (financial resources); 75 FR

63732 (Oct. 18, 2010) (conflicts of interest); 75 FR 77576 (Dec. 13,

2010) (general regulations); 75 FR 78185 (Dec. 15, 2010)

(information management); 76 FR 722 (Jan. 6, 2011) (governance); 76

FR 3698 (Jan. 20, 2011) (risk management); and 76 FR 13101 (Mar. 10,

2011) (participant and product eligibility).

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C. A DCO's Notice to Its Members of a Swap Submission

Regulation 39.5(b)(3)(xi) requires a DCO's swap submission to

include a ``description of the manner in which the [DCO] has provided

notice of the submission to its members and a summary of any opposition

to the submission expressed by the members.'' In the notice of proposed

rulemaking, the Commission invited comment on whether the regulation

should prescribe a specific manner in which a DCO must provide notice

to its members, and whether the regulation should prescribe a specific

period of time between the notice to members and the submission to the

Commission to allow time for members to make their views on the

submission known. Section 723(a)(3) of the Dodd-Frank Act only requires

the DCO to provide notice to its members of the submission; it does not

require the DCO to provide its members with the opportunity to comment.

The Air Transport Association of America (ATA) requested that the

Commission require a DCO to provide in its submission a description of

how the DCO has notified market participants of the submission and of

any opposition expressed by such market participants. Although the

Commission will accept public comment on the DCO's submission, ATA

believes by that time the DCO may have made important, and sometimes

irreversible, decisions with regard to its proposed clearing offering.

The Alternative Investment Management Association Limited (AIMA)

stated that the Commission should require a DCO's members to pass on to

their customers all details about a submission by the DCO to the

Commission and encourage those customers to provide comments to the

Commission.

Better Markets, Inc. suggested requiring a DCO to provide notice to

the Commission and the public when considering clearing a new class of

swaps, rather than only providing notice when a decision to submit has

been made. Better Markets also recommended that the Commission require

a DCO to solicit input from customers and the public to enable a full

and fair consideration of a submission and to include member comments

in support of a submission in addition to comments in opposition.

Additionally, Better Markets commented that a DCO should be required to

provide notice to the Commission and the public of a decision not to

submit a swap for clearing, including comments for and against

submission.

The FSR expressed the view that the DCO and its clearing members

will be in the best position to determine appropriate notice and voting

procedures with respect to these matters.

Freddie Mac recommended that the Commission require DCOs to provide

pre-submission notice of any clearing proposal and a meaningful

opportunity to comment to all interested stakeholders, rather than

merely to the DCO's own members.

Mr. Greenberger suggested that it would be preferable for the

regulations to prescribe a specific manner and timeline for notice, so

that the notice is given with sufficient time and in the proper manner

to gather all of the appropriate objections by DCO members.

IntercontinentalExchange, Inc. (ICE) observed that the requirement

that a DCO provide to the Commission a summary of any opposition to a

swap submission expressed by its members has the effect of creating two

comment periods (including the Commission's 30-day public comment

period), thus extending the timeline for a DCO to submit swaps for

mandatory clearing. ICE proposed that the Commission adopt a 30-day

comment period as sufficient for input from all members and require the

DCO to include only a statement of any opposition from the DCO's board

as part of its submission.

Mr. Barnard recommended that the Commission change the wording

under Regulation 39.5(b)(3)(xi) and require the DCO to provide a

summary of ``any comments on the submission expressed by the members''

rather than just ``any opposition to the submission expressed by the

members,'' in order to promote fairness.

In response to these comments, the Commission is replacing the

words ``opposition to'' with the words ``views on,'' revising the text

of Regulation 39.5(b)(3)(xi) to read as follows: ``A description of the

manner in which the [DCO] has provided notice of the submission to its

members and a summary of any views on the submission expressed by the

members.'' Further, the Commission clarifies that the regulations do

not require a DCO to solicit the views of its members or the public on

the submission, because all interested parties will have the

opportunity to comment during the Commission's 30-day public comment

period. However, if the members do make their views known directly to

the DCO, the DCO is required to share a summary of that information

with the Commission under Regulation 39.5(b)(3)(xi).

D. Public Comment Process for Swap Submissions

In the notice of proposed rulemaking, the Commission stated that,

upon receiving a DCO's swap submission, the

[[Page 44467]]

Commission would begin its 90-day review by posting the submission on

the Commission Web site for a 30-day public comment period, as required

by the Dodd-Frank Act. The Commission invited comment regarding the

appropriateness and sufficiency of providing notice of the submission

on the Commission Web site as compared to publishing notice of the

submission in the Federal Register.

AFSCME, Americans for Financial Reform, Mr. Greenberger, and Mr.

Barnard recommended that the Commission publish submissions both on the

Commission Web site and in the Federal Register to provide the fullest

disclosure possible. ATA supported the Commission's use of its Web site

to provide notice of submissions but recommended that, at the time a

submission is posted, the Commission send a notification to the same

subscribers that receive notifications of Federal Register notices. The

Commission is accepting the recommendation to publish submissions both

on the Commission Web site and in the Federal Register. Accepting this

recommendation does not require any changes to the text of proposed

Regulation 39.5(b)(4), which states that the submission ``will be made

available to the public and posted on the Commission website.''

Publication of the submission in the Federal Register will make the

submission available to the public, and the Commission will have a link

to the Federal Register notice on its Web site.

In other comments on the public comment process for swap

submissions, Freddie Mac recommended that the Commission extend the

period for notice and comment beyond 30 days, and ISDA suggested that

the Commission extend the public comment period to 45 days. The

Commission has decided to keep the comment period at 30 days, the

minimum required by the Dodd-Frank Act, because the Commission

typically will have just 90 days to review the swap submission. The

Commission is concerned that extending the comment period by regulation

may not leave sufficient time for the Commission to carefully consider

the comments received and conduct a thorough review. Nevertheless, the

Commission expects that it will extend the comment period on a case-by-

case basis, because the Commission is allowed to extend the 90-day

review period if the submitting DCO agrees to an extension.

Finally, the National Milk Producers Federation (NMPF) commented

that the regulations would invite DCOs to lay claim to swaps and

categories of swaps, leaving all actual and potential future end users

only 30 days to become aware of, and respond to, such claims. The

Commission notes that all public comments received on a swap

submission, not just the DCO's views, will be considered in making a

mandatory clearing determination and, as discussed above, the

Commission will allow more than 30 days for comments when possible on a

case-by-case basis.

E. Contents of a DCO's Swap Submission

Regulation 39.5(b) sets out the process for DCOs to follow when

submitting a swap, or group, category, type or class of swaps to the

Commission, including what information a DCO must include in the

submission to assist the Commission in its review.

In its comment letter, LCH encouraged the Commission to amend the

supporting information requirements under Regulation 39.5(b)(3), such

that a DCO is required to include in its submission only that

information which is necessary for determining the suitability of a

swap for clearing and the eligibility of a DCO to clear that swap. LCH

believes that a DCO should not have to provide the information required

to support the determination of whether a swap should be subject to a

clearing requirement. LCH commented that the determination that a DCO

may clear a swap should be separate from, and independent of, any

determination that a swap should be subject to mandatory clearing. LCH

recommended that certain words be deleted from the text of proposed

Regulations 39.5(b)(3)(ii)(A),(C), and (D), and that proposed

Regulation 39.5(b)(3)(viii) be deleted, because, in LCH's view, a DCO

would not have access to the information required.

Similarly, CME commented that the Commission should limit the

breadth of the submission required by a DCO seeking approval to clear a

swap to only addressing whether clearing the swap comports with the DCO

core principles. CME stated that the Commission's proposed regulations

would impose costs and obligations that would effectively undermine the

purposes of the Dodd-Frank Act and that, in effect, the Commission is

attempting to charge a DCO that wishes to list a new swap with the

obligation to collect and analyze massive amounts of information so

that the Commission can perform its statutory duty of determining

whether the swap should be subject to the mandatory clearing

requirement. In a second comment letter, CME expressed concern that the

regulations conflate the ``voluntary clearing determination'' and the

``mandatory clearing determination'' for swaps. CME also revised its

earlier comments on the information required for the submission and

recommended that the Commission delete proposed Regulations

39.5(b)(3)(ii), (vii), (viii), and (x) in their entirety and proposed

Regulation 39.5(b)(3)(vi) in part.

In response to LCH and CME's comments, the Commission is deleting

proposed Regulations 39.5(b)(3)(vii), (viii), and (x) in their entirety

and proposed Regulation 39.5(b)(3)(vi) in part, and renumbering

proposed Regulations 39.5(b)(3)(ix) and (xi) as Regulations

39.5(b)(3)(vii) and (viii), respectively, due to the removal of the

other provisions. As a result of this revision, a DCO will only be

required to submit information to the Commission, such as product

specifications and risk management procedures, which a DCO should have

gathered and considered in making its own decision to accept a

particular swap for clearing. The Commission is also adding Regulation

39.5(b)(3)(ix), which would require a DCO to submit ``[a]ny additional

information specifically requested by the Commission.'' This will allow

the Commission to request any information not required by Regulation

39.5(b) if needed on a case-by-case basis.

The Commission is declining to delete Regulation 39.5(b)(3)(ii) or

revise it in accordance with LCH's comments. Regulation 39.5(b)(3)(ii),

as proposed, requires a DCO to submit to the Commission a ``statement

that includes, but is not limited to, information regarding the swap,

or group, category, type, or class of swaps that is-sufficient to

provide the Commission a reasonable basis to make a quantitative and

qualitative assessment of the following factors,'' and then lists the

five factors set out in Section 723(a)(3) of the Dodd-Frank Act that

the Commission is required to take into account in reviewing a swap

submission. LCH had suggested editing these factors for purposes of the

required statement. For example, LCH had suggested editing proposed

Regulation 39.5(b)(3)(ii)(A), which reads ``[t]he existence of

significant outstanding notional exposures, trading liquidity, and

adequate pricing data,'' to read as ``[t]he existence of adequate

pricing data.'' The Commission does not believe it is appropriate to

change the wording that is used in the Dodd-Frank Act.

Instead, in response to LCH's comments, the Commission is revising

the introductory language of Regulation 39.5(b)(3)(ii) to read, in

part: ``A statement that includes, but is not limited to, information

that will assist

[[Page 44468]]

the Commission in making a quantitative and qualitative assessment of

the following factors * * *.'' The Commission believes this change will

require a DCO to address each of the five factors only to the extent

that the DCO is reasonably able to do so. For example, with regard to

the factor in Regulation 39.5(b)(3)(ii)(A) cited above, if LCH is only

able to provide information regarding the existence of adequate pricing

data, then that is the only information that LCH would be required to

provide.

Some DCOs believe that certain swaps that are accepted for clearing

may be obviously unsuitable for mandatory clearing and therefore a DCO

should only have to submit swaps to the Commission for review at the

discretion of the DCO or the Commission. The Dodd-Frank Act, however,

does not give either the DCO or the Commission such discretion. As

previously noted, a DCO is required to submit to the Commission each

swap, or any group, category, type, or class of swaps that it plans to

accept for clearing, and the Commission is required to review each

submission and determine whether clearing is required. Nevertheless,

the Commission would encourage a DCO to use the statement required by

Regulation 39.5(b)(3)(ii) to express its views as to whether the swaps

being submitted should be subject to a clearing requirement.

The Commission believes it is necessary to clarify that a

``voluntary clearing determination'' is not required before a DCO may

accept swaps for clearing. The Commission had expected that a DCO that

wished to accept swaps for clearing would be permitted to do so after

meeting the eligibility requirements of Regulation 39.5(a) and the

submission requirements of Regulations 39.5(b) and 40.2,\9\ the latter

of which applies to DCOs accepting products for clearing by

certification. Under Regulation 40.2, if the Commission has received

the submission required under that section by the open of business on

the business day preceding the product's acceptance for clearing, then

the DCO may begin clearing the product as planned. However, the

Commission recognizes that it would be burdensome to require a DCO to

comply with two different submission requirements before it could

accept swaps for clearing. Accordingly, the Commission has decided to

eliminate the provision in Regulation 40.2 concerning DCOs and only

require compliance with Regulation 39.5. The Commission has also added

paragraph (b)(4) to Regulation 39.5 to require, like Regulation 40.2,

that a DCO's submission must be received by the Commission by the open

of business on the business day preceding the acceptance of the swap,

or group, category, type, or class of swaps for clearing. This change

clarifies that a DCO, which must be eligible or presumed eligible to

clear any swap or group, category, type, or class of swaps that it

plans to accept for clearing, may begin clearing such swaps shortly

after it has made its submission to the Commission and does not have to

wait until the Commission has made a determination on mandatory

clearing.

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\9\ The Commission has proposed to amend Regulation 40.2 to

implement certain provisions of the Dodd-Frank Act. See 75 FR 67282

(Nov. 2, 2010).

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In other comments regarding the DCO's swap submission, the American

Benefits Council (ABC) recommended that the submission be required to

include a specific analysis of the costs and burdens of clearing on

market participants, and Better Markets proposed that the regulations

clearly state that the additional statements and materials the DCO must

include with its submission are not intended to increase the number of

factors to be taken into account by the Commission in its review beyond

the five factors set forth in the Dodd-Frank Act. The Commission

believes a better approach to assessing the costs and burdens of

clearing on market participants is by requesting public comment on the

issue during its reviews of DCO swap submissions. The Commission also

believes that the information that a DCO will be required to provide

with its submission is clearly intended to aid the Commission in its

assessment of the five factors set forth in the Dodd-Frank Act.

F. Group, Category, Type or Class of Swaps

Regulation 39.5(b)(2) encourages a DCO to submit swaps to the

Commission by ``group, category, type or class of swaps,'' language

taken from Section 723(a)(3) of the Dodd-Frank Act. Several commenters

expressed concern about how ``group, category, type or class of swaps''

will be defined. The Coalition for Derivatives End-Users expressed

concern that these groups or categories could be defined too broadly,

without due consideration of the important differences between swaps

within these groups or categories. ABC stated its opposition to the

Commission adopting any clearing requirement that covers a group,

category, type or class of swaps unless the Commission reviews each

swap within the group, category, type or class and determines that each

swap should be cleared.

How the Commission defines a particular group, category, type or

class of swaps for purposes of a clearing requirement will be informed

by: (1) How it is defined by the DCO in its submission (for those swaps

submitted by a DCO); (2) the comments received by the Commission during

the public comment period; (3) the five factors enumerated in the Dodd-

Frank Act that the Commission is required to take into account; and (4)

the Commission's own analysis during its review. The Commission will

review each swap within a group, category, type or class of swaps to

the extent the Commission believes it is necessary to make the proper

determination on mandatory clearing.

G. Factors the Commission Must Take Into Account When Reviewing Swaps

Section 723(a)(3) of the Dodd-Frank Act requires the Commission, in

reviewing a swap or swaps on its own initiative, or a swap submission,

to take into account the following factors, also set out in Regulation

39.5(b)(3)(ii): (1) The existence of significant outstanding notional

exposures, trading liquidity, and adequate pricing data; (2) the

availability of rule framework, capacity, operational expertise and

resources, and credit support infrastructure to clear the contract on

terms that are consistent with the material terms and trading

conventions on which the contract is then traded; (3) the effect on the

mitigation of systemic risk, taking into account the size of the market

for such contract and the resources of the DCO available to clear the

contract; (4) the effect on competition, including appropriate fees and

charges applied to clearing; and (5) the existence of reasonable legal

certainty in the event of the insolvency of the relevant DCO or one or

more of its clearing members with regard to the treatment of customer

and swap counterparty positions, funds, and property.

In a comment letter, AIMA expressed its view that the third factor,

the effect on the mitigation of systemic risk, should override other

considerations. Better Markets proposed that the regulations make clear

that a given level of contract-specific systemic risk avoided by

mandatory clearing does not constitute a threshold for a determination

by the Commission because the Dodd-Frank Act in no way suggests that

only contract types that by themselves pose a risk to the financial

system should be cleared.

The Coalition for Derivatives End-Users urged the Commission to

give significant weight to a swap's liquidity in assessing whether that

swap should

[[Page 44469]]

be subject to mandatory clearing and to consider the link between the

clearing requirement and the trading requirement. The FSR requested

that the Commission consider the changes in the trading market

structure being effected by the Dodd-Frank Act and related regulations

in evaluating mandatory clearing decisions. The FSR is concerned that a

trading system that limits participation will also reduce liquidity in

the system because, due to the trading requirements for cleared swaps,

counterparties will not have the option to complete trades off-exchange

when on-exchange trading is unattractive or unavailable.

ISDA provided detailed comments on each of the five factors and

encouraged the Commission to interpret these criteria strictly. Sungard

proposed that the Commission apply some form of concentration test in

determining whether a swap should be mandated for clearing out of

concern that if the market for a swap is too heavily concentrated in

the hands of a few market makers on the supply side, or a handful of

hedgers or speculators on the demand side, such concentration would

hamper discovery of the market clearing price and impose liquidity risk

on the DCO.

CME commented that the proposed regulations do not state how the

Commission will decide which swaps will be subject to a clearing

requirement. CME believes that the Commission is required to make

public how it will make this critical determination, because it would

allow market participants to anticipate which swaps will be required to

be cleared and may incentivize market participants to voluntarily

submit those swaps for clearing in advance of any requirement that they

be submitted for clearing.

The National Corn Growers Association (NCGA) and Natural Gas Supply

Association (NGSA) encouraged the Commission to acknowledge that swaps

that are not liquid over their full terms should not be required to be

cleared because such swaps do not meet the Dodd-Frank Act's requirement

of trading liquidity for swaps to be subject to the mandatory clearing

requirement. In particular, NCGA and NGSA suggested that the Commission

acknowledge that it will not require illiquid long-term swaps to be

split up into various components in order to extract one or more

clearable components, since the Dodd-Frank Act provides no authority

for such a requirement.

As required by the Dodd-Frank Act, the Commission will take each of

the five factors and the information submitted by the DCO into account

when making a mandatory clearing determination, as well as these

comments and any comments received during the public comment period

that will be a part of each review. The Commission does not believe it

would be appropriate to address these comments at this time, as they

are beyond the scope of the regulations.

H. Commission-Initiated Reviews of Swaps

Section 723(a)(3) of the Dodd-Frank Act and Regulation 39.5(c)

require the Commission, on an ongoing basis, to review swaps that have

not been accepted for clearing by a DCO to make a determination as to

whether the swaps should be required to be cleared.

AIMA suggested that it may be desirable to have a set frequency of

reviews that the Commission must carry out, and that parties other than

DCOs be allowed to request that the Commission initiates a review. AIMA

recommended the Commission use the same criteria to assess a swap under

a Commission-initiated review as it would for a DCO-submitted review.

Finally, AIMA opined that there should be no prohibitions placed on

trading a swap that would be subject to a mandatory clearing

requirement if a DCO existed to clear the contract, and requested

greater clarity as to possible solutions the Commission will consider

to encourage DCOs to begin clearing a new class of swaps.

The Commission does not think it would be prudent to have a set

frequency of Commission-initiated reviews at this time. The Commission

anticipates that the initial mandatory clearing determinations would

only involve swaps that are either already being cleared or that a DCO

wants to clear. Once those determinations are made, the Commission will

be in a better position to assess that portion of the swaps market that

remains uncleared. The Commission can confirm that it will use the same

criteria to assess a swap for both Commission-initiated and DCO-

submitted reviews, and encourages all parties to make recommendations

as to swaps that would be appropriate for a Commission-initiated

review. Finally, the Commission notes that, under Regulation

39.5(c)(3), for any swap that would otherwise be subject to a clearing

requirement except that no DCO has accepted it for clearing, the

Commission may ``take such actions as the Commission determines to be

necessary and in the public interest * * *, '' and it will make such

determinations on a case-by-case basis, after taking into consideration

any comments received pursuant to the 30-day public comment period

provided for in Regulation 39.5(c)(2).

I. Capital and Margin Requirements for Uncleared Swaps

Regulation 39.5(c)(3)(iii) provides that, if the Commission

identifies a swap or group, category, type, or class of swaps that

would otherwise be subject to a clearing requirement except that no DCO

has accepted it for clearing, the Commission may take such actions as

it ``determines to be necessary and in the public interest, which may

include requiring the retaining of adequate margin or capital by

parties to the swap, group, category, type, or class of swaps.'' This

language is taken directly from Section 723(a)(3) of the Dodd-Frank

Act.\10\

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\10\ Section 731 of the Dodd-Frank Act (Section 4s(e)(1) of the

CEA) requires rules imposing capital and margin for bank swap

dealers and bank major swap participants to be set jointly by

prudential regulators and gives the Commission authority to adopt

rules imposing capital and margin for non-bank swap dealers and non-

bank major swap participants. The Commission would consult with the

prudential regulators before taking action under Regulation

39.5(c)(3)(iii).

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ISDA sought clarification that the Commission's authority is

restricted to requiring the retention of adequate margin or capital

only for swap transactions that are not otherwise exempt from the

clearing requirements. First, the Commission notes that, with respect

to swap dealers and major swap participants, it will not impose margin

or capital requirements under Regulation 39.5(c)(iii) that differ from

final Commission regulations on margin or capital for uncleared

swaps.\11\ Further, the Commission does not foresee that it would take

action under Regulation 39.5(c)(3)(iii) to impose margin or capital

requirements on any swap counterparty permitted, under final Commission

regulations, to exercise the end-user exception to mandatory clearing

of swaps.\12\

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\11\ The Commission has proposed margin and capital requirements

for certain swap dealers and major swap participants. See 76 FR

23732 (Apr. 28, 2011) (Margin Requirements for Uncleared Swaps for

Swap Dealers and Major Swap Participants) and 76 FR 27802 (May 12,

2011) (Capital Requirements of Swap Dealers and Major Swap

Participants).

\12\ The Commission has proposed requirements governing the end-

user exception to mandatory clearing of swaps. See 75 FR 80747 (Dec.

23, 2010).

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J. Stay of Clearing Requirement

Under Regulation 39.5(d), after making a determination that a swap

or group, category, type, or class of swaps is required to be cleared,

the Commission, on application of a counterparty to a swap or on its

own initiative, may stay the clearing

[[Page 44470]]

requirement until it completes a review of the terms of the swap and

the clearing arrangement. Upon completion of the review, the Commission

could determine, subject to any terms or conditions as the Commission

determines to be appropriate, that the swap must be cleared, or that

the clearing requirement will not apply but clearing may continue on a

non-mandatory basis.

FHLB suggested that the right to request a stay would be more

meaningful for market participants if the regulation enumerated certain

factors that the Commission will consider in granting such a stay or an

exemption from the clearing requirement. FHLB recommended that the

Commission consider the following factors: DCO credit risk, lack of

relationships with DCO clearing members, and unique/special

characteristics of transactions.

The FSR noted that there is no discussion in the Dodd-Frank Act or

the notice of proposed rulemaking with respect to the time period for

the issuance of the stay after an application has been made and

believes a delay in the issuance of such a stay would defeat the

purpose of the mechanism, especially in circumstances where complying

with a mandatory clearing requirement may not be feasible. The FSR

encouraged the Commission to adopt a policy to issue a stay within one

business day of any request for a stay, unless the request on its face

appears to be frivolous, so as to avoid any lengthy market disruption

while the Commission determines whether the stay should be granted.

Additionally, because the Commission may stay a mandatory clearing

requirement on its own initiative, the FSR recommended that the

Commission allow DCOs, DCMs, and SEFs to request a stay, because these

entities will be in key positions to identify developing market

disturbances related to mandatory clearing.

Mr. Greenberger commented that a counterparty's written request for

a stay should be very specific and the involvement of the DCO in aiding

the investigation should be substantial.

ISDA suggested that the clearing requirement should be stayed in

the following circumstances: In the absence of competition; when there

is an unresolved clearing member default at the only DCO then clearing

the relevant product; when no DCO has elected to clear the product; or

when a product becomes so illiquid as to threaten the DCO's ability to

calculate margin or manage defaults.

The Commission does not believe it would be prudent to enumerate

the factors that it would consider in determining whether to stay a

clearing requirement. Doing so could potentially limit the Commission's

ability to respond to unforeseen or unusual circumstances. Likewise,

the Commission is declining to adopt a deadline by which it must

respond to a request for a stay. The Commission would respond to such

requests in a timely manner and, if any situation developed that would

necessitate the immediate staying of a clearing requirement, the

Commission would not be required to await a request for a stay in order

to take action. Finally, the Commission notes that it would expect to

consult with DCOs, DCMs, and SEFs as appropriate before it would stay a

clearing requirement.

K. Additional Comments

The Commission received many comments that did not pertain to the

aspects of the regulations discussed above. In particular, many of

these comments related to the clearing of swaps in general, rather than

the process for review of swaps for mandatory clearing.

ABC expressed concern that, if a clearing mandate is too broad,

entities could be precluded from customizing swaps to hedge very

specific risks. ABC encouraged the Commission to clarify that it would

not constitute illegal evasion for an entity to enter into a swap that

would be subject to a clearing mandate but for the fact that the swap

contains a unique tailored term adopted for a bona fide business or

investment reason, even if that term prevented the swap from being

accepted for clearing by any DCO.

The Coalition for Derivatives End-Users urged the Commission to

avoid regulations that would serve to discourage end-users from using

customized transactions, and thereby preserve end-users' ability to

enter into transactions that are tailored to meet specific economic and

accounting objectives.

The FSR stated that the need to establish appropriate hedges may

require financial entities to enter into transactions that are similar

to swaps that are subject to a mandatory clearing requirement, but are

not themselves eligible for clearing. In such circumstances, the FSR

believes the presumption should be that the terms of the swap were

determined to support the hedge and not to evade the mandatory clearing

requirement. In addition, the FSR encouraged the Commission to provide

exemptions from the clearing requirement for any swaps entered into

prior to the adoption of the relevant clearing requirement due to the

costs and burdens involved in transitioning swaps into a clearing

arrangement, especially where such swaps have terms that differ from

the standardized terms established by the DCO for cleared swaps.

Lastly, the FSR expressed its belief that the Commission needs to

address whether entering into amendments to, and assignments and

novations of, existing swap transactions will be considered to be

``engaging in a swap,'' which could require them to be cleared.

Freddie Mac urged that the Commission should clarify that the Dodd-

Frank Act requires parties to a swap subject to the clearing

requirement to submit a swap for clearing but does not require parties

to terminate or unwind swaps that fail to clear. Freddie Mac believes

that the uncertainty of whether a swap may be terminated after

execution would increase systemic risk and that allowing uncleared

swaps subject to mandatory clearing to become OTC swaps would reduce

uncertainty and not substantially increase systemic risk.

The Financial Services Agency of the Government of Japan asked the

Commission to confirm that, as the Commission phases in the central

clearing requirement, it would only be applied if both parties of such

swaps are U.S. institutions. If this treatment could not be made

permanent, at the very least they would formally request that such a

transitional arrangement be made until the end of 2012.

NCGA and NGSA stated that the Commission should clarify in its

final rule that, after the mandatory clearing provisions go into

effect, a determination that a swap is required to be cleared will not

apply retroactively to swaps that are open as of the date of such

determination. They believe that retroactive application would impose

substantial undue logistical burdens and transactional costs on market

participants by requiring them to reexamine their portfolios each time

a new determination is made and then arrange with counterparties to

have affected swaps transferred for clearing.

NMPF recommended that the process for reviewing swaps for mandatory

clearing not be so heavily weighted toward a determination that swaps

be mandatorily cleared. NMPF believes that DCOs have an interest in

such a determination, and will have the preponderance of input in a 90-

day determination process. Thus NMPF believes that weight must be put

on the other side for the process to be fair.

In addition to the comments discussed above, the Commission

[[Page 44471]]

received multiple comments recommending that the Commission exempt

interaffiliate transactions from mandatory clearing, and offering

thoughts on how the Commission should implement a clearing requirement.

The Commission notes that all of these comments go beyond the limited

scope of these regulations, and it will consider how to address them

outside of this rulemaking.

L. Effective Date

Upon the effective date of this rule: (1) Any swap or group,

category, type, or class of swaps listed for clearing by a DCO shall be

considered submitted to the Commission, in accordance with Section

2(h)(2)(B)(ii) of the CEA; (2) the Commission will review the

submissions and make the required determinations under Sections

2(h)(2)(B)(iii), (C), and (D); (3) the Commission may initiate its own

reviews under Section 2(h)(2)(A); and (4) DCOs shall submit swaps that

they plan to accept for clearing under Section 2(h)(2)(B)(i), and the

Commission will review the submissions and make the required

determinations under Sections 2(h)(2)(B)(iii), (C), and (D).

III. Cost-Benefit Considerations

Section 15(a) of the CEA \13\ requires the Commission to consider

the costs and benefits of its action before promulgating a regulation

under the CEA. Section 15(a) specifies that costs and benefits shall be

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

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

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

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

interest considerations. In conducting its analysis, the Commission

may, in its discretion, give greater weight to any one of the five

enumerated areas and it may determine that, notwithstanding its costs,

a particular rule is necessary to protect the public interest or to

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

of the CEA.\14\

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\13\ 7 U.S.C. 19(a).

\14\ See, e.g., Fisherman's Doc Co-op., Inc v. Brown, 75 F.3d

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

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

factors in undertaking cost-benefit analysis).

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The Commission invited but did not receive public comments specific

to its cost-benefit estimates and considerations within the initial

comment period following the publication of the Commission's notice of

proposed rulemaking. The Commission also invited the public ``to submit

any data or other information that [it] may have quantifying or

qualifying the costs and benefits of the proposal with their comment

letters.'' The Commission received no such data or other information.

The Commission did, however, receive comments generally discussing the

``burden'' associated with the submission process proposed in this

regulation.

The Commission has considered the costs and the benefits of these

final regulations, as amended below, in light of each area of public

concern specified in Section 15(a) of the CEA. In this regard, the

Commission would like to note that it has discussed the costs and

benefits of its regulations throughout the narrative discussion of its

regulations above and generally views the cost-benefit considerations

of this final rulemaking to be an extension of that discussion. The

Commission would also like to note that its Paperwork Reduction Act

estimates have informed its analysis of the costs of the final

regulations and that any information collection costs have been

considered an important component of the overall compliance costs

associated with final Regulation 39.5.

Consideration of the five broad areas is set out immediately below,

followed by a discussion of the comments received in response to the

proposal that relate to the costs and benefits of the regulations. The

Commission has determined that the public benefits associated with each

of its final regulations promulgated in this release outweigh the

costs.

1. Protection of Market Participants and the Public

This regulation provides an orderly framework for determining the

eligibility of a DCO to clear swaps that it plans to accept for

clearing; for DCOs submitting swaps to the Commission for review; for

Commission-initiated reviews of swaps; and for staying a clearing

requirement. An orderly framework for such a review and determination

reduces uncertainty while collecting relevant information in order to

make an informed decision, which protects all market participants.

Maintaining the Commission's prerogative to engage in Commission-

initiated reviews may also enhance risk management for the financial

system as a whole because it will encourage parties to swap

transactions to seek to have their swaps cleared, rather than face the

uncertainty of not knowing what action the Commission may take at the

conclusion of its review.

Lastly, the notice of proposed rulemaking required DCOs to include

various types of information in their submissions, including an

analysis of the effect of a clearing requirement on the market

``including the potential effect on market liquidity, trading activity,

use of swaps by direct and indirect market participants, and any

potential market disruption.'' This final regulation eliminates some of

these requirements, thereby transferring the responsibility to collect

and analyze this information to the Commission. The Commission has

determined that this approach will provide the same benefits to market

participants and the public while being less costly for DCOs.

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

The final regulations require a DCO to submit swaps to the

Commission ``to the extent reasonable and practicable to do so, by

group, category, type or class of swaps.'' The Commission believes this

will make the review process more efficient, allowing the Commission to

move more swaps into clearing quickly, which in turn will promote

clarity in the markets and contribute to their efficiency and

integrity.

The final regulations also provide an opportunity for the public to

comment on DCO submissions and require DCOs to relay both negative and

positive feedback they receive from market participants. To the extent

that the feedback summarized by DCOs is complete and accurate or that

the public submits feedback directly to the Commission, this provides

ample opportunity for broad input into mandatory clearing decisions.

This greater transparency and public participation increases the

likelihood that all important costs and benefits of mandatory clearing

will be identified and weighed by the Commission.

3. Price Discovery

The process outlined in the regulations will move more swaps into

clearing, which will facilitate price discovery in the swap markets.

4. Sound Risk Management Procedures

The proposed regulations also required DCOs to obtain independent

validation of the scalability of their ``risk management policies,

systems, and procedures, including the margin methodology, settlement

procedures, and default management procedures.'' The Commission finds

that this would increase cost to DCOs and has determined that there is

an alternative that will be less costly and will likely achieve similar

benefits. Specifically,

[[Page 44472]]

DCOs will be required to evaluate the scalability of their risk

management policies, systems, and procedures to comply with the DCO

core principles and additional proposed risk management regulations

that may be promulgated.

5. Other Public Interest Considerations

An orderly framework for the review of swaps and determination on

mandatory clearing will facilitate moving swaps quickly into clearing,

which is likely to reduce risk to the financial system.

Public comments. In its notice of proposed rulemaking, the

Commission solicited comment from the public.\15\ Comments relating to

costs and benefits are summarized below, together with corresponding

responses.

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\15\ See 75 FR 67277, 67278 (Nov. 2, 2010).

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The National Milk Producers Federation suggested that small farmers

will bear a disproportionate share of the costs associated with

mandatory clearing. The subject of this rulemaking is not the costs to

small farmers associated with mandatory clearing but the process a DCO

must follow in order to submit a swap or group, category, type, or

class of swaps to the Commission for a determination as to whether the

swap must be cleared. Moreover, the National Milk Producers Federation

did not specify how and to what extent this disproportionate cost will

manifest itself. In this final regulation, the Commission has

determined that an orderly review of swaps, a review mandated by

Congress, reduces risk and increases certainty and therefore will

reduce costs by making sure such swaps are quickly and properly vetted.

Furthermore, the Commission has considered these concerns and believes

that they should be addressed as each swap or group, category, type, or

class of swaps is considered for mandatory clearing. The regulations

create an opportunity for these concerns to be raised by the public for

a period of 30 days as each swap submission is being reviewed. If there

are particular swaps for which members of the public believe this

concern is relevant, they are encouraged to bring that to the

Commission's attention during the public comment period and these

factors will be weighed as decisions about mandatory clearing are made.

In addition, the Commission has proposed separate regulations that

create an exception to mandatory clearing for end users, which may

address some of these concerns.

CME commented that the information required in the proposed

regulations would be costly for the DCOs to gather and analyze. This

concern has been addressed in the final regulations by eliminating the

requirements that DCOs submit independent validation of the scalability

of their risk management policies, systems, and procedures, and by

eliminating the requirement that DCOs conduct an analysis of the effect

of a clearing requirement on the market. The final regulations now only

require the submission of some of the information that the Commission

assumes a DCO would have gathered and considered in making its own

decision to accept a particular swap for clearing.

The Coalition for Derivative End-Users, expressed concern that

central clearing and required margins for cleared swaps will be

expensive for market participants and could be considered an

inefficient use of resources. These comments are beyond the scope of

this rule, which focuses exclusively on the process for reviewing

swaps.

The Coalition for Derivative End-Users also expressed concern that

the indirect as well as the direct costs of mandatory clearing should

be considered when reviewing swaps. The Commission agrees that it is

important to take the full range of costs as well as the benefits into

account when considering mandatory clearing of a swap. As previously

noted, the regulations establish a public comment process through which

those costs and benefits may be raised and given due consideration. If

there are any ancillary costs related to mandatory clearing of a

specific swap or group, category, type, or class of swaps that the

public believes are either unlikely to be recognized or particularly

problematic, the Commission encourages comments to that effect.

Comments that quantify the referenced costs or that offer specific

scenarios are particularly helpful in that regard.

The Coalition for Derivative End-Users further suggested that the

high cost to a DCO of submitting a swap to the Commission will put

U.S.-based DCOs at a competitive disadvantage to foreign DCOs. The

Coalition for Derivative End-Users did not illustrate how and to what

extent a U.S.-based DCO will be disadvantaged nor specify to what

extent non-U.S.-based DCOs offer the similar functionality, liquidity

or risk profiles in comparison to U.S.-based DCOs. However, concerns

over the costs of submission have been addressed in the final

regulations by reducing the DCO's submission requirements and the

attendant costs.

Freddie Mac expressed concern that uncertainty about whether swaps

that are rejected for clearing by DCOs have to be unwound could

generate losses for organizations using those swaps for hedging

purposes. This concern goes beyond the limited scope of these

regulations, and the Commission will consider how to address it outside

of this rulemaking.

IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) requires Federal agencies, in

promulgating rules, to consider whether those rules will have a

significant economic impact on a substantial number of small entities

and, if so, provide a regulatory flexibility analysis respecting the

impact.\16\ The rules adopted herein will affect DCOs. The Commission

has previously established certain definitions of ``small entities'' to

be used by the Commission in evaluating the impact of its rules on

small entities in accordance with the RFA.\17\ The Commission has

previously determined that DCOs are not small entities for the purpose

of the RFA.\18\ Accordingly, the Chairman, on behalf of the Commission,

hereby certifies pursuant to 5 U.S.C. 605(b) that these rules will not

have a significant economic impact on a substantial number of small

entities. The Chairman made the same certification in the proposed

rulemaking,\19\ and the Commission did not receive any comments on the

RFA in relation to the proposed rulemaking.

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\16\ 5 U.S.C. 601 et seq.

\17\ 47 FR 18618 (Apr. 30, 1982).

\18\ See 66 FR 45605, 45609 (August 29, 2001).

\19\ See 75 FR 67277, 67280 (Nov. 2, 2010).

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B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA) \20\ imposes certain

requirements on Federal agencies (including the Commission) in

connection with their conducting or sponsoring any collection of

information as defined by the PRA. An agency may not conduct or

sponsor, and a person is not required to respond to, a collection of

information unless it displays a currently valid control number. This

rulemaking imposes new collection of information requirements within

the meaning of the PRA. Accordingly, the Commission requested, but the

Office of Management and Budget (OMB) has not yet assigned, a control

number for the new collection of information. However, OMB has assigned

the reference number 201011-3038-002 in the interim. The

[[Page 44473]]

Commission has submitted this final rule along with supporting

documentation for OMB's review. Responses to this collection of

information will be mandatory.

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\20\ 44 U.S.C. 3501 et seq.

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The Commission will protect proprietary information according to

the Freedom of Information Act and 17 CFR part 145, ``Commission

Records and Information.'' In addition, section 8(a)(1) of the CEA

strictly prohibits the Commission, unless specifically authorized by

the CEA, from making public ``data and information that would

separately disclose the business transactions or market positions of

any person and trade secrets or names of customers.'' The Commission is

also required to protect certain information contained in a government

system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.

1. Information Provided by Reporting Entities/Persons

These regulations require DCOs to collect and submit to the

Commission information concerning swaps they plan to accept for

clearing. The Commission is adopting these information collection

requirements in order to give effect to certain provisions of the Dodd-

Frank Act.

Each DCO will determine for itself whether and how often it will

accept a new swap or group, category, type, or class of swaps for

clearing, which will require a submission of the required information

to the Commission. The regulations direct DCOs to submit swaps to the

Commission, to the extent reasonable and practicable to do so, by

group, category, type, or class of swaps, thereby reducing the number

of submissions a DCO would be required to make. The Commission's notice

of proposed rulemaking therefore estimated one annual response per

respondent. Commission staff estimated that each DCO would expend 40

hours to prepare each filing required under the proposed regulations,

which was estimated based on the Commission's prior experience with

DCOs and their preparation of filings for the Commission's review. This

burden may be reduced under the final regulations, which do not require

a DCO to include as much information in its submission as the proposed

regulations would have. Commission staff estimated that it would

receive filings from up to 12 respondents annually, which assumes that

each DCO would make an average of one filing per year. Accordingly, the

burden in terms of hours would in the aggregate be 40 hours annually

per respondent and 480 hours annually for all respondents.

Commission staff estimated that each respondent could expend up to

$4000 annually, based on an hourly wage rate of $100, to comply with

the proposed regulations. This would result in an aggregated cost of

$48,000 per annum (12 respondents x $4,000).

2. Information Collection Comments

The Commission did not receive any comments on the PRA in relation

to the proposed rulemaking.

List of Subjects

17 CFR Part 39

Business and industry, Commodity futures, Reporting and

recordkeeping requirements.

17 CFR Part 140

Authority delegations (Government agencies), Conflict of interests,

Organization and functions (Government agencies).

For the reasons stated in the preamble, amend 17 CFR parts 39 and

140 as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0

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

Authority: 7 U.S.C. 7a-1 as amended by Pub. L. 111-203, 124

Stat. 1376.

0

2. Redesignate Sec. 39.5 as Sec. 39.8 and add new Sec. 39.5 to read

as follows:

Sec. 39.5 Review of swaps for Commission determination on clearing

requirement.

(a) Eligibility to clear swaps. (1) A derivatives clearing

organization shall be presumed eligible to accept for clearing any swap

that is within a group, category, type, or class of swaps that the

derivatives clearing organization already clears. Such presumption of

eligibility, however, is subject to review by the Commission.

(2) A derivatives clearing organization that wishes to accept for

clearing any swap that is not within a group, category, type, or class

of swaps that the derivatives clearing organization already clears

shall request a determination by the Commission of the derivatives

clearing organization's eligibility to clear such a swap before

accepting the swap for clearing. The request, which shall be filed

electronically with the Secretary of the Commission, shall address the

derivatives clearing organization's ability, if it accepts the swap for

clearing, to maintain compliance with section 5b(c)(2) of the Act,

specifically:

(i) The sufficiency of the derivatives clearing organization's

financial resources; and

(ii) The derivative clearing organization's ability to manage the

risks associated with clearing the swap, especially if the Commission

determines that the swap is required to be cleared.

(b) Swap submissions. (1) A derivatives clearing organization shall

submit to the Commission each swap, or any group, category, type, or

class of swaps that it plans to accept for clearing. The derivatives

clearing organization making the submission must be eligible under

paragraph (a) of this section to accept for clearing the submitted

swap, or group, category, type, or class of swaps.

(2) A derivatives clearing organization shall submit swaps to the

Commission, to the extent reasonable and practicable to do so, by

group, category, type, or class of swaps. The Commission may in its

reasonable discretion consolidate multiple submissions from one

derivatives clearing organization or subdivide a derivatives clearing

organization's submission as appropriate for review.

(3) The submission shall be filed electronically with the Secretary

of the Commission and shall include:

(i) A statement that the derivatives clearing organization is

eligible to accept the swap, or group, category, type, or class of

swaps for clearing and describes the extent to which, if the Commission

were to determine that the swap, or group, category, type, or class of

swaps is required to be cleared, the derivatives clearing organization

will be able to maintain compliance with section 5b(c)(2) of the Act;

(ii) A statement that includes, but is not limited to, information

that will assist the Commission in making a quantitative and

qualitative assessment of the following factors:

(A) The existence of significant outstanding notional exposures,

trading liquidity, and adequate pricing data;

(B) The availability of rule framework, capacity, operational

expertise and resources, and credit support infrastructure to clear the

contract on terms that are consistent with the material terms and

trading conventions on which the contract is then traded;

(C) The effect on the mitigation of systemic risk, taking into

account the size of the market for such contract and the resources of

the derivatives clearing organization available to clear the contract;

(D) The effect on competition, including appropriate fees and

charges applied to clearing; and

(E) The existence of reasonable legal certainty in the event of the

insolvency of the relevant derivatives clearing organization or one or

more of its

[[Page 44474]]

clearing members with regard to the treatment of customer and swap

counterparty positions, funds, and property;

(iii) Product specifications, including copies of any standardized

legal documentation, generally accepted contract terms, standard

practices for managing any life cycle events associated with the swap,

and the extent to which the swap is electronically confirmable;

(iv) Participant eligibility standards, if different from the

derivatives clearing organization's general participant eligibility

standards;

(v) Pricing sources, models, and procedures, demonstrating an

ability to obtain sufficient price data to measure credit exposures in

a timely and accurate manner, including any agreements with clearing

members to provide price data and copies of executed agreements with

third-party price vendors, and information about any price reference

index used, such as the name of the index, the source that calculates

it, the methodology used to calculate the price reference index and how

often it is calculated, and when and where it is published publicly;

(vi) Risk management procedures, including measurement and

monitoring of credit exposures, initial and variation margin

methodology, methodologies for stress testing and back testing,

settlement procedures, and default management procedures;

(vii) Applicable rules, manuals, policies, or procedures;

(viii) A description of the manner in which the derivatives

clearing organization has provided notice of the submission to its

members and a summary of any views on the submission expressed by the

members (a copy of the notice to members shall be included with the

submission); and

(ix) Any additional information specifically requested by the

Commission.

(4) The Commission must have received the submission by the open of

business on the business day preceding the acceptance of the swap, or

group, category, type, or class of swaps for clearing.

(5) The submission will be made available to the public and posted

on the Commission Web site for a 30-day public comment period. A

derivatives clearing organization that wishes to request confidential

treatment for portions of its submission may do so in accordance with

the procedures set out in Sec. 145.9(d) of this chapter.

(6) The Commission will review the submission and determine whether

the swap, or group, category, type, or class of swaps described in the

submission is required to be cleared. The Commission will make its

determination not later than 90 days after a complete submission has

been received, unless the submitting derivatives clearing organization

agrees to an extension. The determination of when such submission is

complete shall be at the sole discretion of the Commission. In making a

determination that a clearing requirement shall apply, the Commission

may impose such terms and conditions to the clearing requirement as the

Commission determines to be appropriate.

(c) Commission-initiated reviews. (1) The Commission, on an ongoing

basis, will review swaps that have not been accepted for clearing by a

derivatives clearing organization to make a determination as to whether

the swaps should be required to be cleared. In undertaking such

reviews, the Commission will use information obtained pursuant to

Commission regulations from swap data repositories, swap dealers, and

major swap participants, and any other available information.

(2) Notice regarding any determination made under paragraph (c)(1)

of this section will be made available to the public and posted on the

Commission Web site for a 30-day public comment period.

(3) If no derivatives clearing organization has accepted for

clearing a particular swap, group, category, type, or class of swaps

that the Commission finds would otherwise be subject to a clearing

requirement, the Commission will:

(i) Investigate the relevant facts and circumstances;

(ii) Within 30 days of the completion of its investigation, issue a

public report containing the results of the investigation; and

(iii) Take such actions as the Commission determines to be

necessary and in the public interest, which may include requiring the

retaining of adequate margin or capital by parties to the swap, group,

category, type, or class of swaps.

(d) Stay of clearing requirement. (1) After making a determination

that a swap, or group, category, type, or class of swaps is required to

be cleared, the Commission, on application of a counterparty to a swap

or on its own initiative, may stay the clearing requirement until the

Commission completes a review of the terms of the swap, or group,

category, type, or class of swaps and the clearing arrangement.

(2) A counterparty to a swap that wishes to apply for a stay of the

clearing requirement for that swap shall submit a written request to

the Secretary of the Commission that includes:

(i) The identity and contact information of the counterparty to the

swap;

(ii) The terms of the swap subject to the clearing requirement;

(iii) The name of the derivatives clearing organization clearing

the swap;

(iv) A description of the clearing arrangement; and

(v) A statement explaining why the swap should not be subject to a

clearing requirement.

(3) A derivatives clearing organization that has accepted for

clearing a swap, or group, category, type, or class of swaps that is

subject to a stay of the clearing requirement shall provide any

information requested by the Commission in the course of its review.

(4) The Commission will complete its review not later than 90 days

after issuance of the stay, unless the derivatives clearing

organization that clears the swap, or group, category, type, or class

of swaps agrees to an extension.

(5) Upon completion of its review, the Commission may:

(i) Determine, subject to any terms and conditions as the

Commission determines to be appropriate, that the swap, or group,

category, type, or class of swaps must be cleared; or

(ii) Determine that the clearing requirement will not apply to the

swap, or group, category, type, or class of swaps, but clearing may

continue on a non-mandatory basis.

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

0

3. The authority citation for part 140 continues to read as follows:

Authority: 7 U.S.C. 2 and 12a.

0

4. In Sec. 140.94, revise paragraph (a)(5) and add new paragraph

(a)(6) to read as follows:

Sec. 140.94 Delegation of authority to the Director of the Division

of Clearing and Intermediary Oversight.

(a) * * *

(5) All functions reserved to the Commission in Sec. 5.14 of this

chapter; and

(6) All functions reserved to the Commission in Sec. Sec.

39.5(b)(2) and (d)(3) of this chapter.

* * * * *

[[Page 44475]]

Issued in Washington, DC, on July 19, 2011, by the Commission.

David A. Stawick,

Secretary of the Commission.

Appendices to Process for Review of Swaps for Mandatory Clearing--

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 Dunn, Sommers,

Chilton and O'Malia voted in the affirmative; no Commissioner voted in

the negative.

Appendix 2--Statement of Chairman Gary Gensler

I support the final rulemaking to establish a process for the

review and designation of swaps for mandatory clearing. One of the

primary goals of the Dodd-Frank Wall Street Reform and Consumer

Protection Act was to lower risk by requiring standardized swaps to be

centrally cleared. The final rule is consistent with the congressional

requirement that derivatives clearing organizations be eligible to

clear swaps and that the public has an opportunity for input before a

swap is subject to mandatory clearing.

[FR Doc. 2011-18663 Filed 7-25-11; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: July 26, 2011