Federal Register, Volume 76 Issue 170 (Thursday, September 1, 2011)[Federal Register Volume 76, Number 170 (Thursday, September 1, 2011)]
[Rules and Regulations]
[Pages 54538-54597]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20817]
[[Page 54537]]
Vol. 76
Thursday,
No. 170
September 1, 2011
Part II
Commodity Futures Trading Commission
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17 CFR Part 49
Swap Data Repositories: Registration Standards, Duties and Core
Principles; Final Rule
Federal Register / Vol. 76 , No. 170 / Thursday, September 1, 2011 /
Rules and Regulations
[[Page 54538]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 49
RIN 3038-AD20
Swap Data Repositories: Registration Standards, Duties and Core
Principles
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is adopting its regulations to implement section 21 of
the Commodity Exchange Act (``CEA'' or ``Act''), which establishes
registration requirements, statutory duties, core principles and
certain compliance obligations for registered swap data repositories
(``SDRs''). Section 21 of the CEA was added by section 728 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank
Act'').
DATES: Effective date is October 31, 2011. Applicants at that time may
apply for registration as SDRs but are not required to do so. Mandatory
registration and compliance with the registration rules will occur upon
the effective date of the swap definition rulemaking, which the
Commission will publish at a later date.
FOR FURTHER INFORMATION CONTACT: For questions relating to this
rulemaking: Jeffrey P. Burns, Assistant General Counsel, Office of the
General Counsel (``OGC''), at (202) 418.5101, [email protected]; Susan
Nathan, Senior Special Counsel, Division of Market Oversight (``DMO''),
at (202) 418.5133, [email protected]; or Adedayo Banwo, Counsel, OGC, at
(202) 418.6249, [email protected], Commodity Futures Trading Commission,
Washington, DC 20581. With respect to questions relating to
registration processing and compliance matters: Riva Spear Adriance,
Associate Director, DMO, at (202) 418.5494, [email protected] and
Sebastian Pujol Schott, Associate Deputy Director, Market Compliance,
DMO, at (202) 418.5641, [email protected], respectively.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Overview
B. International Considerations
C. Summary of the Proposed Part 49 Regulations
1. Proposed Regulations Related to Registration
2. Proposed Regulations Related to Statutory Duties of SDRs
3. Proposed Regulations Related to Data Acceptance, Accuracy and
Recordkeeping
4. Proposed Regulations Relating to Data Privacy,
Confidentiality and Access
5. Proposed Regulations Related to Emergency Procedures
6. Regulations Related to Designation of a Chief Compliance
Officer
7. Core Principles Applicable to SDRs
8. Proposed Regulations Relating to Additional Duties
9. Proposed Regulations Related to Real-Time Public Reporting
10. Proposed Regulations Relating to Implementation of SDR rules
D. Overview of Comments Received
II. Part 49 of the Commission's Regulations
A. Requirements of Registration
1. Procedures for Registration
2. Withdrawal From Registration
3. Equity Interest Transfer Notification
4. Swap Data Repositories Located in Foreign Jurisdictions
B. Duties of Registered SDRs
1. Acceptance of Data
2. Confirmation of Data Accuracy
3. Recordkeeping Requirements
4. Monitoring, Screening and Analyzing Swap Data
5. Real-Time Public Reporting
6. Maintenance of Data Privacy
7. Access to SDR Data
8. Emergency Authority Procedures and System Safeguards
C. Designation of Chief Compliance Officer
D. Core Principles Applicable to SDRs
1. Antitrust Considerations (Core Principle 1)
2. Introduction--Governance Arrangements (Core Principle 2) and
Conflicts of Interest (Core Principle 3)
3. Governance Arrangements (Core Principle 2)
4. Conflicts of Interest (Core Principle 3)
E. Additional Duties
1. Financial Resources
2. Disclosure Requirements of Swap Data Repositories
3. Non-Discriminatory Access and Fees
F. Procedures for Implementing Swap Data Repository Regulations
III. Effectiveness and Transition Period
IV. Related Matters
A. Paperwork Reduction Act
B. Cost-Benefit Analysis
C. Regulatory Flexibility Act
V. List of Subjects
I. Background
A. Overview
On July 21, 2010, President Obama signed into law the Dodd-Frank
Act.\1\ Title VII \2\ amended the CEA \3\ to establish a comprehensive
new regulatory framework for swaps and security-based swaps. The
legislation was enacted to reduce risk, increase transparency and
promote market integrity within the financial system by, among other
things (1) providing for the registration and comprehensive regulation
of swap dealers (``SDs'') and major swap participants (``MSPs''); (2)
imposing 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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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010), available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
\2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\3\ 7 U.S.C. 1, et seq.
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To enhance transparency, promote standardization and reduce
systemic risk, section 727 of the Dodd-Frank Act added to the CEA new
section 2(a)(13)(G), which requires all swaps--whether cleared or
uncleared--to be reported to SDRs,\4\ which are new registered entities
created by section 728 of the Dodd-Frank Act.\5\ SDRs are required to
perform specified functions related to the collection and
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maintenance \6\ of swap transaction data and information and to make
such data and information directly and electronically available to
regulators. Section 728 of the Dodd-Frank Act added to the CEA new
section 21 governing registration and regulation of SDRs and directed
the Commission to promulgate rules governing those duties and
responsibilities. Section 21 requires that SDRs register with the
Commission regardless of whether they are also licensed as a bank or
registered as a security-based swap data repository with the Securities
and Exchange Commission (``SEC''), and to submit to inspection and
examination by the Commission.\7\
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\4\ Section 721 of the Dodd-Frank Act amends section 1a of the
CEA to add the definition of SDR. Pursuant to section 1a(48), the
term ``swap data repository means any person that collects and
maintains information or records with respect to transactions or
positions in, or the terms and conditions of, swaps entered into by
third parties for the purpose of providing a centralized
recordkeeping facility for swaps.'' 7 U.S.C. 1a(48).
\5\ The Commission notes that currently there are global trade
repositories for credit, interest rate and equity swaps. Since 2009,
all G-14 dealers have submitted credit swap data to the Depository
Trust and Clearing Corporation's (``DTCC'') Trade Information
Warehouse. In January 2010 TriOptima launched the Global OTC
Derivatives Interest Rate Trade Reporting Repository after selection
by the Rates Steering Committee of the International Swaps and
Derivatives Association (``ISDA'') to provide a trade repository to
collect information on trades in interest rate swaps. In August
2010, DTCC also launched the Equity Derivatives Reporting Repository
for equity swaps and other equity derivatives. Other entities may
also perform trade repository functions on a more limited basis
based on various business models and/or regional or localized
considerations. In addition, a variety of firms also provide
ancillary services and functions essential to the efficient
operation of trade reporting of swaps. Recently, ISDA in
anticipation of the implementation of swap data reporting and SDR
requirements related to the Dodd-Frank Act selected DTCC and a joint
venture between DTCC's Deriv/SERV and EFETnet as ``global''
repositories for interest rates available at http://www2.isda.org/attachment/MzExMQ==/InterestRatesRepositorySelection.pdf and
commodities available at http://www2.isda.org/attachment/MzIwNw==/CommodityRepositorySelection.pdf. In addition, the Global FX
Divisions of the Association of Financial Markets Europe (AFME),
Securities industry and Financial Markets (SIFMA) and the Asian
Securities industry and Financial Markets (ASIFMA) have recommended
a partnership with DTCC and SWIFT for the purpose of developing a
foreign exchange trade repository available at http://www.sifma.org/news/news.aspx?id=8589934651.
\6\ See Commission, Notice of Proposed Rulemaking: Swap Data
Recordkeeping and Reporting Requirements, 75 FR 76574 (Dec. 8, 2010)
(``Data NPRM''). The Data NPRM, among other things, proposed
regulations governing SDR data collection and reporting
responsibilities under part 45 of the Commission's regulations.
\7\ Section 21(a)(1)(B) permits derivatives clearing
organizations (``DCOs'') to register as SDRs.
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To register and maintain registration with the Commission, SDRs are
required to comply with specific duties and core principles enumerated
in section 21 as well as other requirements that the Commission may
prescribe by rule. As described more fully in the Commission's Notice
of Proposed Rulemaking (``SDR NPRM''),\8\ new section 21(c) mandates
that SDRs (1) accept data; (2) confirm with both counterparties the
accuracy of submitted data; (3) maintain data according to standards
prescribed by the Commission; (4) provide direct electronic access to
the Commission or any designee of the Commission (including another
registered entity); (5) provide public reporting of swap data in the
form and frequency required by the Commission; (6) establish automated
systems for monitoring and analyzing data (including the use of end
user clearing exemptions) at the direction of the Commission; (7)
maintain user privacy; (8) on a confidential basis, pursuant to section
8 of the CEA,\9\ upon request and after notifying the Commission, make
data available to other specified regulators; and (9) establish and
maintain emergency and business continuity-disaster recovery procedures
(``BC-DR''). In connection with the sharing of confidential information
with other regulators, the SDR must, pursuant to new section 21(d),
receive a written agreement from such regulator, prior to sharing the
information, stating that it will abide by the confidentiality
provisions of section 8 and agree to indemnify both the SDR and the
Commission against any litigation expenses relating to information
provided under section 8.
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\8\ Commission, Notice of Proposed Rulemaking: Swap Data
Repositories, 75 FR 80898 (Dec. 23, 2010).
\9\ Section 8(e) of the CEA, 7 U.S.C. 12(e), establishes among
other things the conditions under which the Commission may furnish
information obtained in connection with the administration of the
CEA to any department or agency of the United States. Such
information shall not be disclosed by such department or agency
except in any action or proceeding under the laws of the United
States to which it, the Commission or the United States is a party.
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New section 21(e) also added a provision that each SDR designate a
chief compliance officer (``CCO'') with specified duties. New section
21(f) established three focused core principles. First, unless
necessary or appropriate to achieve the purposes of the CEA, an SDR may
not adopt any rule or take any action that results in any unreasonable
restraint or trade, or impose any material anticompetitive burden on
the trading, clearing or reporting of transactions. Second, each SDR
must establish transparent governance arrangements to fulfill the
public interest requirements of the CEA and support the objectives of
the Federal government, owners and participants. Third, each SDR must
establish and enforce rules to minimize conflicts of interest in the
SDR's decision-making processes and establish a process for resolving
conflicts of interest. Section 21(f) further directs the Commission to
establish additional duties for SDRs to minimize conflicts of interest,
protect data, ensure compliance and guarantee the safety and security
of the SDR.\10\
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\10\ Pursuant to this provision, the Commission also may develop
additional duties taking into account evolving standards of the
United States and the international community. Section 21(f)(4) of
the CEA, 7 U.S.C. 24a(f)(4). This provision is sometimes referred to
as ``Core Principle 4.''
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B. International Considerations
Section 752(a) of the Dodd-Frank Act directs the Commission to
consult and coordinate with foreign regulatory authorities regarding
the establishment of consistent international standards for the
regulation of swaps and various ``swap entities.'' The Commission is
committed to a cooperative international approach to the registration
and regulation of SDRs and has consulted extensively with various
foreign regulatory authorities in promulgating both its proposed and
final regulations. In this regard, both the proposed and final part 49
regulations reflect the Commission's intent to harmonize our approach
to the extent possible with the European Commission's regulatory
proposal related to OTC derivatives, central counterparties and trade
repositories.\11\ The Commission's part 49 regulations also largely
adopt the recommendations of the May 2010 ``CPSS-IOSCO Consultative
Report, Considerations for Trade Repositories in the OTC Derivatives
Market'' (``Working Group Report'').\12\ The Commission believes that
the Dodd-Frank Act and the part 49 regulations are consistent with the
goals of the Working Group Report. As noted in the SDR NPRM, section 21
of the CEA does not authorize the Commission to exempt any entity
performing the functions of an SDR from the registration requirements
or any other duties established by the Dodd-Frank Act.\13\ Certain non-
U.S. swap activity is excluded, however, from the reach of the Dodd-
Frank Act and Commission regulations pursuant to section 2(i) of the
CEA.\14\
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\11\ See Proposal for a Regulation of the European Parliament
and of the Council on OTC Derivatives, Central Counterparties, and
Trade Repositories (the ``European Commission Proposal''), COM
(2010). See also SDR NPRM supra note 8 at 80899-80900 and note 16.
The proposal, if implemented, would become a part of the European
Union's framework for financial supervision. The European Union is
composed of 27 member states and the European Securities and Markets
Authority will supervise the European securities markets along with
the national regulators of the member states.
\12\ This working group was jointly established by the Committee
on Payment and Settlement Systems (``CPSS'') of the Bank of
International Settlements (``BIS'') and the Technical Committee of
the International Organization of Securities Commissions
(``IOSCO''). The Working Group Report presented a set of factors to
consider in connection with the design, operation and regulation of
SDRs. A significant focus of the Working Group Report is access to
SDR data by appropriate regulators: the report urges that a trade
repository ``should support market transparency by making data
available to relevant authorities and the public in line with their
respective information needs.'' The Working Group Report is
available at http://www.bis.org/publ/cpss90.pdf. See also CPSS-IOSCO
Consultative Report, Principles of Financial Market Infrastructures
(March 2011) available at http://www.bis.org/publ/cpss94.pdf. See
also Financial Stability Board, Implementing OTC Derivatives Market
Reforms, October 25, 2010 (``FSB Report''); FSB, Derivative Market
Reforms, Progress Report on Implementation, April 15, 2010 (``FSB
Progress Report'').
\13\ Section 721(d) of the Dodd-Frank Act, which as relevant
here amended the Commission's exemptive authority under section
4c(1) of the CEA, does not permit the Commission to grant exemptions
with respect to new section 21 of the CEA unless expressly
authorized.
\14\ Section 2(i) of the CEA, as amended by section 722 of the
Dodd-Frank Act, excludes from U.S. jurisdiction all swap activity
that does not have a ``direct and significant connection with
activities in, or effect on, commerce of the United States'' unless
such activity contravenes regulations necessary to prevent evasion.
7 U.S.C. 2(i)(1)-(2).
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C. Summary of the Proposed Part 49 Regulations
Against this background, the Commission developed and published for
comment part 49 of the
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Commission's regulations establishing provisions applicable to the
registration and regulation of SDRs.\15\ Proposed part 49 of the
Commission's regulations included procedures and substantive
requirements to achieve and maintain registration as an SDR--including
proposed standards for compliance with each of the statutory duties
enumerated in section 21(c), the three core principles outlined in
section 21(f), and proposed additional duties consistent with the
authority conferred by section 21(f)(4).
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\15\ A full description and discussion of each proposed rule can
be found in the SDR NPRM, supra note 8.
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1. Proposed Regulations Related to Registration
Section 21(a)(1)(A) makes it unlawful for any person, unless
registered with the Commission, directly or indirectly to make use of
the mails or any means or instrumentality of interstate commerce to
perform the functions of an SDR. Consistent with this statutory
directive, the Commission proposed regulations establishing procedural
and substantive requirements governing registration as an SDR.\16\ The
proposed regulations required that SDRs specify the asset class or
classes for which they will accept swap data and undertake to accept
all swaps in asset classes for which they have specified.\17\ If the
applicant is a foreign entity, the proposed regulations specified that
it be required to certify, and provide an opinion of counsel, that as a
matter of law it is able to provide the Commission with prompt access
to its books and records and to submit to onsite inspection and
examination by the Commission.\18\ The proposal established the
standard of review as well as the standards for denial, suspension and
revocation of registration. In addition, the proposed rules provided a
``provisional registration'' for SDR applicants that are in substantial
compliance with the registration standards set forth in the
regulations.\19\ With respect to Commission review of SDR rules and
rule amendments, the proposed rules provided procedures by which an
applicant for SDR registration may either request that the Commission
approve any or all of its rules or self-certify that its rules comply
with the CEA or Commission regulations thereunder (``self
certification'').\20\
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\16\ Proposed Sec. Sec. 49.3-49.4 and 49.6-49.7; Proposed Form
SDR.
\17\ Proposed Sec. 49.10. Proposed Sec. 49.2(a)(2) defines the
term ``asset class'' as those swaps in a particular broad category
of goods, services or commodities underlying a swap. The asset
classes include credit, equity, interest rates, currency, other
commodities, and such other asset classes as may be determined by
the Commission.
\18\ Proposed Sec. 49.7.
\19\ Proposed Sec. 49.3(b).
\20\ Proposed Sec. 49.8.
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The proposed regulations separately required SDRs to file with the
Commission a notice of an equity interest transfer of ten percent or
more, as defined in the Commission's revised part 40 rules \21\ and
specified the necessary information and related notifications.
Similarly, the proposed rules described the procedures and requirements
for registering successor entities of an SDR.\22\
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\21\ See Commission, Notice of Proposed Rulemaking: Revisions to
part 40 (Provisions Common to Registered Entities), 75 FR 67282
(Nov. 2, 2010)(``Part 40 NPRM'') and Final rule: Revisions to part
40 (Provisions Common to Registered Entities), 76 FR 44776 (July 27,
2011)(``Part 40 Adopting Release'') (collectively, ``part 40'').
\22\ Proposed Sec. 49.6.
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2. Proposed Regulations Related to Statutory Duties of SDRs
Section 21(c) of the CEA prescribes the minimum duties required of
SDRs. To register and maintain registration, an SDR must (i) accept
swap data as prescribed by the Commission; (ii) confirm with both
counterparties to a swap the accuracy of the data; (iii) maintain the
data submitted; (iv) provide the Commission or its designee (including
another registered entity) with direct electronic access to the swap
data; (v) provide the information prescribed by the Commission to
comply with the public reporting requirements set forth in section
2(a)(13) of the CEA; (vi) establish automated systems for monitoring,
screening, and analyzing swap data; (vii) maintain the privacy and
confidentiality of any and all swap data received by the SDR; (viii)
provide access to the swap data to specified appropriate domestic and
foreign regulators; and (ix) adopt and implement emergency and BC-DR
procedures.
Pursuant to the authority granted by sections 21(f)(4) \23\ and
8a(5) \24\ of the CEA, the Commission proposed to include in part 49
four additional duties requiring SDRs to (i) adopt and implement system
safeguards, including BC-DR plans; (ii) maintain sufficient financial
resources; (iii) furnish market participants with a disclosure document
setting forth the risks and costs associated with using the services of
an SDR; and (iv) provide fair and open access and fees and charges that
are equitable and non-discriminatory. Proposed Sec. Sec. 49.9-49.18
and 49.23-49.27 described the standards for compliance with each of
these duties.
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\23\ Section 21(f)(4) of the CEA; see supra note 10.
\24\ Section 8a(5) of the CEA, 7 U.S.C. 12a(5), authorizes the
Commission to promulgate such rules and regulations as, in the
judgment of the Commission, are reasonably necessary to effectuate
any of the provisions or accomplish any of the purposes of the CEA.
In connection with SDRs, section 21(a)(3)(A)(ii), 7 U.S.C.
24a(3)(A)(ii), specifically requires that an SDR, to be registered
and maintain registration, must comply with any requirement that the
Commission may impose by rule or regulation pursuant to section
8a(5) of the CEA.
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3. Proposed Regulations Related to Data Acceptance, Accuracy and
Recordkeeping
Sections 21(c)(1)-(5) of the CEA, as adopted by section 728 of the
Dodd-Frank Act, address the duties of SDRs in connection with accepting
and maintaining swap data, ensuring accuracy and reliability, and
providing direct electronic data access to the Commission or its
designee.\25\ To implement section 21(c)(1), the Commission proposed
that SDRs adopt policies and procedures that will enable them to
electronically accept data and other regulatory information, and to
accept all swaps in an asset class, or classes, for which they have
registered.\26\ The Commission also proposed that SDRs establish
policies and procedures to prevent a valid swap from being invalidated,
altered or modified through the SDR's confirmation or recording
process, and provide facilities for effectively resolving disputes
concerning the accuracy of swap data and positions recorded by the
SDR.\27\
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\25\ In a companion rulemaking under new part 45 of its
regulations, the Commission has proposed data elements that must be
reported to SDRs and has in addition provided specific requirements
for SDRs relating to (i) determining which counterparty must report
the swap data to the SDR; (ii) third-party facilitation of swap data
reporting; (iii) reporting to a single SDR in connection with the
reporting of swap data; and (iv) reporting errors and omissions. See
Data NPRM supra note 6.
\26\ Proposed Sec. 49.10.
\27\ Id.
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Proposed Sec. 49.11 implemented section 21(c)(2) of the CEA and
specified that an SDR adopt policies and procedures to ensure the
accuracy of swap data reported to it, and must confirm with both
counterparties to the swap \28\ the accuracy of data and information
submitted by them.\29\
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\28\ These proposed confirmation requirements would not apply to
real-time public reporting. See proposed Sec. 43.3(f) set forth in
Commission, Notice of Proposed Rulemaking: Real-Time Public
Reporting of Swap Transaction Data, 74 FR 76140 (Dec. 7, 2010) (the
``Real-Time NPRM'').
\29\ As noted, the form and content of the swap data ultimately
will be established in the Commission's part 45 regulations related
to data elements and standards. The Data NPRM detailed and defined
the terms ``confirmation'' and ``confirmation data.'' See Data NPRM
supra note 6.
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Proposed Sec. 49.12 implemented section 21(c)(3) of the CEA and
required
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SDRs to maintain the books and records of all activity and data
relating to swaps reported to the SDR, consistent with recordkeeping
and reporting rules to be established in new parts 43 and 45 of the
Commission's regulations.\30\ As proposed, Sec. 49.12 required that
SDR books and records be open to inspection on request by any
representative of the Commission, the United States Department of
Justice, the SEC or any representative of a prudential regulator
authorized by the Commission. The proposal would further require each
SDR that publicly disseminates swap data in real time to comply with
the real-time reporting requirements prescribed in part 43.\31\
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\30\ See Sec. 45.2 set forth in the Data NPRM supra note 6 and
Sec. 43.3 set forth in Real-Time NPRM supra note 28.
\31\ Id.
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The Commission proposed two requirements in connection with the
provision of direct electronic access mandated by section 21(c)(4) of
the CEA. First, SDRs would be required to provide the Commission or its
designee with connectivity and access to the SDR's database; second,
SDRs would be required to electronically deliver to the Commission or
its designee certain data in the form and manner prescribed by the
Commission.\32\ The Commission also proposed that SDRs be required to
provide it with monitoring tools identical to those provided to the
SDR's compliance staff and CCO.\33\ In connection with section
21(c)(5)'s mandate that SDRs establish automated systems for
monitoring, screening and analyzing swap data, the Commission proposed
that at this time SDRs establish the infrastructure necessary to
fulfill the statutory requirement.\34\
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\32\ Proposed Sec. 49.17.
\33\ Id.
\34\ Proposed Sec. Sec. 49.13 and 49.14. The latter proposal
was designed to implement the Commission's program to monitor and
prevent abuse of end-user clearing exemption claims. See section
2(h)(7) of the CEA, as amended, which creates a framework by which
certain swaps may be exempt from clearing if one of its
counterparties is (i) not a financial entity; (ii) is using swaps to
hedge or mitigate commercial risk; and (iii) notifies the Commission
as to how it generally meets the financial obligations associated
with entering into non-cleared swaps (the ``end-user clearing
exemption''). See Commission, Notice of Proposed Rulemaking: End-
User Exemption to Mandatory Clearing of Swaps, 75 FR 80747 (Dec. 23,
2010) (``End-User NPRM'').
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4. Proposed Regulations Relating to Data Privacy, Confidentiality and
Access
Section 21(c)(6) of the CEA requires that an SDR maintain the
privacy of all swap transaction information that it receives from an
SD, counterparty or any other registered entity. The Commission
recognized that data related to real-time public reporting is, by its
nature, publicly available, while detailed core data intended for use
by the Commission and other regulators is subject to statutory
confidential treatment. Accordingly, the Commission proposed to
implement section 21(c)(6)'s mandate--and also in part the conflicts of
interest core principle applicable to SDRs (``Core Principle 3'')--by
requiring that ``SDR Information'' that is not subject to real-time
reporting be treated as non-public and confidential and may not be
accessed, disclosed, or used for purposes unrelated to SDR
responsibilities under the CEA unless the submitters of the data
explicitly agree to such use.\35\ The proposed regulation also directed
SDRs to establish and maintain safeguards, policies and procedures
addressing the misappropriation or misuse of swap data that the
Commission is prohibited from disclosing pursuant to section 8 of the
CEA (``Section 8 Material'') \36\ or similar material, such as
intellectual property.
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\35\ Proposed Sec. 49.16. However, aggregated data that cannot
be attributed to individual transactions or market participants may
be made publicly available by SDRs.
\36\ Id. Section 8(a) of the CEA prohibits the Commission from
disclosing information or material if it ``would separately disclose
the business transactions or market positions of any person and
trade secrets or names of customers.'' See also the definition of
``Section 8 Material'' in Sec. 49.2(a)(14).
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The Commission proposed to prohibit the use of SDR data for
commercial or business purposes by the SDR or any of its affiliated
entities with a limited exception where the SDR has received the
express written consent of the market participants who submitted the
swap data.\37\ The proposal required that SDRs develop and maintain
firewalls to protect data they are required to maintain, and permitted
access to third-party service providers so long as they have
implemented stringent confidentiality procedures to protect data and
information from improper disclosure.\38\
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\37\ Proposed Sec. 49.17(g)(2).
\38\ Id. This proposal was intended to partially implement
section 21(c)(6)'s privacy provisions as well as the provisions of
section 21(f)(3), which requires an SDR to establish and enforce
rules to mitigate conflicts of interest. See SDR NPRM supra note 8
at 80911.
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Section 21(c)(7) requires that an SDR make data available to
certain domestic and foreign regulators (``Appropriate Domestic
Regulator'' or ``Appropriate Foreign Regulator'') under specified
circumstances. To implement this provision, the Commission proposed
definitions and standards for determining appropriateness--such as an
existing memorandum of understanding (``MOU'') or similar agreement
executed with the Commission--as well as procedures for gaining access
to data maintained by SDRs.\39\ Separately, section 21(d) mandates that
prior to receipt of any requested data or information from an SDR, the
Appropriate Foreign or Appropriate Domestic Regulator must execute a
``Confidentiality and Indemnification Agreement'' with the SDR. The
Commission proposed to implement this provision by requiring that such
an agreement be executed between SDRs and each appropriate
regulator.\40\ The Commission acknowledged in the SDR NPRM that this
requirement could have the unintended effect of inhibiting access to
data maintained by SDRs. Consistent with the international
harmonization envisioned by section 752 of the Dodd-Frank Act, the
Commission stated that it will endeavor to provide sufficient access to
SDR data to Appropriate Foreign and Domestic Regulators. In that
regard, the Commission noted that pursuant to section 8(e) of the CEA
it may share confidential information in its possession with any
foreign futures authority, department or agency of any foreign
government or political subdivision thereof.\41\
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\39\ Id.
\40\ Proposed Sec. 49.18.
\41\ SDR NPRM supra note 8 at 80910.
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5. Proposed Regulations Related to Emergency Procedures
To implement section 21(c)(8), the Commission proposed Sec. 49.23
to require SDRs to adopt specific policies and procedures for the
exercise of emergency authority. The Commission based its proposals on
existing emergency authority concepts--in particular, the application
guidance for former designated contract market (``DCM'') Core Principle
6.\42\ As proposed, Sec. 49.23 required SDRs to enumerate the
circumstances in which it is authorized to invoke its emergency
authority, applicable procedures, and the range of measures it is
authorized to take in response to an emergency. Further, the emergency
policies and procedures adopted by an SDR must specifically address
conflicts of interest and include a requirement that the SDR's CCO be
consulted in any emergency that may raise conflicts of interest. The
proposal further required an SDR to identify to the Commission the
persons authorized to exercise emergency authority and the chain of
command, and to promptly notify the
[[Page 54542]]
Commission of any emergency action taken.
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\42\ Id. at 80911.
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6. Regulations Related to Designation of a Chief Compliance Officer
Section 21(e) establishes the CCO as a focal point for compliance.
The Commission implemented section 21(e) in proposed Sec. 49.22, which
further developed and detailed CCO statutory requirements and
responsibilities. Specifically, proposed Sec. 49.22 established the
supervisory regime applicable to CCOs; specified removal provisions;
specified the duties and authorities of CCOs; and detailed the
information that must be included in the required annual compliance
report and the procedure for submission of the report to the
Commission.
7. Core Principles Applicable to SDRs
Unlike prescriptive rules, core principles generally provide the
registered entity with reasonable discretion in establishing the manner
of compliance with each specified principle. Section 21(f) enumerates
three focused core principles applicable to SDRs: (1) Antitrust
considerations (``Core Principle 1''); (2) governance arrangements
(``Core Principle 2''); and (3) conflicts of interest, Core Principle
3.\43\ With respect to Core Principle 1, antitrust considerations, the
Commission proposed in Sec. 49.19 that, unless necessary or
appropriate to achieve the purposes of the CEA, SDRs should avoid
adopting any rule, regulation or policy or taking any action that
results in an unreasonable restraint of trade or imposes any material
anticompetitive burden on the trading, clearing, reporting, and/or
processing of swaps.
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\43\ Section 21(f)(4), the ``fourth core principle,'' grants
broad rulemaking authority to the Commission to establish additional
duties for SDRs. The Commission proposed to add several additional
duties pursuant to this authority; they are discussed in section II.
E, below.
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Core Principle 2 requires that each SDR establish governance
arrangements that are transparent to fulfill public interest
requirements and to support the objectives of the Federal government,
owners and participants. Core Principle 3 provides that each SDR
establish and enforce rules to minimize conflicts of interest in its
decision-making processes and establish a process for resolving such
conflicts. In order to ensure proper implementation of Core Principles
2 and 3, the Commission proposed Sec. 49.20 (focusing on the
transparency of SDR governance arrangements) and Sec. 49.21
(addressing SDR identification and mitigation of existing and potential
conflicts of interest).
Proposed Sec. 49.20 prescribed minimum standards for the
transparency of SDR governance arrangements and required that the SDR
make available certain information to the Commission and the public
that is current, accurate, clear and readily accessible; and that it
disclose summaries of significant decisions. In addition, proposed
Sec. 49.20 required each SDR to ensure that an independent perspective
be reflected in the nominations process for its board of directors as
well as the process for assigning members of the board or others to SDR
committees. Finally, the proposal included a number of substantive
requirements for SDR boards of directors and committees. In
implementing Core Principle 3, the Commission proposed in Sec. 49.21
that each SDR maintain and enforce rules that would identify and
mitigate existing and potential conflicts of interest in its decision-
making processes.
8. Proposed Regulations Relating to Additional Duties
As noted above, section 21(f)(4) provides authority under which the
Commission may prescribe additional duties for SDRs. Pursuant to
section 21(f)(4) and section 8a(5) of the CEA, the Commission proposed
to include in part 49 four additional duties that would require SDRs to
(i) adopt and implement system safeguards, including BC-DR plans; \44\
(ii) maintain sufficient financial resources; \45\ (iii) furnish to
market participants a disclosure document setting forth the risks and
costs associated with using the services of an SDR; \46\ and (iv)
provide fair and open access to the SDR and fees that are equitable and
non-discriminatory.\47\
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\44\ Proposed Sec. 49.24.
\45\ Proposed Sec. 49.25.
\46\ Proposed Sec. 49.26.
\47\ Proposed Sec. 49.27.
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9. Proposed Regulations Related to Real-Time Public Reporting
As discussed above, section 727 of the Dodd-Frank Act established
certain public reporting requirements for all swap transactions and
participants, creating new section 2(a)(13)(B) which establishes the
reporting requirements pursuant to which the Commission is authorized
to promulgate rules mandating the public availability of swap
transaction and pricing data in ``real time.'' \48\ To implement these
provisions, the Commission proposed a real-time public reporting
framework for swap transaction and pricing data in new part 43 of its
Regulations.\49\ Proposed Sec. 49.15 details SDRs' ability to accept
and publicly disseminate swap transaction and pricing data on a swap
market as well as those executed off-exchange; its provisions apply to
off-facility swap transactions and to all swap transactions executed on
a SEF or DCM that fulfill the public dissemination requirement of
proposed part 43 by reporting to a registered SDR. As proposed, Sec.
49.15 required SDRs to establish electronic reporting systems necessary
to receive and publicly disseminate all required data fields and
further requires SDRs who disseminate swap transaction and pricing data
in real time to promptly notify the Commission when such data is not
timely reported.
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\48\ Section 2(a)(13)(A) of the CEA defines real-time public
reporting to mean ``as soon as technologically practicable after the
time at which the swap transaction has been executed.''
\49\ See Real-Time NPRM supra note 28.
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10. Proposed Regulations Relating to Implementation of SDR Rules
Proposed Sec. 40.8 was intended to conform SDR implementation
procedures to the proposed amendments to the Commission's part 40
regulations addressing provisions common to all registered
entities.\50\ The proposal provided that an applicant for registration
as an SDR may request Commission approval of some or all of its rules
or, alternatively, may self-certify its rules. Proposed Sec. 40.8
specified procedures applicable to both alternatives.
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\50\ See Part 40 supra note 21.
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D. Overview of Comments Received 51
The Commission received a total of 29 comments from a broad range
of
[[Page 54543]]
interested persons, including existing trade repositories and potential
SDRs, foreign regulatory authorities, trade organizations, banks,
commercial end-users, and DCMs. While commenters generally expressed
support for the proposed part 49 rules, they also offered
recommendations for clarification or modification of specific
provisions. Comments generally focused on one or more of a dozen broad
themes, including (i) SDRs as a public utility; (ii) commercialization
of data; (iii) indemnification requirements; (iv) monitoring, screening
and analyzing swap data; (v) ability of SDRs to invalidate or modify
the terms of an executed swap; (vi) real-time public reporting; (vii)
pricing; (viii) bundling of services; (ix) registration; (x) governance
and conflicts of interest; (xi) access to data; and (xii)
implementation and phase-in.\52\ Individual comments will be described
and discussed as appropriate throughout this section.
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\51\ The initial comment period with respect to proposed part 49
closed on February 22, 2011. The comment periods for most proposed
rulemakings implementing the Dodd-Frank Act were reopened for 30
days from April 27 through June 2, 2011. Throughout this release,
comment letters (``CL'') are identified by ``CL'' and the submitter.
Each letter will be addressed as appropriate in connection with the
discussion, infra, of the final regulatory provision or provisions
to which they relate. All comment letters are available through the
Commission Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=939. Comments addressing the proposed part 49
regulations were received from: (1) American Benefits Council
(``ABC'') and the Committee on the Investment of Employee Benefits
Assets (``CIEBA'') on February 22, 2011 (``CL-ABC/CIEBA''); (2)
Americans for Financial Reform (``AFR'') on February 22, 2011 (``CL-
AFR''); (3) Argus Media Inc. (``Argus'') on February 22, 2011 (``CL-
Argus''); (4) Association of Institutional Investors (``AII'') on
June 2, 2011 (``CL-AII''); (5) Chris Barnard (``Barnard'') on May
25, 2011 (``CL-Barnard''); (6) Better Markets on February 22, 2011
(``CL-Better Markets''); (7) CIEBA on June 3, 2011 (``CL-CIEBA'');
(8) CME Group (``CME'') on February 22, 2011 (``CL-CME''); (9)
Council of Institutional Investors (``Council'') on February 18,
2011 (``CL-Council''); (10) Depository Trust & Clearing Corporation
(``DTCC'') on February 22, 2011 (``CL-DTCC I''); (11) DTCC on June
3, 2011 (``CL-DTCC II''); (12) DTCC on June 10, 2011 (``CL-DTCC
III''); (13) European Securities and Markets Authority (``ESMA'') on
January 17, 2011 (``CL-ESMA''); (14) Foreign Banking Organizations--
Barclays, BNP Paribas, Deutsche Bank, Royal Bank of Canada, The
Royal Bank of Scotland Group, Societe Generale and UBS (``Foreign
Banks'') on January 11, 2011 (``CL-Foreign Banks''); (15) Global
Foreign Exchange Division (``Global FX Division') formed in
cooperation with the 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'') on February 22, 2011
(``CL-Global FX Division''); (16) Managed Funds Association
(``MFA'') on February 21, 2011 (``CL-MFA''); (17) Markit on February
7, 2011 (``CL-Markit''); (18) MarkitSERV on February 7, 2011 (``CL-
MarkitSERV I''); (19) MarkitSERV on June 3, 2011 (``CL-MarkitSERV
II''); (20) MarkitSERV on June 3, 2011 (``CL-MarkitSERV III''); (21)
Not-For-Profit Electric End-User Coalition consisting of the
National Rural Electric Cooperative Association, the American Public
Power Association and the Large Public Power Council (``NFPE
Coalition'') on February 22, 2011 (CL-NFPE Coalition''); (22) The
Office of the Comptroller of the Currency (``OCC'') on June 30, 2011
(``CL-OCC''); (23) Regis--TR on February 22, 2011 (``CL-Regis-TR'');
(24) Reval.com, Inc. (``Reval'') on January 24, 2011 (``CL-Reval
I''); (25) Reval on February 18, 2011 (``CL-Reval II''); (26) Reval
on February 20, 2011 (``CL-Reval III''); (27) Securities Industry
and Financial Markets Association (``SIFMA'') Asset Management Group
(``AMG'') on February 7, 2011 (``CL-AMG''); (28) SunGard Energy &
Commodities (``Sungard'') on February 22, 2011 (``CL-Sungard''); and
(29) TriOptima on February 22, 2011 (``CL-TriOptima'').
In addition, five comment letters submitted in response to the
Data NPRM also referenced the proposed part 49 regulations. Those
commenters are: (1) DTCC on February 7, 2011 (``CL-Data-DTCC''); (2)
Encana Marketing (USA) Inc. (``Encana'') on February 7, 2011 (``CL-
Data-Encana''); (3) Foreign Banks on February 17, 2011 (``CL-Data-
Foreign Banks''); (4) Global FX Division on February 7, 2011 (``CL-
Data-Global FX Division''); and (5) InterContinentalExchange, Inc.
(``ICE'') on February 7, 2011 (``CL-Data-ICE''). The comments have
been considered in connection with the promulgation of these final
rules, and will be addressed in connection with the discussion of
the provisions to which they relate.
The Commission notes that both DTCC and CME submitted additional
late comment letters related to the SDR Rulemaking on July 21, 2011
and July 29, 2011, respectively. These late-filed comment letters
were received very close to the Commission's decision on the final
part 49 rules; the letters raised no new issues, and therefore, the
Commission is not providing a specific response to any issues raised
by the letters.
\52\ The Commission in its SDR NPRM requested comment on the
nature and length of any implementation or phase-in period for
proposed part 49. Six commenters responded, recommending variously
that there be separate phase-in periods for different asset classes
and/or that the Commission sequence the implementation of reporting
rules by first implementing parts 45 and 49. Subsequently, when
sufficient information is collected to fully study the markets,
rules related to real-time and block trading should be implemented.
The Commission has determined to separately address implementation
and sequencing issues and will consider and address comments related
to those concerns in connection with that action. In addition, 14
additional comments were received by the Commission in connection
with its request for comment on the order in which it should
consider final rulemakings made under the Dodd-Frank Act. See infra
note 315 for cites to the additional letters.
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II. Part 49 of the Commission's Regulations: The Final Rules
As proposed in the SDR NPRM, part 49 contains provisions governing
the registration and regulation of SDRs. The scope of part 49 is
established in Sec. 49.1; definitions are contained in Sec. 49.2.
Proposed Sec. Sec. 49.3-49.4 and 49.6-49.7, along with Form SDR,
establish the procedures and substantive requirements for registration
as an SDR. Proposed Sec. 49.5 governs equity interest transfers and
Sec. 49.8 establishes procedures under which an SDR must implement its
rules. Compliance with the statutory duties described in section 21(c)
of the CEA is established in Sec. 49.9 and detailed in Sec. Sec.
49.10 through 49.18 and Sec. Sec. 49.23 and 49.24. Core principles
applicable to SDRs as outlined in section 21(f) are set forth in
Sec. Sec. 49.19 through 49.22. Additional duties promulgated pursuant
to section 21(f)(4) of the CEA (``Core Principle 4'') are set forth in
Sec. Sec. 49.25 through 49.27. Unless otherwise discussed in this
section, the regulations are adopted as proposed.
A. Requirements of Registration
1. Procedures for Registration--Sec. 49.3
To implement the requirements of section 21(a), the Commission
proposed Sec. 49.3 to establish application and approval procedures.
Proposed Sec. 49.3 required each SDR applicant to file for
registration electronically on proposed Form SDR.\53\ Form SDR would
require each applicant to provide the Commission with documentation
relating to its business organization, financial resources,
technological capabilities, and accessibility of services.\54\ The
Commission is adopting Sec. Sec. 49.3-49.7 substantially as proposed
subject to the minor modifications discussed below.
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\53\ This form would be used for initial or provisional
registration as an SDR as well as for any amendments to the
applicant's registration status.
\54\ SDR NPRM supra 8 at 80900-80901.
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The Commission received one comment relating to registration
generally. CIEBA requested that the Commission clarify that it will
register any qualified applicant as an SDR.\55\ The Commission confirms
that it expects to register any applicant that satisfies the
requirements for registration established in section 21 of the CEA and
this part 49.\56\
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\55\ See CL-CIEBA supra note 51.
\56\ In particular, the Commission notes that section 21(B) of
the CEA, as amended by section 728 of the Dodd-Frank Act, expressly
provides that a DCO may register as an SDR.
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As discussed below, although it received no comments regarding
proposed Form SDR, the Commission has determined to make minor
technical and conforming changes to Form SDR and also to amend certain
provisions of Sec. Sec. 49.3-49.7.\57\
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\57\ The Commission in approving applicants for registration as
SDRs expects to provide an identifying code that is unique for each
``approved'' SDR in order to provide proper identification for each
SDR and the transactions that are reported to it.
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(a) Form SDR
The Commission is making certain technical amendments to Form SDR
to harmonize, to the extent possible, the SDR registration procedures
with the application procedures for DCMs, DCOs, and SEFs. For example,
the word ``material'' has been added to the registration instructions
to make clear that ``intentional misstatements or omissions of material
fact may constitute federal criminal violations.'' Because the
registration application must be filed electronically, Form SDR as
adopted no longer requires the applicant to provide two copies of Form
SDR and attached exhibits. Additionally, the Commission revised Item 8
to account for various organizational structures. Moreover, instead of
requesting ``State/Country'' of the entity's incorporation or filing,
the final Form SDR requests that the applicant note the
``Jurisdiction'' of the organization and list the jurisdictions in
which the applicant is qualified to do business. This information will
assist the Commission in determining whether other domestic and foreign
regulators should be contacted during the application process.
[[Page 54544]]
Both Sec. 49.3(a)(5) and Form SDR, as adopted, require that an
annual amendment on Form SDR be filed within 60 days of the end of each
fiscal year rather than on a calendar year basis. The Commission
believes that this is consistent with the CCO filing provisions set
forth in Sec. 49.22 and will provide the Commission with more timely
financial statements.
The Commission is also making technical amendments to the form to
eliminate redundant and ambiguous undefined language. For example, the
term ``Applicant'' is capitalized and is referred to as a proper person
to create consistency and references to ``facing page'' were removed as
this concept was not defined in Form SDR or the regulations.
Form SDR as adopted clarifies that in order to assist the
Commission in its review of an application, applicants for registration
are encouraged to supplement Form SDR with any additional information
that may be significant to their operation as an SDR. In addition, the
Commission in adopting final Form SDR clarifies that SDR applicants
must be mindful that certain information submitted for application
purposes may be made available to the public and therefore advises
applicant to request confidential treatment, where appropriate, when
submitting application materials.
(b) Provisional Registration
As proposed, Sec. 49.3(b) permitted the Commission, upon the
request of an applicant, to grant provisional registration as an SDR if
the applicant is in substantial compliance with the standards set forth
in proposed Sec. 49.3(a)(4).\58\ Because the Commission believed that
provisional registration should not be a permanent part of part 49,
proposed regulation 49.3(b) provided for a ``sunset'' provision so that
the provisional registration provision would terminate 365 days from
the effective date of the proposed regulations. The Commission has
determined to amend proposed Sec. 49.3(b) to remove this sunset
provision and provide that the Commission may terminate granting new
provisional registrations at a later date.\59\ The Commission believes
that removal of the sunset provision will allow the Commission to fully
evaluate applications for registration and provide greater flexibility
in establishing compliance deadlines with registration requirements
under Sec. 49.3. The Commission expects to work with applicants to
ensure that the transition from provisional registration to full
registration is as prompt and seamless as possible.
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\58\ Proposed Sec. 49.3(a)(4) delineated the standards for
approval of an SDR application: The SDR (i) is appropriately
organized, and has the capacity, to ensure the prompt, accurate and
reliable performance of its functions as an SDR; (ii) can comply
with any applicable provisions of the CEA and regulations
thereunder; (iii) can carry out its functions in a manner consistent
with the purposes of section 21 of the CEA; and (iv) can operate in
a fair, equitable and consistent manner.
\59\ No comments were received in response to the proposed
provisional registration provisions.
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In its comment letter, DTCC urged that applicants for provisional
registration be required to demonstrate operational capability, real-
time processing, multiple redundancy and robust information security
controls.\60\ The Commission agrees that SDRs should have sufficient
operational capabilities to operate on a 24-hour basis based on a 6-day
working week and accordingly has clarified in Sec. 49.3(b) that in
considering a grant of provisional registration it will require both
(i) a demonstrated ability to substantially comply with the standards
established in Sec. 49.3(a)(4) and statutory duties and core
principles; and (ii) demonstrated operational capability, real-time
processing, multiple redundancy and robust information security
controls.
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\60\ CL-DTCC I supra note 51 at 4.
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(c) Registration of Existing Registered Entities
Although comments addressing the proposed application and
registration procedures generally indicated satisfaction with the
Commission's proposal, CME recommended that DCOs wishing to register as
SDRs be given relief from ``duplicative'' registration and requested
that the Commission adopt an abbreviated notice registration procedure
for registered DCOs in good standing with the Commission.\61\
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\61\ See CL-CME supra note 51.
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The Commission acknowledges the merits of CME's suggestion that
there be a process to streamline the application procedures for
existing DCO registrants, and therefore, is adopting a modification to
Sec. 49.3. The Commission is making a minor revision to Sec.
49.3(a)(3) so that applicants are not subject to unnecessary
duplicative review by the staff of the Commission. Specifically, staff
in considering an application for registration as an SDR shall include
in its review an applicant's past relevant submissions to the
Commission and its compliance history. In addition, the Commission
believes that once it gains experience with the SDR registration
process it may re-evaluate whether a shortened or ``notice''
registration process should be available to existing non-SDR
registrants (such as a DCO) seeking registration as an SDR.\62\
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\62\ The Commission notes that the additional cost of providing
documents that may already be available to the Commission is
expected to be limited to the expense of providing electronic copies
of the exhibits set forth in Form SDR.
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2. Withdrawal From Registration--Sec. 49.4
As proposed, Sec. 49.4(a) outlined the process for withdrawal from
registration and specified that written notice of a request to withdraw
be served at least 90 days prior to the desired effective date of the
withdrawal. The Commission has corrected Sec. 49.4(a) to clarify that
notice must be served at least 60 days prior to the desired effective
date of the withdrawal; this correction achieves consistency with Sec.
49.4(b), which provides that a notice of withdrawal from registration
shall be effective on the 60th day after its filing with the
Commission.
3. Notification of Equity Interest Transfers--Sec. 49.5
As proposed, Sec. 49.5 required SDRs to file with the Commission a
notice of the equity interest transfer of ten percent or more, no later
than the business day following the date on which the SDR enters into a
firm obligation to transfer the equity interest. The Commission
proposed a ten percent threshold because it believes that a change in
ownership of such magnitude, even without a corresponding change in
control, may have an impact on the operations of the SDR.\63\
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\63\ SDR NPRM supra note 8 at 80902, n.25.
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The Commission received a single comment relating to this provision
which recommended that the Commission lower the notification threshold
from ten percent to five percent. The same commenter also urged that
the Commission obtain notification at or prior to the firm commitment
to transfer the equity interest.\64\ The Commission has considered
these comments and believes that the notification threshold as proposed
is adequate, based on its belief that a ten percent threshold
appropriately covers those transfers that may result in significant
control or lead to control of the SDR's management.
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\64\ See CL-Better Markets supra note 51.
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As proposed, Sec. 49.5(a) and (c) required filings with the
Commission relating to equity transfer notifications and certifications
electronically through dedicated e-mail addresses. The Commission
believes that future procedures may change, and therefore,
[[Page 54545]]
is revising these provisions so that SDRs file certain equity transfer
notifications and certifications in a format and manner to be specified
by the Secretary of the Commission. Accordingly, the Commission is
adopting this provision largely as proposed subject to the modification
described above.
4. Swap Data Repositories Located in Foreign Jurisdictions--Sec. 49.7
The Commission proposed Sec. 49.7 to enable it to obtain necessary
swap data and related books and records maintained by an SDR located
outside the United States. As proposed, Sec. 49.7 required each SDR
located outside the United States to provide an opinion of counsel that
the SDR can, as a matter of law, provide the Commission with prompt
access to its books and records and submit to onsite inspection and
examination by the Commission. The Commission believes this provision
is necessary because different jurisdictions may have different legal
frameworks, which in turn may limit or restrict the Commission's
ability to receive information from an SDR. An opinion of counsel in
this regard will allow the Commission to better evaluate an SDR's
capability to meet the requirements of registration and ongoing
supervision.
The Commission requested comment on a series of questions relating
to registration of a foreign-based SDR.\65\ In response, the Commission
received several comments regarding the potential for ``duplicative''
registration requirements.\66\ With one exception, commenters supported
a system of cross-registration or ``recognition'' in order to reduce
potential burdens.
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\65\ Specifically, the Commission requested comment with respect
to whether (i) the registration process for the foreign SDR be any
different than the Commission's proposed registration process; (ii)
there are any factors that the Commission should consider to ensure
that an SDR located outside the United States seeking to register as
an SDR can, in compliance with applicable foreign laws, provide the
Commission with access to the SDR's books and records that are
required pursuant to proposed Sec. 49.7 and can submit to onsite
inspection and examination by the Commission; and (iii) there are
any other factors the Commission should consider relating to an SDR
located outside of the United States See SDR NPRM supra 8 at 80903.
\66\ See CL-DTCC II; CL-Foreign Banks; CL-ESMA; CL-TriOptima;
CL-Regis-TR; CL-Reval supra note 51.
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ESMA in particular requested that the Commission consider a
recognition regime in which an SDR located in a foreign jurisdiction
could register with the Commission if (i) the laws and regulations of
the foreign jurisdiction are equivalent to those in the U.S.; and (ii)
a MOU has been signed by the Commission and the foreign regulator.\67\
ESMA suggested that the MOU would ensure access to all information the
Commission will need in order to fulfill its statutory duties.
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\67\ CL-ESMA supra note 51.
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Reval, however, urged that that all foreign-based SDRs be required
to comply with U.S. regulations and procedures, and to physically host
the data in the U.S. or create a daily backup of the data with an
entity in the U.S.\68\ DTCC also maintained that foreign-based SDRs
should not be approved by the Commission under reduced registration
requirements \69\ and asserted that an abbreviated or notice
registration procedure for foreign SDRs should be based on a comparable
regulatory structure for repositories in the home country of the
foreign SDR.
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\68\ CL-Reval II supra note 51.
\69\ CL-DTCC I supra note 51.
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The Commission notes that the Dodd-Frank Act and the CEA do not
authorize the Commission to exempt SDRs located in foreign
jurisdictions from the registration requirements set forth in section
21. At the same time, the Commission is cognizant of the global nature
of the swaps market and of concerns regarding regulatory
responsibilities and costs associated with requiring foreign-based SDRs
to comply with multiple, separate regulatory regimes. To that end, the
Commission expects to consult, cooperate, and exchange information with
foreign regulators in connection with the oversight of foreign-based
SDRs that are separately registered in jurisdictions outside of the
U.S.
The Commission is mindful of the commenters' concerns and
emphasizes that the extent of the Commission's ability to coordinate
with foreign regulators will depend largely on the comparability and
comprehensiveness of supervision and regulation by the foreign
jurisdiction in which the SDR is located. In considering the
feasibility of a particular recognition regime, the Commission intends
to review regulatory requirements and the supervision or oversight
programs of a ``home'' or foreign regulator of an SDR to determine the
extent to which the Commission potentially could rely on such foreign
regulators. The level of cooperation and the extent of any coordination
would be evaluated on an individual basis and would be governed by an
MOU. For example, the Commission and the foreign regulator should be
capable of exchanging regulatory reports (including examination
reports) and filings, as well as other information applicable to the
operation of such entity as an SDR. This exchange of information would
assist the Commission in determining whether the SDR located in a
foreign jurisdiction is in compliance with duties mandated under part
49. Such cooperation or coordination with foreign regulators would not
limit or in any way condition the discretion of the Commission in the
discharge of its regulatory responsibilities.
B. Duties of Registered SDRs
Section 21(c) sets forth the minimum duties that an SDR is required
to perform to become registered and to maintain registration. These
statutory duties require that SDRs (i) accept swap data as prescribed
by the Commission; (ii) confirm with both counterparties to a swap the
accuracy of the data; (iii) maintain the data submitted; (iv) provide
the Commission or its designee (including another registered entity)
with direct electronic access to the swap data; (v) provide the
necessary information as prescribed by the Commission to comply with
the public reporting requirements set forth in section 2(a)(13) of the
CEA; (vi) establish automated systems for monitoring, screening, and
analyzing swap data; (vii) maintain the privacy or confidentiality of
any and all swap data that the SDR receives; (viii) provide access to
the swap data to certain ``appropriate'' domestic and foreign
regulators; and (ix) adopt and implement emergency procedures. In
addition, the Commission pursuant to its authority under sections
21(f)(4) and 8a(5) \70\ of the CEA proposed that registered SDRs (i)
adopt and implement system safeguards, including BC-DR plans; (ii)
maintain sufficient financial resources; (iii) furnish market
participant with a disclosure document setting forth the risks and
costs associated with using the services of the SDR; and (iv) provide
fair and open access and fees and charges that are equitable and non-
discriminatory.
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\70\ Section 8a(5) of the CEA, 7 U.S.C. 12a(5), authorizes the
Commission to promulgate such rules and regulations as, in the
judgment of the Commission, are reasonably necessary to effectuate
any of the provisions or accomplish any of the purposes of the CEA.
In connection with SDRs, section 21(a)(3)(A)(ii), 7 U.S.C.
24a(a)(3)(A)(ii) specifically requires that an SDR to be registered
and maintain its registration must comply with any requirement that
the Commission may impose by rule or regulation pursuant to section
8a(5) of the CEA.
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1. Acceptance of Data--Sec. 49.10
As proposed, Sec. 49.10 required that SDRs adopt policies and
procedures that would enable the SDR to electronically accept data and
other regulatory
[[Page 54546]]
information; \71\ accept all swaps in the asset class(es) \72\ for
which they have registered; \73\ establish sufficient policies and
procedures to prevent a valid swap from being invalidated, altered or
modified through the confirmation or recording process of the SDR; and
establish procedures and provide facilities for effectively resolving
disputes over the accuracy of the swap data and positions that are
recorded in the SDR.
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\71\ See section 21(c)(1) of the CEA, 7 U.S.C. 24a(c)(1). The
Commission proposed in new part 45 to the Commission's Regulations
the specific data elements that must be reported and applicable to
DCMs, DCOs, swap execution facilities (``SEFs''), foreign boards of
trade (``FBOTs''),1 SDs, MSPs, non-end-user SDs/MSPs and end-users
in connection with the reporting of such swap data to SDRs. These
data elements and standards would include the reporting of
continuation data throughout the life of the swap. In addition, the
Data NPRM also provides specific requirements for SDRs relating to
(i) determining which counterparty must report to the SDR; (ii)
third-party facilitation of swap data reporting; (iii) reporting to
a single SDR in connection with the reporting of swap data; (iv)
required data standards; and (v) the reporting of errors and
omissions. See Data NPRM supra note 6.
\72\ Proposed Sec. 49.2(a)(2) defined ``asset class'' as those
swaps in a particular broad category of goods, services or
commodities underlying a swap. The asset classes include credit,
equity, interest rates, currency, other commodities and such other
assets as may be determined by the Commission. See also Department
of the Treasury, Notice of Proposed Determination of Foreign
Exchange Swaps and Foreign Exchange Forwards Under the Commodity
Exchange Act, 76 FR 25774 (May 5, 2011) and Request for Comments:
Determination of Foreign Exchange Swaps and Forwards, 75 FR 66829
(Oct. 29, 2010) and 75 FR 66426 (Oct. 28, 2010).
\73\ As detailed in proposed Sec. 49.27, SDRs would be required
to provide fair and open access to their services. The Commission
submits that SDRs would not be permitted to discriminate in
connection with the access to their services. As a result, market
participants with sufficient technology resources for connectivity
and the payment of fees would be granted access to the services of
the SDR.
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The Commission received one comment relating to the definition of
asset class that indicated cross-currency (also known as currency)
swaps are not properly characterized under the ``currency'' asset class
but instead are interest rate products.\74\ Therefore, the Commission
believes a modification is necessary to better reflect the fact that
the industry typically characterizes ''currency'' swaps as ``interest
rate swaps.'' This characterization is based on the attributes of
currency swaps that resemble the structure and operation exhibited by
interest rate swaps while in ``foreign exchange'' swaps, the underlying
foreign currency is exchanged by the parties. Accordingly, the
Commission is replacing the term ``currency'' in the definition of
asset class with ``foreign exchange'' as set forth in Sec. 49.2(a)(2)
to accurately reflect the asset classes employed in the swaps market.
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\74\ See CL-Global FX Division supra note 51 at 2.
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The Commission received a single comment relating to data formats
and protocols for data submission to SDRs.\75\ DTCC commented that a
registered SDR should have the flexibility to specify the acceptable
data formats, connectivity requirements, and other protocols for
submitting information.\76\ While the Commission generally agrees with
DTCC that SDRs should have flexibility to specify acceptable data
formats and other technical requirements, the Commission does not
believe that DTCC's recommendations are necessary to operational
flexibility. Several commenters supported \77\ the proposed requirement
in Sec. 49.10(b) that an SDR accept all swaps from any asset class or
classes for which it registers. CME, however, recommended that DCO-SDRs
should only be required to accept data for swaps that they clear and
not for uncleared/bilateral transactions.\78\ The Commission believes
that CME's approach would lead to greater data fragmentation.
Additionally, the Commission believes that pursuant to section
2(a)(13)(G), SDRs are required to accept cleared and uncleared swaps.
Accordingly, the Commission is adopting Sec. 49.10(b) substantially as
proposed, with the addition of the phrase ``unless otherwise prescribed
by the Commission'' so that the Commission may, in its discretion,
provide flexibility to the general rule that an SDR must accept all
swaps in an asset class for which it has registered. This flexibility
will be especially relevant in connection with the implementation or
phasing of reporting obligations of market participants.
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\75\ See CL-DTCC I supra note 51.
\76\ Id.
\77\ See CL-Better Markets, CL-DTCC I and CL-Global FX Division
supra note 51.
\78\ See CL-CME supra note 51.
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The Commission received four comments relating to proposed Sec.
49.10(c).\79\ The comments were supportive of the Commission's efforts
to prevent improper invalidation of swap transactions; as discussed
below, however, some commenters felt that further refinement of the
text is necessary.
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\79\ See CL-ABC/CIEBA, CL-AMG and CL-CIEBA supra note 51.
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ABC/CIEBA and AMG requested that the Commission clarify that Sec.
49.10(c) would prevent an SDR from adopting user agreements that
indirectly serve to modify or invalidate terms that have been agreed
upon by the counterparties.\80\ The Commission has adopted the
recommended clarification. ABC/CIEBA and AMG also requested that the
Commission seek to prevent confirmation and reporting platforms from
adopting provisions in their user agreements that would permit the
modification or invalidation without the consent of the
counterparties.\81\ CIEBA also separately suggested that the Commission
prohibit SDRs from using third-party service providers which invalidate
a swap without the consent of a counterparty.\82\ The Commission
believes that Sec. 49.10(c), as proposed, would clearly prohibit SDRs
as well as any agent or third-party service provider of the SDR to
modify or invalidate a swap transaction without the consent of the
counterparties.
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\80\ CL-ABC/CIEBA and CL-AMG supra note 51 at 3-4 and 9,
respectively.
\81\ Id.
\82\ CL-CIEBA supra note 51 at 5.
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2. Confirmation of Data Accuracy--Sec. 49.11
As proposed, Sec. 49.11 required SDRs to establish and adopt
policies and procedures to ensure the accuracy of swap data that is
reported to an SDR.\83\ In particular, proposed Sec. 49.11 required
that the SDR confirm with both counterparties to the swap the accuracy
of the data and information submitted \84\ and receive acknowledgement
of all data submitted as well as corrections of any errors.\85\ The SDR
NPRM specified that confirmation is unnecessary when the reporting
party is a SEF, DCM, DCO or a confirmation or matching service provider
to whom the swap counterparty has delegated its reporting obligation.
However, the SDR would still be required to ensure that the data and
information it receives from such entity is accurate.
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\83\ See Data NPRM supra note 6.
\84\ The Data NPRM details and defines ``confirmation'' and
``confirmation data.'' The term confirmation is proposed in Sec.
45.1(b) to mean ``the full, signed legal confirmation by the
counterparties of all of the terms of a swap.'' The term
``confirmation data'' is proposed in Sec. 45.1(c) to mean ``all of
the terms of a swap matched and agreed upon by the counterparties in
confirming the swap.'' See Data NPRM, supra note 6.
\85\ This requirement does not apply to real-time public
reporting. See proposed Sec. 43.3(f) supra note 28.
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As detailed in proposed part 45, the reporting of swap creation
data (primary economic terms data and confirmation data) and swap
continuation data will take place through different channels, depending
on the nature of the transaction and counterparties. Primary economic
terms data is required to be reported by a SEF or DCM if the swap is
executed on a platform, and by the reporting counterparty (SD, MSP, or
other counterparty) if the swap is not platform executed. Confirmation
data
[[Page 54547]]
will be reported by a DCO if the swap is cleared, and by the reporting
counterparty if the swap is uncleared. Swap continuation data will be
reported throughout the life of a swap by the DCO and/or the reporting
counterparty. Consistent with proposed part 45 and Sec. 49.12, SDRs
are required to accept swap data from these entities, as well as from
third-party service providers who may be acting on their behalf.
The Commission received five comments relating to an SDR's
obligation to confirm the accuracy of the reported swap data.\86\
Several commenters recommended that an SDR should not be required to
affirmatively communicate with both counterparties in order to confirm
the accuracy of data submitted. Reval commented that the SDR should
only be required to confirm the accuracy of the trade with the
reporting entity.\87\ DTCC \88\ and MarkitSERV \89\ both supported the
use of confirmation records in fulfilling the obligation of the SDR to
confirm data submissions.
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\86\ See CL-Reval II, CL-DTCC I, CL-MarkitSERV I, CL-ABC/CIEBA
and CL-Data-Encana supra note 51.
\87\ CL-Reval II supra note 51 at 6.
\88\ CL-DTCC I supra note 51 at 20.
\89\ CL-MarkitSERV I supra note 51 at 6.
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The Commission notes that section 21(c)(2) of the CEA states that
an SDR must confirm the accuracy of the data that was submitted with
both counterparties to the swap and does not draw any distinction
between submitted swap data that has or has not been legally confirmed.
However, the Commission agrees with the commenters that it may not be
necessary to affirmatively communicate with both counterparties in all
circumstances. Therefore, the Commission has modified the manner in
which an SDR may fulfill the requirement to confirm the accuracy of the
data. As adopted, Sec. 49.11 will not require an SDR to affirmatively
communicate with both counterparties when data is received from a SEF,
DCM, DCO, or third-party service provider under certain conditions.
Communication need not be direct and affirmative where the SDR has
formed a reasonable belief that the data is accurate, the data or
accompanying information reflects that both counterparties agreed to
the data, and the counterparties were provided with a 48-hour
correction period. The SDR must affirmatively communicate with both
counterparties to the swap when data is submitted directly by a swap
counterparty such as an SD, MSP or non-SD/MSP counterparty such as an
end-user.
Encana requested that the Commission provide additional guidance on
how proposed Sec. 45.10 and Sec. 49.11 work together. Both
regulations impose obligations on reporting parties and SDRs relating
to errors and omissions in the reporting of swap transaction data.\90\
The Commission submits that the regulations are complementary and are
both expected to protect the integrity and the accuracy of reported
data. While Sec. 45.10 provides an ongoing obligation for
counterparties to provide error corrections, Sec. 49.11 imposes a duty
on the SDR to provide a correction period to receive from
counterparties, within a short time period after the data has been
submitted, acknowledgment of the accuracy of the data.
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\90\ See CL-Encana supra note 51.
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3. Recordkeeping Requirements--Sec. 49.12
Proposed Sec. 49.12 implements section 21(c)(3) consistent with
existing Commission regulations and the Commission's proposed part 45
regulations \91\ and required that SDRs maintain swap data throughout
the existence of the swap and for five years following termination
during which time the records must be readily accessible by the SDR and
available to the Commission via real-time electronic access and in
archival storage capable of being retrieved within three business days.
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\91\ See Data NPRM supra note 6.
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The Commission received one comment \92\ recommending that swap
data be kept indefinitely.\93\ As proposed, Sec. 49.12(a) required
SDRs to maintain books and records as prescribed by proposed Sec.
45.2. Rather than specifically referencing and incorporating the
provisions of proposed Sec. 45.2, the Commission believes Sec.
49.12(a) should require SDRs to comply with any and all recordkeeping
provisions adopted under part 45.\94\ Accordingly, Sec. 49.12(a) as
adopted requires registered SDRs to ``maintain books and records in
accordance with the requirements of part 45 of this chapter regarding
the data required to be reported to the swap data repository.'' Under
Sec. 49.12(a), registered SDRs will be required to maintain swap data
for the time periods and under the standards to be set forth in part
45.\95\
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\92\ See CL-Barnard supra note 51 at 2.
\93\ The Commission has also received several comments in
connection with the proposed part 45 recordkeeping provisions.
Comments received in connection with proposed part 45 will be
reviewed in connection with that rulemaking; the Commission is
adopting Sec. 49.12(a) largely as proposed subject to the
modifications discussed below.
\94\ Like other rules that are tied to related rulemakings,
Sec. 49.12(c) will become effective 60 days after publication in
the Federal Register but compliance will not be required until such
time as the part 45 rules become effective.
\95\ The time period and standards in part 45 are currently
proposed as throughout the existence of the swap and for five years
following termination during which time the records must be readily
accessible by the SDR and available to the Commission via real-time
electronic access and in archival storage capable of being
retrievable within three business days.
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The Commission is revising proposed Sec. 49.12 to require SDRs to
comply with the time periods set forth in part 45 for maintaining books
and records. The Commission does not believe that SDRs should be
required to keep records indefinitely following the expiration of the
underlying transactions.
Proposed Sec. 49.12(c) required all books and records to be open
to inspection upon request by any representative of the Commission, the
United States Department of Justice, the SEC or prudential regulators
as authorized by the Commission. The Commission is revising Sec.
49.12(c) to remove the SEC and prudential regulators so that only the
Commission and the Department of Justice will have books and records
inspection rights.\96\ This change will maintain consistency with
existing Commission regulations on recordkeeping.\97\
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\96\ See proposed rule 13n-7 under the Securities Exchange Act
of 1934, 17 CFR 240.13n-7 set forth in the SEC's proposal relating
to security-based swap data repositories. The SEC in that proposal
did not provide inspection rights of the books and records of a
security-based swap data repository to the Commission or prudential
regulators. See SEC, Notice of Proposed Rulemaking: Security-Based
Swap Data Repository Registration, Duties and Core Principles, 75 FR
77306 (Dec. 10, 2010).
\97\ Commission regulation Sec. 1.31 requires that all ``books
and records required to be kept by the act or by these regulations
shall be kept for a period of five years from the date thereof and
shall be readily accessible during the first 2 years of the 5-year
period. All such books and records shall be open to inspection by
any representative of the Commission or the United States Department
of Justice.'' The Commission notes that section 4r(c) of the CEA
adopted by Section 729 of the Dodd-Frank Act provides inspection
rights to, among others, the SEC, prudential regulators and the
FSOC. However, these rights are limited to counterparties that do
not clear or have their swap transactions reported to, or accepted
by, an SDR. Accordingly, the Commission lacks the statutory
authority to provide books and records inspection rights to those
named other regulators.
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The Commission believes that the proper procedure for Appropriate
Domestic Regulators to obtain SDR Information is through the mechanism
set forth in Sec. 49.17 (Access to SDR Data) discussed below in
section II.B.7.
The Commission is adopting Sec. 49.12(d) largely as proposed,
subject to a slight modification discussed below in connection with
Sec. 49.15 relating to real-time public reporting requirements.
[[Page 54548]]
4. Monitoring, Screening and Analyzing Swap Data--Sec. 49.13 and Sec.
49.14
Proposed Sec. Sec. 49.13 and 49.14 implement section 21 of the CEA
and together reflect SDRs' significant responsibilities in the new
swaps market regulatory structure established by the Dodd-Frank Act.
Under this new regulatory structure, SDRs will function not only as
repositories for swap transaction data, but also as potential sources
of support for the Commission's oversight of swaps markets and swap
market participants. Section 21(c)(5) of the CEA, as amended by section
728 of the Dodd-Frank Act, requires SDRs to establish ``automated
systems for monitoring, screening, and analyzing swap data, including
compliance and frequency of end-user clearing exemption claims by
individuals and affiliated entities.'' \98\ By its terms, section
21(c)(5) requires that such automated systems be established ``at the
direction of the Commission,'' but does not provide for specific
functions which SDRs should undertake with respect to the swap
transaction data in their possession. The only specific requirement set
forth in section 21(c)(5) is that SDRs have systems in place capable of
fulfilling such requirements as the Commission may assign.
---------------------------------------------------------------------------
\98\ Section 21(c)(5) of the CEA.
---------------------------------------------------------------------------
Proposed Sec. Sec. 49.13 and 49.14 required that SDRs: (1)
Monitor, screen, and analyze all swap data in their possession as the
Commission may require; (2) develop systems and resources as necessary
to execute any monitoring, screening, or analyzing functions assigned
by the Commission; and (3) monitor, screen, and analyze swap
transactions which are reported to the SDR as exempt from clearing
pursuant to section 2(h)(7) of the CEA (i.e., end-user clearing
exemption).
The Commission received eight comment letters relating to proposed
Sec. Sec. 49.13 and 49.14.\99\ While the commenters were generally
supportive of the proposed rules and their objectives, they articulated
a number of concerns, including: (1) The level of detail concerning
routine and ad hoc monitoring, screening and analysis requirements; (2)
future compliance costs; and (3) the level of responsibilities imposed
on SDRs and/or retained by the Commission. Four of the commenters \100\
requested additional detail and clarity on the anticipated requirements
in proposed Sec. 49.13(a) and (b).
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\99\ These letters represent comments from five potential SDRs,
two non-profit organizations, and one individual . See CL-AFR, CL-
Barnard, CL-Better Markets, CL-CME, CL-DTCC I, CL-Reval II, CL-
Sungard, and CL-TriOptima supra note 51.
\100\ CL-Barnard, CL-CME, CL-Sungard and CL-TriOptima supra note
51.
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Sungard, in particular, expressed concern that proposed Sec.
49.13(a) provided only ``limited guidance'' on the requirements to be
imposed on SDRs' automated systems for monitoring, screening, and
analyzing swap data.\101\ Sungard referenced the SDR NPRM which stated
that the Commission ``will consider specific tasks to be performed by
SDRs at a later date'' and requested that in the final rule 49.13(a),
the Commission ``provide an implementation period and effective date
which are based on such later date.'' \102\ Sungard also commented that
the potentially rising cost of compliance with proposed Sec. 49.13(b),
which requires that SDRs maintain sufficient resources to fulfill the
requirements in Sec. 49.13(a), monitor their resources annually, and
make adjustment as needed to remain in regulatory compliance, might
harm the commercial viability of SDRs.\103\
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\101\ See CL-Sungard supra note 51 at 2.
\102\ Id. at 2. See also SDR NPRM supra note 8 at 80907.
\103\ Sungard made a number of recommendations to ensure the
commercial viability of SDRs, including (1) a constraint on the
growth in resources required under Sec. 49.13(b), (2) a mechanism
to recover at least a portion of resource costs in a manner other
than user fees, or (3) ``some other mechanism to allow for the
business planning necessary for the SDR to function while being
certain of compliance with applicable rules.'' Id.
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Three commenters \104\ suggested that the Commission should play a
larger role in the monitoring, screening, and analyzing of swap market
data; while two commenters \105\ took the opposing view and suggested
that data monitoring, screening, and analyzing should be performed
centrally by an SDR. Both AFR and Better Markets believed that
aggregated data monitoring and analysis should be performed by the
Commission rather than relying on SDRs.\106\ CME's comments raised
concerns with providing SDRs with surveillance responsibilities.\107\
DTCC, however, recommended that certain monitoring, screening, and
analyzing functions be performed centrally by an SDR.\108\ Reval
recommended that SDRs be more than a data warehouse and provide data
analysis to the Commission.\109\
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\104\ See CL-AFR, CL-Better Markets and CL-CME supra note 51.
\105\ See CL-DTCC I and CL-Reval II supra note 51.
\106\ AFR further suggested that the Commission develop ``the
capacity to perform key data analysis in-house, using raw data from
SDRs, instead of becoming dependent on privately owned SDRs to
measure aggregate exposures.'' Id. at 4. Better Markets suggested
that the Commission build its own ``single, in-house system'' for
monitoring and analyzing swap data rather than rely on individual
SDRs. CL-Better Markets supra note 51 at 8.
\107\ CME stated that it is ``not convinced that SDRs should be
given wide ranging surveillance responsibilities.'' CL-CME supra
note 51 at 5. And instead, opined that ``[m]arket-wide surveillance
duties are best placed with a regulator or self-regulatory
organization empowered with disciplinary powers * * *.'' Id.
\108\ CL-DTCC I supra note 51 at 24.
\109\ CL-Reval II supra note 51 at 7. Reval suggested that SDRs
should be required to provide an independent valuation of the swaps
submitted to the SDR, provide the relevant market data that goes
into the calculation of the swap value, verify the credit value
adjustment for uncleared trades, and provide the Commission with
historic, current, and future risk analysis to anticipate systemic
risk. Id. at 8.
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Commenters expressed concern that Sec. Sec. 49.13(a) and 49.14 do
not sufficiently describe the specific tasks SDRs are expected to
perform. The Commission recognizes that Sec. Sec. 49.13(a) and 49.14
do not contain specific requirements. Its intention in Sec. Sec.
49.13(a) and 49.14 is to codify the statutory requirements in section
21(c)(5) and establish that specific monitoring, screening, and
analyzing duties will be imposed when its knowledge of the markets is
more fully developed.\110\ At that time, the Commission will provide
SDRs with adequate notice to permit them to meet specific requirements
of Sec. Sec. 49.13(a) and 49.14.
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\110\ See proposed Sec. 49.13(a). SDR NPRM supra note 8 at
80907.
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Regarding proposed Sec. 49.13(b), the Commission believes that
SDRs and other regulated entities should always maintain sufficient
resources to comply with regulatory requirements under the CEA. The
Commission also recognizes the necessity for adequate resource
requirements for SDRs given the expectation that SDRs may play a
significant role in assisting the Commission to fulfill its regulatory
mandate. Therefore, the Commission has not implemented Sungard's
suggestion to impose a cap on the growth of required information
technology, staff, and other resources required under Sec. 49.13(b).
The Commission also notes that the requirement of Sec. 43.13(b) to
``establish and maintain sufficient information technology, staff, and
other resources'' is similar to provisions proposed and already
existing for DCMs and proposed for SEFs.\111\ Furthermore, any
increased
[[Page 54549]]
regulatory functions covered by proposed Sec. 49.13(b), which may
result in increase costs, will apply to all SDRs equally. As discussed
above, the Commission has also committed to giving sufficient notice
before imposing specific obligations under Sec. Sec. 49.13 and 49.14,
giving SDRs time to also address any resulting financial needs.
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\111\ See Core Principle 2, Acceptable Practices, in appendix B
to part 38 of the Commission's regulations. The Application Guidance
for this Core Principle requires designated contract markets to
``have arrangements and resources for effective trade practice
surveillance programs'' and ``have arrangements, resources and
authority for effective rule enforcement.'' 17 CFR 38, appendix B.
See also proposed Sec. 38.155(a) which requires a designated
contract market to ``establish and maintain sufficient compliance
department resources and staff to ensure that it can conduct
effective audit trail reviews, trade practice surveillance, market
surveillance, and real-time market monitoring.'' 75 FR 80572, 80613
(Dec. 22, 2010)(``DCM NPRM''). See also proposed Sec. 37.203(c)(1)
which requires a swap execution facility to ``establish and maintain
sufficient compliance department resources and staff to ensure that
it can conduct effective audit trail reviews, trade practice
surveillance, market surveillance and real-time market monitoring.''
Commission, Notice of Proposed Rulemaking: Core Principles and Other
Requirements for Swap Execution Facilities, 76 FR 1214, 1241 (Jan.
7, 2011)(``SEF NPRM'').
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AFR, Better Markets and CME recommended that the Commission play a
larger role than proposed in the monitoring, screening, and analyzing
of swap market data. Both AFR and Better Markets, in particular,
recommended that the Commission build its own systems for monitoring,
screening and analyzing swap data. The Commission believes that the
proper role of an SDR is to provide the Commission with a centralized
recordkeeping facility to facilitate its surveillance and oversight
responsibilities in the swaps markets. The Commission does not propose
that SDRs displace the Commission's regulatory responsibilities, but
neither does it propose to displace SDRs statutory obligations to
monitor, screen and analyze swap market data. The Commission largely
agrees with AFR and Better Markets in that the Commission should retain
the responsibility for surveillance and oversight of the swaps market;
however, the Commission believes it is unnecessary to duplicate systems
that will already be available through the SDR infrastructure.
Additionally, the Commission believes that SDRs, at the direction of
the Commission, will provide sufficient capacity for monitoring,
screening, and analyzing swap data. The Commission believes that the
approach of proposed Sec. Sec. 49.13 and 49.14 adequately balances the
Commission's regulatory responsibilities with SDRs statutory duties
and, as articulated by DTCC, ``promotes efficiency in the system.''
\112\
---------------------------------------------------------------------------
\112\ CL-DTCC supra note 51 at 24.
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Commenters also made recommendations relating to uniform
recordkeeping and reporting requirements across different SDRs. The
Commission notes that it addressed this issue in a separate, related,
rulemaking.\113\ Nonetheless, the Commission does not agree with Better
Markets that it must also require SDR systems to be uniform and
compatible. The Commission believes that its designation of uniform
recordkeeping and reporting requirements will sustain a level of system
compatibility. In addition, when established, the monitoring,
screening, and analyzing tasks required of SDRs will likely impose a
level of uniformity of system outputs within similarly situated SDRs.
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\113\ See Data NPRM supra note 6.
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Lastly, the Commission agrees with Reval's assertion that in order
to minimize systemic risk, SDRs need to engage in certain data analysis
and reporting rather than function merely as warehouses of transaction
data. However, as articulated above, at this time the Commission has
not proposed, nor is it implementing, specific data analysis functions
for SDRs. The Commission intends to consider additional specific tasks
to be performed by SDRs when its knowledge and experience of the
regulatory oversight needs with respect to the swap markets has
developed more fully.
With the clarifications and modifications described above, the
Commission is adopting Sec. Sec. 49.13 and 49.14 substantially as
proposed.\114\
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\114\ The Commission is making two non-substantive modifications
to Sec. Sec. 49.13(a) and 49.14. The word ``perform'' will be added
to the last sentence in Sec. 49.13(a) and the word ``of'' will be
added to the last sentence in Sec. 49.14. These modifications are
being made to improve the sentence structure of both of these
sections.
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5. Real-Time Public Reporting--Sec. 49.15
Section 2(a)(13)(D) of the CEA permits the Commission to require
registered entities to publicly disseminate swap transaction and
pricing data. To implement section 2(a)(13), the Commission is
establishing a real-time public reporting framework in a new part 43 of
the Commission's regulations that is subject to a separate
rulemaking.\115\
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\115\ See Real-Time NPRM supra note 28. As noted above,
Sec. Sec. 49.12(d) and 49.15 will become effective 60 days from the
date of publication in the Federal Register, but compliance will not
be required until such time as the part 43 rules become effective.
See note 93 supra.
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As proposed, Sec. 49.12(d) and Sec. 49.15 together set forth the
requirements for SDRs regarding the public dissemination of swap
transaction and pricing data. Proposed Sec. 49.12(d) required each SDR
to comply generally with the requirements prescribed in part 43, while
proposed Sec. 49.15 described additional duties of an SDR relating to
the acceptance and public dissemination of swap transaction and pricing
data in real-time.
The Commission received a total of seven comments relating to
proposed Sec. Sec. 49.12(d) and 49.15.\116\ Markit and Argus urged the
Commission to adopt tighter restrictions on the commercial non-public
dissemination of real-time data,\117\ while Markit also recommended
that the part 43 rules explicitly state that ownership of swap
transaction data does not transfer from counterparties to other
regulated entities such as DCMs, SEFs and DCOs.\118\ AMG and AII both
requested that the Commission phase-in block size determinations and
time-limits for real-time dissemination.\119\ NFPE Coalition also
requested a clarification regarding aspects of the real-time reporting
requirements and suggested that SDRs should not be used to determine
the timeliness of real-time public reporting.\120\ ICE and DTCC
believed that SDRs should be designated as the sole vehicle for the
dissemination of swap data \121\ while DTCC also expressed the concern
that public dissemination could disclose the identities of swap
counterparties.\122\ Better Markets also recommended that the
Commission have real-time streaming or instantaneous access to swap
transaction data in order to fulfill its regulatory obligations.\123\
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\116\ See CL-Markit, CL-AMG, CL-Argus, CL-AII, CL-NFPE
Coalition, CL-DTCC I and CL-DTCC II supra note 51.
\117\ CL-Markit and CL-Argus supra note 51.
\118\ CL-Markit supra note 51.
\119\ CL-AMG and CL-AII supra note 51.
\120\ CL-NFPE Coalition supra note 51.
\121\ CL-Data-ICE, CL-DTCC I and CL-DTCC II supra note 51.
\122\ CL-DTCC I supra note 51.
\123\ CL-Better Markets supra note 51.
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The Commission is adopting Sec. 49.15 substantially as proposed.
As adopted, Sec. 49.15(a) will no longer limit the real-time reporting
of swap transactions for SDRs to ``off facility swaps.'' The Commission
is currently considering comments received in connection with the
proposed part 43 regulations,\124\ including those relating to an SDR's
role in the public dissemination of swap transaction and pricing data
in real time. The Commission may include limitations on the type of
public reporting and dissemination for SDRs. As adopted, Sec.
49.15(c), relating to the untimely submission of swap data for real-
time public reporting and dissemination purposes will not reference the
specific time periods and notification procedures proposed in part 43.
Instead, Sec. 49.15(c) will require SDRs to ``notify the Commission of
any swap transaction for which the real-time swap data was not received
by the swap data repository in accordance with part 43 of
[[Page 54550]]
this chapter.'' The Commission believes this change provides
appropriate flexibility to adjust SDR responsibilities with regard to
the untimely reporting of swap transaction data in accordance with any
future adoption of part 43. The Commission will consider the comment
received in connection with proposed Sec. 49.15(c) when addressing the
relevant provisions in part 43, which is expected to be finalized
subsequent to this rulemaking.
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\124\ Real-Time NPRM supra note 28.
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In response to comments received \125\ concerning the commercial
use of real-time public swap data and the commercialization of data
generally, the Commission submits that persons responsible \126\ for
the public dissemination of swap data are prohibited from distributing
such data prior to public dissemination. Such pre-publicly available
dissemination would constitute a ``commercial use'' under Sec.
49.17(g). Therefore, SDRs may not make commercial use of real-time swap
data before dissemination to the public, including any analysis for
commercial purposes. As set forth in 49.17(g)(1), the Commission also
notes that SDRs must maintain appropriate firewalls to protect swap
data from unlawful commercial uses.
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\125\ See CL-Markit and CL-Argus supra note 51.
\126\ Although SDRs are permitted to delegate the performance of
various functions to 3rd party service providers, the SDR retains
the responsibility for compliance with this and other regulatory
restrictions.
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Additionally, as discussed above, in light of the comments received
and as a result of its consideration of proposed Sec. 49.15, the
Commission will continue to consider the role SDRs will play in the
public dissemination of real-time swap data and will address these
issues in the context of the part 43 rules.
6. Maintenance of Data Privacy--Sec. 49.16
To implement the statutory requirements of sections 21(c)(6)\127\
and 21(f)(3)\128\ of the CEA, as added by section 728 of the Dodd-Frank
Act,\129\ the Commission proposed in Sec. 49.16 that SDRs maintain the
privacy and confidentiality of reported swap data.
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\127\ 7 U.S.C. 24a(c)(6). For a discussion of commercial data
privacy, see generally Department of Commerce, Internet Policy Task
Force, Commercial Data Privacy and Innovation in the Internet
Economy: A Dynamic Policy Framework (Dec. 2010) and Federal Trade
Commission (FTC), Preliminary Staff Report, Protecting Consumer
Privacy in an Era of Rapid Change (Dec. 2010). See also FTC, Final
Rule: Standards for Safeguarding Customer Information, 67 FR 36484
(May 23, 2002).
\128\ According to such ``core principle,'' each SDR shall
``establish and enforce rules to minimize conflicts of interest in
[its] decision-making process * * *'' and ``establish a process for
resolving conflicts of interest. See infra section II D. 4.
\129\ See section 21(f)(3) of the CEA, 7 U.S.C. 24a(f)(3).
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Section 21(c)(6) of the CEA provides that an SDR shall ``maintain
the privacy of any and all swap transaction information that the swap
data repository receives from an SD, counterparty, or any other
registered entity.'' Section 21(f)(3) of the CEA also sets forth a
conflict of interest ``core principle'' applicable to an SDR. As
detailed further below, the Commission has identified certain conflicts
that may implicate access, disclosure, or use of SDR Information.\130\
SDR Information includes any information that an SDR receives from a
reporting counterparty,\131\ including market participants \132\ such
as DCMs, DCOs, SEFs, SDs, MSPs and non-SD/MSP counterparties.
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\130\ The term ``SDR Information'' is defined in proposed Sec.
49.2(a)(15) to mean ``any information that the swap data repository
maintains.'' Sec. 49.17(f) and (g) discussed below contain more
specific prohibitions on access or use of SDR Information.
\131\ The term ``reporting counterparty'' is set forth in
proposed Sec. 45.5 of the Data Rulemaking NPRM. The proposed
definition is based on section 4r(3) of the CEA.
\132\ The term ``market participant'' is defined in proposed
Sec. 49.2(a)(6) to mean any person participating in the swap
market, including, but not limited to, DCMs, DCOs, SEFs, SDs, MSPs,
and any other counterparties to a swap transaction.
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The Commission emphasizes that SDRs are expected to receive two
separate ``streams'' of data: (i) Data related to real-time public
reporting which by its nature is publicly available and (ii) data that
is intended for use by the Commission and other regulators which is
subject to statutory confidential treatment (``Core Data'').
Accordingly, pursuant to sections 21(c)(6) and 21(f)(3) (Core Principle
3--Conflicts of Interest) of the CEA, SDR information that is not
subject to real-time public reporting should be treated as non-public
and held strictly confidential such that it may not be accessed,
disclosed, or used for purposes not related to SDR responsibilities
under the CEA or the regulations thereunder, unless such use is
explicitly agreed to by the reporting entities. However, aggregated
data that cannot be attributed to individual transactions or market
participants may be disclosed by an SDR on a voluntary basis or as
required by the Commission.
As proposed, Sec. 49.16 required SDRs to establish, maintain, and
enforce specific policies and procedures to protect the privacy or
confidentiality of any and all SDR Information, including privacy or
confidentiality policies and procedures for the sharing of SDR
Information with SDR affiliates \133\ as well as certain non-affiliated
third parties.\134\ Proposed Sec. 49.16 also required SDRs to
establish and maintain safeguards, policies, and procedures that would,
at a minimum, address the misappropriation or misuse of swap data that
the Commission is prohibited (save for limited exceptions) from
disclosing Section 8 Material.\135\ As discussed, Section 8 Material is
that information or material described in section 8(a) of the CEA that
the Commission is prohibited from publishing if it ``would separately
disclose the business transactions or market positions of any person
and trade secrets or names of customers.'' \136\ Such information would
typically
[[Page 54551]]
include trade data, position data, business transactions, trade secrets
and any other non-public personal information about a market
participant or any of its customers. Moreover, proposed Sec. 49.16
required an SDR to also protect information that is not Section 8
Material as well as intellectual property that may include trading
strategies.
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\133\ The term ``affiliate'' is defined in proposed Sec.
49.2(a)(1) to mean a person that ``directly, or indirectly,
controls, is controlled by, or is under common control with, the
swap data repository.''
\134\ The term ``non-affiliated third party'' is defined in
proposed Sec. 49.2(a)(7) to mean ``any person except (i) swap data
repository, (ii) the swap data repository's affiliate, or (iii) a
person employed by a swap data repository and any entity that is not
the swap data repository's affiliate (and ``non-affiliated third
party'' includes such entity that jointly employs the person).''
\135\ The term ``Section 8 Material'' is defined in proposed
Sec. 49.2(a)(13) as ``the business transactions, trade data, or
market positions of any person and trade secrets or names of
customers.'' The legislative history of section 8 of the CEA
reflects substantial Congressional concern with protecting the
legitimate interests of certain market participants. In particular,
Congressional members were concerned that ``bona fide hedging
transactions'' and ``legitimate'' or ``necessary'' speculative
transactions would be impracticable if disclosure of positions or
transactions was permitted. Congress was also concerned that
publication of the names and market positions of large traders would
facilitate manipulation and place traders at a competitive
disadvantage. See generally 61 Cong. Rec. 1321 (1921); Regulation of
Grain Exchanges, Hearing on H.R. 8829 Before the H. Comm. on
Agriculture, 73rd Cong. (1934).
\136\ Section 8(a) of the CEA outlines the scope and authority
of the Commission to publish or otherwise publicly disclose
information that is gathered in the course of its investigative and
market surveillance activities. While the section authorizes the
Commission to publish or disclose the information obtained through
the use of its powers, it expressly provides that, except in
specifically prescribed circumstances, the Commission may not
lawfully: publish data and information that would separately
disclose the business transactions or market positions of any person
and trade secrets or names of customers. * * *
7 U.S.C. 12(a).
The statutory bar to disclosure of ``business transactions,
market positions and trade secrets'' is qualified by several
narrowly-defined exceptions set forth in section 8(e) of the CEA. 7
U.S.C. 12(e). Section 8(e) generally provides that ``upon request,''
the CFTC may furnish ``any information'' in its possession
``obtained in connection with its administration of the [CEA]'' to
another U.S. government department or agency, individual states,
foreign futures authorities and foreign governments and any
committee of the U.S. Congress that is ``acting within the scope of
its jurisdiction.'' Section 8(b) of the CEA permits disclosure of
Section 8 Material in connection with certain congressional,
administrative or judicial proceedings. In addition, section 8(e)
also provides an exception for information that was previously
disclosed publicly pursuant to section 8.
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The Commission submits that these SDR safeguards, policies, and
procedures addressing privacy and confidentiality--as well as misuse
and misappropriation--of data should provide (i) limitations on access
related to Section 8 Material and other SDR Information; (ii) standards
related to controlling persons associated with the SDR trading for
their personal benefit or the benefit of others; and (iii) adequate
oversight to ensure SDR compliance with Sec. 49.17. As set forth in
Sec. 49.17 discussed below in the section entitled ``Access to SDR
Data,'' an SDR may share swap data and information with certain
``appropriate'' domestic and foreign regulators. Commercial use of the
data maintained by an SDR--exclusive of real-time reporting data--is
strictly circumscribed as provided in Sec. 49.17. As noted above, swap
data that is publicly disseminated in real-time by SDRs pursuant to
proposed part 43 of the Commission's Regulation would not be subject to
the privacy and confidentiality requirements set forth in Sec. 49.16.
The Commission received two comments relating to privacy and
confidentiality concerns.\137\ DTCC specifically supported the
Commission's efforts to keep swap data reported to SDRs confidential
but noted the possibility of unintentional disclosure of participant
identities in connection with the public dissemination of swap data.
The concern raised by DTCC focused on the perceived potential for
market participants to extrapolate identities of counterparties to a
transaction that is publicly reported pursuant to the real-time public
reporting requirements. The Commission, however, believes that the
manner in which real-time public reporting will occur pursuant to part
43 will mitigate this concern because counterparty identities will not
be disclosed and the actual underlying notional amount will not be
associated with any particular transaction. MFA similarly believes that
the requirements of Sec. 49.16 may not be sufficient to protect the
confidentiality of trading positions.
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\137\ See CL-DTCC I and CL-MFA supra note 51.
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The Commission agrees with MFA that the confidentiality of position
level data held by an SDR is extremely important and notes that Sec.
49.16, as proposed, would require that each SDR ``[e]stablish and
maintain safeguards, policies, and procedures reasonably designed to
prevent the misappropriation or misuse, directly or indirectly, of: (i)
Section 8 Material; (ii) other SDR Information; and/or Intellectual
property * * *'' \138\ Accordingly, the Commission believes that this
requirement covers the matters that MFA proposed for inclusion in Sec.
49.16. ``Section 8 Material'' as defined in proposed Sec. 49.2(a)(11)
means the ``business transactions, trade data or market positions of
any person and trade secrets or names of customers.'' The details of
any master agreements governing a swap would clearly fall within a
``business transaction'' referenced in the definition of Section 8
Material.
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\138\ Proposed Sec. 49.16(a)(2) set forth in SDR NPRM supra
note 51 at 80931.
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In connection with MFA's desire to have the legal standard of care
set forth in Sec. 49.16, the Commission submits that SDRs, rather than
the Commission, are in the better position to establish appropriate
procedures to protect the confidentiality of SDR data consistent with
Sec. 49.16. In addition, the Commission believes that MFA's
recommendation to hold current and former SDR employees, directors,
officers, agents and representatives liable by regulation for any
breach of the SDR's privacy policies and procedures is beyond the scope
of section 21(c)(6). Consistent with MFA's comments, the Commission
believes that SDRs must be prohibited, as a condition of accepting data
from reporting entities, from requiring the waiver of any legal rights
such entities may have with respect to breaches of confidentiality by
the SDR. The Commission also received comments on confidentiality and
aggregated data from DTCC, which was concerned that market participants
may be able to identify the parties to a particular transaction through
extrapolation even though the disclosed data is ``aggregated.'' \139\
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\139\ CL-DTCC I supra note 51.
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In order to clarify its position with respect to the disclosure of
``aggregated data,'' the Commission believes that it is permissible
under the Dodd-Frank Act and part 49 of the Commission's regulations
for an SDR to disclose, for non-commercial purposes, data on an
aggregated basis such that the disclosed data reasonably cannot be
attributed to individual transactions or market participants. In
addition, the Commission submits that if requested by the Commission,
an SDR would be required to disclose aggregated data in such form and
manner as the Commission prescribes.
Accordingly, the Commission is adopting Sec. 49.16 largely as
proposed with the addition of (i) paragraph (b) to clarify that an SDR
is prohibited from requiring a waiver of a reporting entity's legal
rights for breaches of confidentiality by the SDR or affiliated
entities; and (ii) paragraph (c) to clarify that SDRs may disclose
aggregated data voluntarily or as requested by the Commission.
7. Access to SDR Data--Sec. 49.17
(a) Definition of Appropriate Domestic Regulator
As detailed in the SDR NPRM, the Commission in proposed Sec. 49.17
specifically included the Federal Reserve Bank of New York (``FRBNY'')
as an ``Appropriate Domestic Regulator'' because section 21(c)(7) of
the CEA does not specifically provide for the sharing of information
between an SDR and the FRBNY. The Commission believes that only
including the FRBNY as an Appropriate Domestic Regulator is overly
restrictive, and therefore, is revising the definition of ``Appropriate
Domestic Regulator'' to include any ``Federal Reserve Bank.'' \140\
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\140\ The Commission notes that the expansion of ``Appropriate
Domestic Regulator'' to include any Federal Reserve Bank will serve
to ensure that the Board of Governors of the Federal Reserve System
(``FRB'') will be able to effectively and efficiently perform its
statutory responsibilities as prescribed by the Federal Reserve Act
(``FRA'').
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(b) Commission Access
As detailed in the SDR NPRM, a critical function and responsibility
of an SDR is to provide ``direct electronic access'' to the Commission
or its designee, which could include another registered entity.\141\
The Commission in Sec. 49.17(b)(3) defined the term ``direct
electronic access'' as ``an electronic system, platform or framework
that provides internet or web-based access to real-time swap
transaction data.'' The Commission believes that a clarification to the
definition of ``direct electronic access'' is necessary to include
[[Page 54552]]
``scheduled data transfers to the Commission's electronic systems.''
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\141\ See section 21(c)(4)(A) of the CEA. The term ``registered
entity'' is defined in section 1a(40) of the CEA to include (i) a
board of trade designated as a contract market under section 5 of
the CEA; (ii) a DCO registered under section 5b of the CEA; (iii) a
SEF registered under section 5h of the CEA; (iv) an SDR registered
under section 21 of the CEA; and (v) with respect to a contract that
the Commission determines is a significant price discovery contract,
any electronic trading facility on which the contract is executed or
traded. 7 U.S.C. 1a(40).
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The Commission received seven comments on direct electronic
access.\142\ Although most commenters were generally supportive of the
Commission's approach, a few objected to certain provisions of Sec.
49.17(c) as proposed. Each comment is discussed below.
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\142\ See CL-Better Markets, CL-AFR and CL-Reval I supra note
51. Compare CL-DTCC II, CL-Data-DTCC, CL-CME and CL-NFPE Coalition
supra note 51.
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In connection with the Commission's request for comment,\143\
Better Markets and AFR both registered their preference for real-time
direct streaming of swap data versus periodic electronic transfer of
data.\144\ The Commission agrees with both Better Markets and AFR that
real-time access to swap data is necessary for adequate oversight and
surveillance of the swaps market.
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\143\ The Commission in the SDR NPRM requested comment on real-
time access as follows: ``What are the advantages and disadvantages
of requiring SDRs to provide a direct streaming of the data to the
Commission or its designee? Should the Commission require periodic
electronic transfer of data as an alternative? If so, how often
should such transfer occur (e.g., hourly, a few times a day, every
few days, once a week)?'' SDR NPRM supra note 51 at 80906.
\144\ CL-AFR and CL-Better Markets supra note 51 at 3 and 7-8,
respectively.
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In response to a Commission request \145\ for comment relating to
the most cost-effective method or manner in providing direct electronic
access, Reval stated that SDRs should be required to provide the
Commission with internet browser-based access to a hosted SDR solution.
Consistent with Reval's comments, the Commission believes that an
internet or Web-based method to access reported swap data held and
maintained by SDRs would be the least disruptive and most efficient
process.
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\145\ The Commission in the SDR NPRM requested the comment on
the following: ``What would be the most feasible and cost-effective
method for an SDR to provide direct electronic access to the
Commission or its designee?'' SDR NPRM supra note 8 at 80906.
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DTCC noted its experience with the Trade Information Warehouse for
OTC credit derivatives \146\ and recommended that the Commission permit
SDRs to adopt in their discretion the manner and method of providing
data sets to the Commission. The Commission believes that the manner
and method of obtaining access to the swap data held by SDRs is the
function and prerogative of the Commission and should not be left to
the judgment or discretion of the SDR and its management. In connection
with its separate comment letter responsive to the Data NPRM, DTCC also
asserted that the Commission should allow sufficient reporting
flexibility. As set forth above, the Commission does not believe that
SDRs should have the discretion or ability to determine the appropriate
data sets that should be provided to the Commission.
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\146\ CL-DTCC II supra note 51.
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CME stated that it is impractical to provide Commission staff with
access identical to that provided to the SDR's CCO because of technical
considerations.\147\ CME also disagreed with the premise of ``direct
electronic access'' set forth in Sec. 49.17(c), maintaining that SDRs
should not be required to provide ``proprietary'' systems to the
Commission without compensation and without adequate assurances that
the swap data would remain confidential. Moreover, CME asserted that
``real-time'' electronic access to the swap data maintained by an SDR
is not necessary.
---------------------------------------------------------------------------
\147\ CL-CME supra note 51 at 5-6.
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The Commission disagrees with CME's view regarding Commission
direct electronic access. As stated previously, section 21(c)(4)(A) of
the CEA mandates that SDRs provide the Commission (or any Commission
designee) with direct electronic access.\148\ Accordingly, the
Commission submits that this requirement to provide the Commission with
direct electronic access is not qualified or at the discretion of the
SDR. With respect to CME's concern relating to improper disclosure of
confidential swap data, the Commission notes that section 8 of the CEA
prohibits the Commission from disclosing information ``that would
separately disclose the business transactions or market positions of
any person and trade secrets or names of customers.'' \149\
Accordingly, the Commission believes that CME's comments are
unwarranted and should not serve to limit direct electronic access by
the Commission and its staff.
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\148\ Id.
\149\ See 7 U.S.C. 12(a). The statutory bar to disclosure of
``business transactions, market positions and trade secrets'' is
qualified by several narrowly-defined exceptions set forth in
section 8(e) of the CEA.
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NFPE Coalition commented that the Commission should not have access
to entity data submitted by non-financial entities, including the
identity of such entities, unless they engage in swaps to the extent
that their exposure could pose a systemic risk. The Commission notes
that the Dodd-Frank Act generally provides regulators with the ability
to monitor and oversee the swaps markets by reviewing and analyzing the
data to be held by SDRs. The Commission submits that the ability to
review and analyze all swap transactions (whether by a financial or
non-financial entity) is essential in order for the entire market to be
sufficiently monitored and analyzed. The Commission does not agree with
the NFPE Coalition's view that non-financial entity transactions should
remain confidential given the direct statutory requirements in section
21(c)(6) of the CEA that SDRs ``maintain the privacy of any and all
swap transaction information that the swap data repository receives
from a swap dealer, counterparty, or any other registered entity.''
Based on the analysis set forth above relating to proposed Sec.
49.17(c) and an SDR's statutory duty to provide the Commission or its
designee with direct electronic access, the Commission is adopting
Sec. 49.17(c) as proposed. In addition, as discussed above, the
Commission is also adopting a minor revision to the definition of
``direct electronic access'' set forth in Sec. 49.17(b)(3) to clarify
that ``direct electronic access'' would include ``scheduled data
transfers to Commission's electronic systems.''
(c) Other Regulator Access to SDR Data
Section 21(c)(7) \150\ of the CEA requires a registered SDR, on a
confidential basis pursuant to section 8 of the CEA, upon request and
after notifying the Commission, to make available all data \151\
obtained by the registered SDR, to ``Appropriate Domestic Regulators''
and ``Appropriate Foreign Regulators.''
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\150\ Section 21(c)(7) of the CEA reads:
A swap data repository shall--* * * on a confidential basis
pursuant to Section 8, upon request, and after notifying the
Commission of the request, make available all data obtained by the
swap data repository, including individual counterparty trade and
position data, to--(A) each appropriate prudential regulator; (B)
the Financial Stability Oversight Council; (C) the Securities and
Exchange Commission; (D) the Department of Justice; and (E) any
other person that the Commission determines to be appropriate. * * *
7 U.S.C. 24a(c)(7). Included in the definition of Appropriate
Domestic Regulators are all domestic entities listed in section
21(c)(7) and other persons that the Commission has determined to be
appropriate.
\151\ The sharing of data with an Appropriate Domestic Regulator
by a registered SDR is subject to the confidentiality and
indemnification restrictions in section 21(d) of the CEA, 7 U.S.C.
24a(d).
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The Commission also proposed that the term ``Appropriate Foreign
Regulator'' be defined in Sec. 49.17. As proposed, the definition of
``Appropriate Foreign Regulator'' has two parts or elements. First,
Sec. 49.17(b)(2) defines an Appropriate Foreign Regulator as those
``foreign regulators'' \152\ with an existing MOU or
[[Page 54553]]
other similar type of information sharing arrangement executed with the
Commission. Second, Sec. 49.17(b)(2) provides that foreign regulators
without an MOU with the Commission may be deemed ``Appropriate Foreign
Regulators'' as determined on a case-by-case basis by the Commission.
Accordingly, Sec. 49.17 as proposed set forth detailed filing
procedures for foreign regulators who do not currently have an MOU with
the Commission to obtain the status of ``Appropriate Foreign
Regulator.'' The Commission received no comments relating to the
proposed definition of Appropriate Domestic Regulator and Appropriate
Foreign Regulator. Accordingly, the Commission is adopting Sec.
49.17(b) as proposed.
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\152\ The term ``foreign regulator'' is defined in proposed
Sec. 49.2(a)(4) to mean ``a foreign futures authority as defined in
section 1a(26) of the Commodity Exchange Act, foreign financial
supervisors, foreign central banks and foreign ministries.''
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The procedure for Appropriate Domestic Regulators or Appropriate
Foreign Regulators to gain access to the data held and maintained by an
SDR was detailed in proposed Sec. 49.17(d). First, an Appropriate
Domestic Regulator or Appropriate Foreign Regulator is required to
request access with the registered SDR in sufficient detail so that the
SDR is able to determine the basis of the request. As part of this
request, the Appropriate Domestic Regulator or Appropriate Foreign
Regulator must also certify (i) its statutory authority; and (ii) that
it is acting within the scope of its jurisdiction. The registered SDR
must then notify the Commission promptly by electronic means of any
request received from an Appropriate Domestic Regulator or Appropriate
Foreign Regulator. As proposed, the registered SDR will then provide
access to the requested swap data if satisfied that the Appropriate
Domestic Regulator or Appropriate Foreign Regulator is acting within
the scope of its authority.
The Commission received one comment from the OCC expressing concern
that SDRs would serve a ``gate keeping'' function relating to regulator
access.\153\ OCC maintained that SDRs should not be permitted to
question the statutory authority of a regulator to receive swaps data
maintained by the SDR. Although other commenters \154\ did not
specifically comment on the procedure set forth in Sec. 49.17(d)
relating to regulators' access, these commenters generally indicated
that SDRs should operate in a manner that would freely provide
information to regulators. These commenters viewed the purpose of SDRs
as one of assisting regulators in fulfilling their regulatory
obligations. The theme of these comments is that SDRs should serve as
an impartial vehicle for assisting regulators.
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\153\ CL-OCC supra note 51.
\154\ See CL-DTCC I, CL-TriOptima, CL-Regis--TR and CL-ESMA
supra note 51.
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Upon review of the comments received and the access procedure
generally, the Commission believes that other regulator access
(Appropriate Domestic Regulator and Appropriate Foreign Regulators)
should not be constrained or limited by SDRs. Therefore, the Commission
is revising proposed Sec. 49.17(d) so that Appropriate Domestic
Regulator and Appropriate Foreign Regulators when filing a request for
access are only required to certify that they are acting within the
scope of their jurisdiction. As proposed, Sec. 49.17(d)(i) required
the Appropriate Domestic Regulator or Appropriate Foreign Regulator to
set forth in sufficient detail the basis for its request. The
Commission is eliminating this requirement in Sec. 49.17(d) as
adopted. In addition, proposed Sec. 49.17(d)(3) required an SDR to
provide access to the requested swap data ``if satisfied that the
Appropriate Domestic Regulator or Appropriate Foreign Regulator is
acting within the scope of its authority.'' The Commission is also
revising proposed Sec. 49.17(d)(3) so that Appropriate Domestic
Regulators' and Appropriate Foreign Regulators' access to SDR swap data
is provided once the SDR notifies the Commission of the request.
(d) Confidentiality and Indemnification Agreement
For the purpose of implementing section 21(c)(7) and (d) of the
CEA, the Commission proposed Sec. 49.18. Consistent with section
21(d),\155\ Sec. 49.18, as proposed, provided that an Appropriate
Domestic Regulator or Appropriate Foreign Regulator prior to receipt of
any requested data or information from a registered SDR must execute a
``Confidentiality and Indemnification Agreement'' with the registered
SDR. The Commission further provided in proposed Sec. 49.18 that an
Appropriate Domestic Regulator or Appropriate Foreign Regulator must
notify and provide a copy of the Confidentiality and Indemnification
Agreement to the Commission.
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\155\ Section 21(d) of the CEA provides:
Before the swap data repository may share information with any
entity described in subsection (c)(7)-(1) the swap data repository
shall receive a written agreement from each entity stating that the
entity shall abide by the confidentiality requirements described in
Section 8 relating to the information on swap transactions that is
provided; and (2) each entity shall agree to indemnify the swap data
repository and the Commission for any expenses arising from
litigation related to the information provided under section 8.
7 U.S.C. 24a(d).
---------------------------------------------------------------------------
Proposed Sec. 49.18 required that the Confidentiality and
Indemnification Agreement executed with each Appropriate Domestic
Regulator and/or Appropriate Foreign Regulator provide that such entity
abide by the confidentiality requirements set forth in section 8 of the
CEA relating to the swap data that is to be provided by the registered
SDR. Moreover, the Confidentiality and Indemnification Agreement must
provide that each section 21(c)(7) entity agree to indemnify the
registered SDR and the Commission for any expenses arising from
litigation relating to the information provided under section 8 of the
CEA. The Commission received four comments \156\ relating to the
confidentiality and indemnification agreement requirement and/or
information sharing among regulators.
---------------------------------------------------------------------------
\156\ See CL-DTCC I, CL-TriOptima, CL-ESMA and CL-Foreign Banks
supra note 51.
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DTCC stated that proposed Sec. 49.18 is not consistent with the
OTC Derivatives Regulators' Forum (``ODRF'') \157\ guidelines which
generally provide that ``[a]uthorities, including central banks,
prudential supervisors, resolution authorities and market regulators,
with a material interest in [credit derivatives] information in
furtherance of their regulatory and/or governmental responsibilities
should have unfettered access to the relevant data, irrespective of the
location of the trade repository.'' \158\ Accordingly, DTCC recommended
that the indemnification provisions of section 21(d) as proposed in
Sec. 49.18 should not apply where regulators are carrying out
regulatory responsibilities, acting in a manner consistent with
international agreements and maintaining the confidentiality of the
data.\159\ With this recommendation, DTCC requested the
[[Page 54554]]
Commission together with other global regulators provide ``model
indemnity language'' for use by all repositories or SDRs.
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\157\ ODRF includes representatives from central banks,
prudential supervisors and market regulators from over 20 countries
globally. The ODRF is not a standard-setting body, but instead,
supports the application of standards set by other bodies in the
international regulatory community. The Forum provides an
environment for regulators and authorities to exchange views and to
share information related to OTC derivatives central counterparties
and trade repositories on a regular basis. It also provides mutual
assistance among the authorities in carrying out their respective
responsibilities with respect to OTC derivatives. However, it is
important to note that the ODRF does not supersede any regulator's
statutory mission or national and otherwise applicable laws.
\158\ See letter from OTC Derivatives Regulators' Forum to the
Warehouse Trust Company, dated June 18, 2010. Available at: http://www.dtcc.com/downloads/legal/imp_notices/2010/derivserv/tiw044.zip.
See also Working Group Report supra note 12.
\159\ Id.
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TriOptima specifically encouraged the Commission to ``adopt as
flexible as interpretation as possible'' of the indemnification
provision proposed in Sec. 49.18.\160\ Similarly, ESMA questioned the
necessity of an indemnification agreement between a foreign regulator
and a U.S.-registered SDR.\161\ ESMA stated that this proposal would
undermine the trust necessary among various regulators in connection
with data access from SDRs. Although not specific to the
indemnification provision, the Foreign Banks also commented that
regulators should support cross-border information sharing efforts so
that a complete picture of the overall swaps market is available for
supervision and surveillance purposes.\162\
---------------------------------------------------------------------------
\160\ CL-TriOptima supra note 51 at 3-4.
\161\ CL-ESMA supra note 51.
\162\ CL-Foreign Banks supra note 51 at 7.
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The Commission is mindful that the Confidentiality and
Indemnification Agreement requirement set forth in section 21(d) and
Sec. 49.18 may be difficult for certain domestic and foreign
regulators to execute with an SDR due to various home country laws and
regulations. We note in this regard that section 752 of the Dodd-Frank
Act seeks to ``promote effective and consistent global regulation of
swaps'' and provides that the CFTC and foreign regulators ``may agree
to such information-sharing arrangements as may be deemed to be
necessary or appropriate in the public interest * * *.'' In light of
this statutory directive, the Commission continues to work to provide
sufficient access to SDR data to appropriate domestic and foreign
regulatory authorities.
The Commission believes that, under the circumstances described
below, certain Appropriate Domestic Regulators may be provided access
to the swap data reported and maintained by SDRs without being subject
to the notice and indemnification provisions of section 21(c)(7) and
(d).\163\ First, the SDR must be subject to the regulatory
jurisdiction, and register with, the Appropriate Domestic Regulator.
Second, consistent with section 21(c)(4)(A) of the CEA, the SDR would
be permitted to provide direct electronic access to such Appropriate
Domestic Regulator as a designee of the Commission.\164\ Under these
circumstances, the Appropriate Domestic Regulator would be provided
direct electronic access to the SDR subject to the same terms and
conditions as would apply to the Commission.\165\
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\163\ Pursuant to the directive set forth in section 712(a) of
the Dodd-Frank Act, 15 U.S.C. 8302, the Commission has interpreted
this provision as providing the basis to permit access to the swap
data maintained by SDRs to Appropriate Domestic Regulators that have
concurrent regulatory jurisdiction over such SDRs, without the
application of the notice and indemnification provisions of sections
21(c)(7) and (d) of the CEA, respectively. As indicated above, the
SDR, among other things, must be subject to the regulatory
oversight, and be registered with, the Appropriate Domestic
Regulator.
\164\ As part of such designation, the Commission would require
an Appropriate Domestic Regulator to enter into a MOU or similar
type of information sharing arrangement with the Commission. See
section 8(e) of the CEA, 7 U.S.C. 12(a).
\165\ The Commission notes that certain SDRs are likely to
register with both the Commission and the SEC because the same
entity will offer its services for both swaps and security-based
swaps. In addition, the Board of Governors of the Federal Reserve
System currently supervises the Warehouse Trust, the global
repository for credit derivatives. The Commission expects Warehouse
Trust to register with the Commission as an SDR and continue to be a
member of the Federal Reserve System, thereby, subject to the
concurrent jurisdiction of the Commission and the Board of Governors
of the Federal Reserve System.
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In connection with foreign regulatory authorities, the Commission
believes that confidential swap data reported to, and maintained, by an
SDR may be appropriately accessed by an Appropriate Foreign Regulator
without the execution of a Confidentiality and Indemnification
Agreement when the Appropriate Foreign Regulator is acting in a
regulatory capacity with respect to a SDR that is also registered with
the Appropriate Foreign Regulator.\166\ In such dual-registration
cases, the Appropriate Foreign Regulator may receive information
directly from the SDR without notice to the Commission and/or the
execution of the Confidentiality and Indemnification Agreement, subject
to applicable statutory confidentiality provisions set forth in section
8 of the CEA.\167\
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\166\ See section 752 of the Dodd-Frank Act, 15 U.S.C. 8325.
Consistent with the directive in section 752 to ``promote effective
and consistent global regulation of swaps,'' the Commission does not
interpret the notice and indemnification provisions set forth in
sections 21(c)(7) and (d) of the CEA to apply in circumstances in
which an Appropriate Foreign Regulator possesses independent
sovereign legal authority to obtain access to the information and
data held and maintained by an SDR.
\167\ See Written Testimony of Gary Gensler, Chairman of the
Commission, before the U.S House Committee on Financial Services on
June 16, 2011 available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-86.html and letter from Gary Gensler,
Chairman of the Commission, and Mary Schapiro, Chairman of the SEC,
to Michael Barnier, European Commissioner for Internal Markets and
Services, European Commission, dated June 8, 2011.
---------------------------------------------------------------------------
Lastly, The Commission notes that the notice and indemnification
requirements set forth in section 21(c)(7) and (d) of the CEA would not
apply when the Commission, pursuant to section 8(e) of the CEA, shares
confidential information in its possession obtained in connection with
the administration of the CEA to ``any foreign futures authority,
department or agency of any foreign government or any political
subdivision thereof'' acting within the scope of their jurisdiction.
Thus, Appropriate Foreign Regulators may, pursuant to section 8(e),
receive SDR Information from the Commission without the execution of
the Confidentiality and Indemnification Agreement.
Accordingly, the Commission is adopting Sec. 49.18 as revised to
provide that SDRs that are dually-registered with the Commission and an
Appropriate Domestic or Foreign Regulator may provide access without
the execution of a Confidentiality and Indemnification Agreement. The
Commission is similarly revising Sec. 49.17(d), as noted above, so
that Appropriate Domestic and Foreign Regulators with regulatory
responsibilities over SDRs are not required to file data access
requests with their regulated repository or SDR.
(e) Third-Party Service Providers Employed by SDRs
The Commission in the SDR NPRM recognized that SDRs from time to
time may contract with third parties in order to fulfill certain
operational and data-related obligations. Data access to a third-party
service provider may be especially important in connection with certain
technology and infrastructure services.
The Commission received one comment letter relating to proposed
Sec. 49.17(e). MFA was concerned that Sec. 49.17(e) may not be
sufficient to protect data and information held and maintained by SDRs
from improper disclosure.\168\ MFA recommended that the Commission
require the confidentiality procedures between an SDR and a third-party
service provider to follow the same standard of care and protocol that
applies to an SDR's obligation to protect confidential swap
information.
---------------------------------------------------------------------------
\168\ CL-MFA supra note 51.
---------------------------------------------------------------------------
The Commission agrees with MFA's recommendation and accordingly has
revised Sec. 49.17(e) to require that any ``Confidentiality
Agreement'' between an SDR and a third party include a provision that
the third-party service provider have the same or equivalent
confidentiality procedures as the SDR outlined in Sec. 49.16.
[[Page 54555]]
(f) Counterparty Access to SDRs
The Commission proposed Sec. 49.17(f) to generally prohibit access
to the swaps data maintained by a registered SDR by market
participants, such as SDs and MSPs, unless the specific data was
originally submitted by such party. The underlying basis for this
regulation was to maintain the privacy and confidentiality of the
reported data while also limiting potential access to reported swap
data to the rightful parties to a swap.
The statutory authority for proposed Sec. 49.17(f) is two-fold.
First, section 21(c)(6) of the CEA requires registered SDRs to maintain
the privacy of any and all swap transaction information that the
registered SDR receives from an SD, counterparty, or any other
registered entity. Second, section 21(f)(3) \169\ of the CEA requires
an SDR to establish and enforce rules to mitigate conflicts of
interest.
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\169\ See infra section II.D.4.
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The Commission received two comment letters relating to Sec.
49.17(f). ABC/CIBEA noted that Sec. 49.17(f), as proposed, generally
prohibits access to swap data maintained by an SDR subject to an
exception permitting access ``* * * if the specific data was originally
submitted by such party.'' \170\ ABC/CIEBA asserts that this provision
would only include the reporting party, and therefore, recommended the
Commission revise Sec. 49.17(f) so that the exception provides
``[d]ata and information related to a particular swap that is
maintained by the registered swap data repository may be accessed by
either counterparty to that particular swap.'' \171\ The Global FX
Division similarly indicated that Sec. 49.17(f) should be modified to
permit both counterparties to a swap to view the reported data that is
held and maintained by such SDR.\172\
---------------------------------------------------------------------------
\170\ CL-ABC/CIEBA supra note 51.
\171\ CL-ABC/CIEBA supra note 51 at 6.
\172\ CL-Global FX Division supra note 51.
---------------------------------------------------------------------------
Based on the comments noted above, the Commission is adopting Sec.
49.17(f) largely as proposed with a revision to Sec. 49.17(f)(2) to
allow both counterparties to a swap to access information held and
maintained at an SDR for that particular swap.
(g) Commercial Use of Data
The Commission in the SDR NPRM proposed Sec. 49.17(g) to generally
prohibit an SDR from using the data it accepts and maintains for
commercial or business purposes. As part of this prohibition, Sec.
49.17(g) required a registered SDR to adopt and implement adequate
``firewalls'' to protect the swaps data from any improper, commercial
use. Proposed Sec. 49.17(g)(2) provided for a limited exception to the
commercial use prohibition if the submitters of the data provide
express written consent to the SDR that its reported data can be used
for commercial purposes. The statutory basis for Sec. 49.17(g), as
proposed, is established in sections 21(c)(6) and 21(f)(3) of the
CEA.\173\
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\173\ See section 728 of the Dodd-Frank Act.
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Section 21(c)(6) provides that an SDR shall ``maintain the privacy
of any and all swap transaction information that the swap data
repository receives from a swap dealer, counterparty, or any other
registered entity.'' As indicated in the SDR NPRM, SDRs are expected to
receive two separate ``streams'' of data: (i) Data related to real-time
public reporting which by its nature is publicly available; and (ii)
``core'' regulatory data that is intended for use by the Commission and
other regulators which is subject to statutory confidential treatment
(``Core Data''). Accordingly, SDR Information that is not subject to
real-time public reporting should be treated as non-public and subject
to the prohibitions on commercial use set for in proposed Sec.
49.17(g). In this manner, the Core Data could not be accessed,
disclosed, or used for purposes not related to SDR responsibilities
under the CEA or the regulations thereunder, unless such use is
explicitly agreed to by the submitters of the data.
Section 21(f)(3) of the CEA, Core Principle 3, also provides that
each SDR must establish and enforce rules to minimize conflicts of
interest in the decision-making process of the SDR and to establish a
process for resolving such conflicts.\174\ Because of the inherent
conflicts in connection with maintaining swap data and SDR operations
(e.g., the incentive to develop ancillary services using swap data),
the Commission proposed that ``commercial use'' of any data submitted
and maintained by an SDR must be severely restricted. The Commission
was also concerned that an SDR may attempt to use this limited
``commercial use'' exception as a precondition for accepting non-SD/
non-MSP, SD and/or MSP swap transactions. Accordingly, proposed Sec.
49.27 required registered SDRs to provide fair, open and equal access
to its services and must not discriminate against submitters of data
regardless of whether such a submitter has agreed to any ``commercial
use'' of its data. The Commission received a total of six comment
letters relating to the commercialization of data.\175\ Each of these
comments is discussed in turn below.
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\174\ See section 21(f)(3) of the CEA, 7 U.S.C. 24a(f)(3) as
added by section 728 of the Dodd-Frank Act.
\175\ See CL-Markit, CL-CME, CL-Argus, CL-DTCC I, CL-DTCC II and
CL-Better Markets supra note 51.
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Markit sought clarification regarding the application of proposed
Sec. 49.17(g) to the (i) preservation of data ownership rights and
(ii) the permissible uses of data by an SDR.\176\ Markit recommended
that regulations relating to the real-time reporting of swap data make
clear that swap data ownership does not transfer to the SEF, DCM or any
other regulated entity, as appropriate.
---------------------------------------------------------------------------
\176\ CL-Markit I supra note 51 at 2.
---------------------------------------------------------------------------
The Commission believes that (i) counterparty ``consent'' to real-
time reporting proposed in part 43 does not provide consent under
proposed Sec. 49.17(g) adequate to permit an SDR to use such Core Data
for commercial purposes; and (ii) regulated entities responsible for
the public dissemination of real-time swap data should be restricted
from making commercial use of that data prior to public dissemination.
The Commission does not agree with Markit's suggestion that the
commercial use of real-time data by SDRs requires the consent of the
data owners but, as discussed, has modified Sec. 49.17(g)(3) to
prohibit SDRs from making commercial use of real-time data before
disseminating such data publicly.
CME commented that the Commission should adopt more stringent
requirements to protect commercialization of data received from any
entity. Accordingly, CME recommended the Commission revise proposed
Sec. 49.17(g) so that: (i) The SDR must receive express written
consent before commercializing any data received, whether the entity is
a swap counterparty or other registered entity (such as a DCO); (ii)
the term ``market participant'' should apply more broadly than just to
counterparties; and (iii) information submitted by a DCO to an SDR
should not be considered to be aggregated data exempt from the
commercialization prohibition.\177\
---------------------------------------------------------------------------
\177\ CL-CME supra note 51 at 4-5.
---------------------------------------------------------------------------
The Commission shares the CME's view that information submitted to
an SDR by a registered entity, such as a DCO, is not aggregated data
exempt from the commercialization prohibition.
The Commission notes that the definition of ``market participant''
set forth in proposed Sec. 49.2(a)(6) applies to various registered
entities such as DCMs, DCOs and SEFs and, therefore, is not limited to
swap counterparties.
[[Page 54556]]
However, in terms of proposed Sec. 49.17(g) and the underlying privacy
provision related to SDRs set forth in section 21(c)(6) of the CEA, the
Commission agrees with the CME's recommendation for additional clarity
regarding market participants that are able to consent to the
commercial use of data. Therefore, consistent with CME's comment, the
Commission is revising proposed Sec. 49.17(g) by replacing the term
``market participant'' with the language of section 21(c)(6) of the CEA
which states ``swap dealer, counterparty, or any other registered
entity.''
Argus commented that proposed Sec. 49.17(g) may not be sufficient
to prevent the indirect commercial use of confidential data held by an
SDR. In its role of collecting and disseminating information for real-
time reporting of swap transactions, Argus believes that SDRs may seek
to ``monetize'' or commercially use ``real-time'' data.
The Commission believes that Sec. 49.17(g) adequately protects
swap data reported to an SDR from improper disclosure to affiliates of
the SDR and other third parties. In particular, the Commission notes
that Sec. 49.17(g)(1) specifically requires that an SDR ``adopt and
implement adequate `firewalls' to protect the data required to be
maintained under Sec. 49.12 of this part and section 21(b) of the Act
from any improper, commercial use.'' \178\ As a preliminary matter, the
Commission believes that adequate controls or firewalls would require
SDR staff that is involved with any commercial use of real-time data to
be restricted from obtaining access to any Core Data. The Commission
does not support Argus' recommendation that would prohibit the
commercial use of real-time data by an SDR if such SDR has access to
non real-time data.
---------------------------------------------------------------------------
\178\ 17 CFR 49.17(g)(1).
---------------------------------------------------------------------------
DTCC commented that data reported and maintained by SDRs should not
be ``commercialized.'' \179\ As a result, DTCC believes that a
prohibition against commercial uses or practices relating to commercial
use of SDR data will lead to a more cost efficient and less risky swap
market. DTCC also submitted that SDRs should provide open access to
offered services while preserving trading parties' control over the
reported data maintained by the SDR.\180\ Accordingly, DTCC believes
that the particular SDR for which a trade is reported should be based
on the counterparty's selection and not by a SEF, DCO, confirmation
facility or other service provider.
---------------------------------------------------------------------------
\179\ CL-DTCC I supra note 51 at 3.
\180\ CL-DTCC II supra note 51 at 3.
---------------------------------------------------------------------------
The Commission generally agrees with DTCC's views relating to
commercialization of data. However, with respect to the selection of
the SDR by the reporting counterparty,\181\ the Commission notes that
the reporting counterparty may contractually delegate its decision to
an agent such as a SEF, DCO, confirmation facility or other service
provider. Accordingly, the Commission does not believe Sec. 49.17(g)
requires a revision on this point.
---------------------------------------------------------------------------
\181\ See proposed Sec. Sec. 45.5-45.7 of the Commission's
Regulations set forth in the Data NPRM supra note 6.
---------------------------------------------------------------------------
Better Markets asserted that if the SDR uses data for ``commercial
purposes'' the SDR must be required to provide the data to the public
on equal terms as to price, priority and speed of transmittal.\182\ The
Commission believes that generally the reporting counterparty may
consent to the commercial use of its data without an additional
requirement on an SDR to provide such data access to the public on
equal terms.
---------------------------------------------------------------------------
\182\ Id. at 13.
---------------------------------------------------------------------------
The Commission continues to believe that conflicts are inherent in
the reporting and maintaining of swap data by SDRs, and submits that
the ``commercial use'' of Core Data should be restricted. However, as
noted above, an SDR could, consistent with section 8 of the CEA,
commercially use swap data that was reported on a real-time basis
pursuant to proposed part 43 of the Commission's Regulations. However,
the Commission notes that an SDR would be in violation of Sec.
49.17(g) and if it were to require the express consent of a market
participant to use any reported data held and maintained by the SDR as
a condition for the reporting of such swap transaction data.
Accordingly, the Commission is adopting Sec. 49.17(g) largely as
proposed subject to the revisions noted above.
8. Emergency Authority Procedures and System Safeguards--Sec. Sec.
49.23 and 49.24
Section 21(c)(8) of the CEA requires SDRs to ``establish and
maintain emergency procedures, backup facilities, and a plan for
disaster recovery that allows for the timely recovery and resumption of
operations and the fulfillment of the responsibilities and obligations
of the organization.'' Proposed Sec. Sec. 49.23 and 49.24 of the
Commission's regulations implement section 21(c)(8).
Proposed Sec. 49.23, consistent with former DCM Core Principle 6
\183\ and new application guidance for both DCMs and SEFs,\184\
required SDRs to set forth emergency contingency plans, including the
designation of officials to act in the event of an emergency, chains of
command and emergency conflict of interest policies and
procedures.\185\ Consistent with new core principle 20 for DCMs and new
core principle 14 for SEFs added by sections 735 and 733 of the Dodd
Frank Act, respectively, proposed Sec. 49.24 required system
safeguards for SDRs including business continuity and resumption of
services plans and coordinated system testing.\186\
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\183\ Former section 5(d)(6) of the CEA, 7 U.S.C. 7(d)(6); 17
CFR part 38, App. B, Application Guidance for former Core Principle
6.
\184\ The new DCM emergency procedures core principle is also
enumerated as DCM Core Principle 6 and codified in section 5(d)(6)
of the CEA, 7 U.S.C. 7(d)(6); it is substantively similar to its
predecessor. The new SEF emergency procedures core principle is
enumerated as SEF Core Principle 8 and codified in section 5h(f)(8)
of the CEA, 7 U.S.C. 7b-3(f)(8).
\185\ See SDR NPRM supra note 8 at 80911-80912.
\186\ Core principle 20 (DCMs) and core principle 14 (SEFs) are
virtually identical and provide that each respective registered
entity shall ``(A) establish and maintain a program of risk analysis
and oversight to identify and minimize sources of operational risk,
through the development of appropriate controls and procedures, and
the development of automated systems, that are reliable, secure, and
have adequate scalable capacity; (B) establish and maintain
emergency procedures, backup facilities, and a plan for disaster
recovery that allow for the timely recovery and resumption of
operations and the fulfillment of the responsibilities and
obligations of the board of trade [or swap execution facility]; and
(C) periodically conduct tests to verify that backup resources are
sufficient to ensure continued order processing and trade matching,
price reporting, market surveillance, and maintenance of a
comprehensive and accurate audit trail.'' The new DCM Core Principle
20 is codified in section 5(d)(20) of the CEA, 7 U.S.C. 7(d)(20).
The new SEF Core Principle 14 is codified in section 5h(f)(14) of
the CEA, 7 U.S.C. 7b-3(f)(14). See DCM NPRM and SEF NPRM, supra note
111.
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Proposed Sec. 49.24(d) specifically required that SDRs have
sufficient BC-DR plans and resources to enable a resumption of the
SDR's operations within one business day following a disruption in SDR
operations. For SDRs determined by the Commission to be ``critical,''
\187\ proposed Sec. 49.24(e)
[[Page 54557]]
required that they (i) implement a disaster recovery plan and BC-DR
resources sufficient to enable a same-day recovery time objective in
the event that its normal capabilities become inoperable, including a
wide-scale disruption; and (ii) maintain geographic dispersal of
infrastructure and personnel sufficient to enable achievement of a
same-day recovery time objective, in the event of a wide-scale
disruption.
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\187\ The Commission in Sec. 49.24 has not defined a
``critical'' SDR, but instead, believes a determination of
``critical'' is a fact-intensive analysis. However, the Commission
submits that a ``critical'' SDR would be an SDR that is integral to
the swaps market generally or based on a particular asset class.
Generally, the Commission will evaluate each SDR on a case-by-case
basis, giving consideration to whether the SDR provides essential
reporting and other services (such as swap confirmation and/or risk
management) that is integral to the swaps market. Because of the
nature of the swaps market and the essential reporting and
maintenance of accurate data, the Commission is likely to view
``critical'' on a collective rather than individual basis. The
Commission may also consider other relevant factors that it finds
important such as whether a single or select number of SDRs maintain
the vast majority of swap transaction data. See Commission, Notice
of Proposed Rulemaking: Business Continuity and Disaster Recovery,
75 FR 42,633 (July 22, 2010); Interagency Paper on Sound Practices
to Strengthen the Resilience of the U.S. Financial System issued by
the Board of Governors of the Federal Reserve System, the Department
of the Treasury and the SEC, 68 FR 17,809 (Apr. 11, 2003); SEC,
Policy Statement Relating to Business Continuity Planning for
Trading Markets, Exchange Act Release No. 48,545 (Sept. 25, 2003),
68 FR 56,656 (Oct. 1, 2003).
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The Commission received no comments regarding the provisions in
proposed Sec. 49.23. The Commission received one comment from Chris
Barnard regarding proposed Sec. 49.24(j).\188\ Barnard, in connection
with proposed recordkeeping requirements, indicated his view that
proposed Sec. 49.24(j) should be amended so that SDRs are required to
keep system safeguard records indefinitely. The Commission notes that
apart from the specific recordkeeping for reported swap transactions
set forth in proposed Sec. 49.12, the general recordkeeping
requirements set forth in Sec. 1.31 of the Commission Regulation's
would apply to BC-DR testing records.\189\ The Commission believes that
Sec. 1.31 subjects SDRs to adequate record retention requirements for
BC-DR testing, and therefore, has not adopted Barnard's recommendation.
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\188\ CL-Barnard supra note 51 at 2.
\189\ Sec. 1.31(a)(1) specifically provides that ``[a]ll books
and records required to be kept by the Act or by these regulations
shall be kept for a period of five years from the date thereof and
shall be readily accessible during the first 2 years of the 5-year
period. All such books and records shall be open to inspection by
any representative of the Commission or the United States Department
of Justice.''See 17 CFR 1.31(a)(1).
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Upon review of the comment received and the proposed emergency
procedures and system safeguard regulations, the Commission is adopting
Sec. 49.23 and Sec. 49.24 as proposed.
C. Designation of Chief Compliance Officer--Sec. 49.22
Section 21(e) of the CEA, as amended by section 728 of the Dodd-
Frank Act, establishes the position of CCO and enumerates specific
responsibilities for CCOs at all SDRs. Section 21(e) contains three
parts, which, taken together, establish CCOs as the focal points for
SDRs' compliance with the CEA and applicable Commission regulations.
Section 21(e) requires, first, that every SDR designate an individual
to serve as CCO.\190\ Second, it enumerates specific duties for CCOs
and establishes their responsibilities within an SDR.\191\ Third, it
outlines the requirements of a mandatory annual report from SDRs to the
Commission, which must be prepared and signed by an SDR's CCO.\192\
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\190\ See section 21(e)(1) of the CEA, 7 U.S.C. 24a(e)(1).
\191\ See section 21(e)(2) of the CEA, adopted as part of the
Dodd-Frank Act, providing that a CCO shall:
(A) report directly to the board or to the senior officer of the
swap data repository; (B) review the compliance of the swap data
repository with respect to the requirements and core principles
described in this section; (C) in consultation with the board of the
swap data repository, a body performing a function similar to the
board of the swap data repository, or the senior officer of the swap
data repository, resolve any conflicts of interest that may arise;
(D) be responsible for administering each policy and procedure that
is required to be established pursuant to this section; (E) ensure
compliance with this Act (including regulations) relating to
agreements, contracts, or transactions, including each rule
prescribed by the Commission under this section; (F) establish
procedures for the remediation of noncompliance issues identified by
the chief compliance officer through any--(i) compliance office
review; (ii) look-back; (iii) internal or external audit finding;
(iv) self-reported error; or (v) validated complaint; and (G)
establish and follow appropriate procedures for the handling,
management response, remediation, retesting, and closing of
noncompliance issues.
7 U.S.C. 24a(e)(2).
\192\ See section 21(e)(3)(A) of the CEA, adopted as part of the
Dodd-Frank Act, providing that a CCO shall:
[A]nnually prepare and sign a report that contains a description
of--(i) the compliance of the swap data repository of the chief
compliance officer with respect to this Act (including regulations);
and (ii) each policy and procedure of the swap data repository of
the chief compliance officer (including the code of ethics and
conflict of interest policies of the swap data repository). (B)
REQUIREMENTS.--A compliance report under subparagraph (A) shall--(i)
accompany each appropriate financial report of the swap data
repository that is required to be furnished to the Commission
pursuant to this section; and (ii) include a certification that,
under penalty of law, the compliance report is accurate and
complete.
7 U.S.C. 24a(e)(3)(A)-(B).
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Proposed Sec. 49.22 expanded upon the statutory provisions of
section 21(e) of the CEA and granted CCOs the authority necessary to
fulfill their responsibilities.\193\ Proposed Sec. 49.22 is composed
of six general parts. Proposed Sec. 49.22(a) defined the term ``board
of directors.'' Proposed Sec. 49.22(b) set forth the requirement that
each SDR must appoint a CCO, and detailed the minimum qualifications
for the CCO. Proposed Sec. 49.22(c) provided for the supervisory
structure that the CCO is subject to within an SDR. Proposed Sec.
49.22(d) enumerated the duties and responsibilities of the CCO.
Proposed Sec. Sec. 49.22(e) and (f) detailed the information that must
be included in the annual compliance report and set forth the process
by which this report must be submitted to the Commission. Lastly,
proposed Sec. 49.22(g) detailed the recordkeeping requirements that
the swap data repository must follow in relation to compliance matters
and the annual compliance report that is submitted to the Commission.
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\193\ See SDR NPRM supra note 51.
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The Commission requested comment on a number of issues relating to
proposed Sec. 49.22. Of particular note were two issues relating to
the appointment and supervisory structure of the CCO. Due to concerns
about potential conflicts of interest, the Commission requested comment
on whether a CCO should be permitted to also serve as the general
counsel of an SDR or as a member of the SDR's legal department. The
Commission also requested comment on any additional measures that could
be required of an SDR to adequately protect CCOs from undue influence
in the performance of their duties.\194\ These issues, and any comments
received, are discussed in greater detail below.
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\194\ SDR NPRM supra note 8 at 80914.
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The Commission received six comments relating to the SDR's CCO
provisions, including three from potential SDRs, one from an operator
of a number of registered DCMs, one from a public interest
organization, and one from a private individual.\195\
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\195\ The potential SDR commenters included: TriOptima, Reval
and DTCC. The public interest organization commenter was Better
Markets and the private individual commenter was Chris Barnard. CME
submitted a comment letter on behalf of the four DCMs which it
operates. See CL-TriOptima, CL-Reval, CL-DTCC I, CL-Better Markets,
CL-Barnard and CL-CME supra note 51.
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In response to persuasive arguments by various commenters, Sec.
49.22 as adopted includes a number of revisions. The Commission is
modifying: (1) The qualifications of a CCO to include a requirement
that the CCO not serve as the general counsel of the SDR or be a member
of the SDR's legal department; (2) the procedures relating to removing
the CCO to require that an SDR notify the Commission when a CCO is
removed; (3) the enumerated duties of the CCO to clarify that potential
conflicts of interest listed are not exhaustive and that the CCO is not
required to guarantee compliance with Commission regulations, but only
to take reasonable steps to ensure compliance; (4) the required
contents of the annual compliance report that must be submitted to the
Commission to reflect that policies and procedures cannot guarantee
compliance with Commission regulations; (5) the
[[Page 54558]]
procedures relating to the submission of the annual compliance report
to the Commission to clarify that the report must be submitted with the
annual amendment to Form SDR and to remove certain provisions relating
to the process by which the Commission may disclose the report to other
parties; and (6) additional provisions as detailed below.
1. Definition of Board of Directors
The Commission in proposed Sec. 49.22(a) defined the term ``board
of directors'' as ``the board of directors of a swap data repository or
for those swap data repositories whose organizational structure does
not include a board of directors, a body performing a function similar
to a board of directors.'' \196\ The Commission also requested comment
on a number of issues, including whether: (1) There should be
additional rules around the types of bodies which may perform board-
like functions at an SDR; (2) the proposed definition of board of
directors appropriately address issues related to parent companies,
subsidiaries, affiliates, and SDRs located in foreign jurisdictions;
and (3) the proposed rule allowed for sufficient flexibility with
regard to an SDR's business structure.\197\
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\196\ SDR NPRM supra note 8 at 80934.
\197\ SDR NPRM supra note 8 at 80913.
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The Commission received no comments on the proposed definition of
board of directors.
The Commission believes that the flexibility of the proposed
definition of board of directors adequately reflects the various forms
of business associations which an SDR could conceivably take, including
forms which do not include a corporate board of directors. Accordingly,
the Commission is adopting Sec. 49.22(a) as proposed.
2. Designation and Qualifications of Chief Compliance Officer
The Commission received three comments related to the designation
and qualifications of an SDR's CCO, as described in proposed Sec.
49.22(b)(1) and Sec. 49.22(b)(2), respectively. Two of these comments,
from Chris Barnard and Better Markets, relate to whether a CCO should
be allowed to serve as general counsel of the SDR. The third comment,
from CME, discusses its concern regarding the CCO's authority to
``enforce'' policies and procedures necessary to fulfill the duties set
forth for CCOs.\198\
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\198\ CL-CME supra note 51 at 7.
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Better Markets and Chris Barnard commented that the CCO should not
be allowed to serve as general counsel or be a member of the legal
department of the SDR. Both commenters were concerned about the
conflicts of interest that would result from a CCO also representing
the SDR in legal matters. In addition to its comment regarding CCO's
serving as general counsel, Better Markets also commented that in
situations where there are a number of affiliate organizations, ``a
single senior CCO should have overall responsibility of each affiliated
and controlled entity, even if individual entities within the group
have CCOs.'' \199\
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\199\ CL-Better Markets supra note 51 at 10.
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Proposed Sec. 49.22(b)(1), pertaining to the designation of a CCO,
also addresses the authority and resources available to a CCO. In
connection, CME commented that the use of the word ``enforce'' in
proposed Sec. 49.22(b)(1)(i) gives the CCO authority that should be
reserved for senior management.
The Commission agrees with the comments made by Better Markets and
Chris Barnard regarding the inherent conflicts of interest that would
occur if a CCO were to serve as general counsel of an SDR or as an
attorney in the legal department. Any member of the legal department of
an SDR must act as an advocate for the SDR and pursue the SDR's self-
interest as narrowly defined by management. If a CCO were to serve as
general counsel of the SDR or as a member of the legal department, this
role as an advocate may diverge with the CCO's statutory and regulatory
responsibilities. The Commission believes that placing both sets of
obligations in a single individual creates potential conflicts of
interest, and therefore, has determined to mitigate such potential
conflicts by prohibiting the CCO of an SDR from serving in the SDR's
legal department.\200\ As a result, the Commission is revising proposed
Sec. 49.22(b)(2) to add Sec. 49.22(b)(2)(ii), which states that
``[t]he chief compliance officer may not be a member of the swap data
repository's legal department or serve as its general counsel.''
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\200\ The Dodd-Frank Act also created the position of CCO for a
number of other regulated entities, including swap execution
facilities. For these other regulated entities the Commission
determined that the conflicts of interest associated with a CCO
serving as in-house counsel were substantial and prohibited the CCO
from serving as in-house counsel for these regulated entities. See
proposed Sec. 37.1501(b)(2)(ii) and SEF NPRM supra note 111 at
1251.
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In other respects, the Commission disagrees with commenters' views
on the structure and conception of the CCO position. Section 21(e)(2)
of the CEA requires the CCO to ``resolve any conflicts of interest that
may arise'' and ``ensure compliance with this Act.'' \201\ These duties
suggest that the CCO is more than just an advisor to management and
would have the ability to enforce compliance with the CEA and
Commission regulations. While the CEA does not specifically use the
word ``enforce,'' the Commission believes that this language is
necessary to ensure that CCOs have the authority to fulfill their
statutory and regulatory obligations and is consistent with the
statutory directive for the CCO to ``ensure compliance with the Act
(including regulations).'' \202\ These considerations are particularly
important given an SDR CCO's unique responsibilities with respect to
fair and open access requirements set forth in Sec. 49.27 and
protecting commercially valuable swap data from improper use. The
Commission notes that the authority granted to the CCO pursuant to
Sec. 49.22(b)(1)(i) does not include the ability to hire and fire SDR
personnel other than its compliance staff. For purposes of
clarification, however, the Commission is adopting a minor modification
to Sec. 49.22(b)(1)(ii) to state that ``[t]he chief compliance officer
shall have supervisory authority over all staff acting at the direction
of the chief compliance officer.'' Section 49.22(b)(1)(ii) now provides
greater clarity as to the SDR staff that must be under the managerial
oversight of the CCO.
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\201\ Sections 21(e)(2)(C) and (E) of the CEA.
\202\ Section 21(e)(2)(E) of the CEA.
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The Commission believes that Sec. 49.22(b) effectively establishes
the CCO as the focal point of regulatory compliance at an SDR and
ensures that the CCO will have the authority to fulfill his or her
duties as set forth in the CEA and Commission regulations. Accordingly,
the Commission is adopting Sec. 49.22(b)(1) and Sec. 49.22(b)(2)
subject to the above modifications.
3. Appointment, Supervision and Removal of Chief Compliance Officer
As set forth in the SDR NPRM, proposed Sec. Sec. 49.22(c)(1),
49.22(c)(2) and 49.22(c)(3) provide the supervisory regime applicable
to CCOs \203\ by requiring that a CCO be appointed by a majority of the
SDR's board of directors or senior officer, and that a majority of the
board or senior officer be responsible for approving the CCO's
compensation; by allowing an SDR with a board of directors to grant
oversight authority to either its board or to its senior officer; and
by requiring the approval of a majority of an SDR's board of directors
for CCO removal (or in the
[[Page 54559]]
case where a SDR has no board of directors, its senior officer).\204\
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\203\ SDR NPRM supra note 8 at 80914.
\204\ Id. at 80934.
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Proposed Sec. Sec. 49.22(c)(1) and 49.22(c)(3) sought ``to provide
an SDR's CCO with a measure of independence from management in the
performance of his or her duties.'' \205\ However, the Commission
requested comment regarding any additional measures that should be
required to adequately protect CCOs from undue influence. The
Commission was particularly interested in how it might offer such
protection to a CCO who reports to his or her senior officer, either at
the SDR's choosing or because the SDR does not have a board of
directors.
---------------------------------------------------------------------------
\205\ Id. at 80914.
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The Commission specifically requested comments on (1) whether a CCO
should report to the SDR's board rather than to its senior officer; (2)
what potential conflicts of interest might arise if a CCO reports to
the senior officer rather than to the board, and how might those
conflicts be mitigated; and (3) whether ``senior officer'' of an SDR
should be a defined term, and if so, how the term should be
defined.\206\ In addition, the Commission also requested comment on
whether the provision that would require a majority of a board of
directors to remove the CCO is sufficiently specific.\207\
---------------------------------------------------------------------------
\206\ SDR NPRM supra note 8 at 80914.
\207\ Id.
---------------------------------------------------------------------------
The Commission received four comments relating to the appointment,
supervision and removal of a CCO. Three of these comments suggested
additional measures to protect the CCO from excessive influence by
management. The fourth commenter requested that, in the final rule,
SDRs be granted ``a reasonable amount of flexibility in determining how
certain aspects of the CCO role (e.g., reporting lines, measures to
ensure CCO independence) will be designed.'' \208\
---------------------------------------------------------------------------
\208\ See CL-CME supra note 51 at 7.
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Chris Barnard and Better Markets both recommended that the ability
to appoint or remove the CCO be granted to only the independent public
directors of the board and not of the entire board. Better Markets also
commented that the CCO ``must have a direct reporting line to the
independent directors or Audit Committee.'' \209\ Additionally, Better
Markets stated that the CCO should be required to meet with the entire
board of directors and the senior officer at least once a year and meet
with the independent directors at least quarterly. Better Markets
believes that these quarterly meetings should be required to ensure
that the independent members of the board can adequately supervise the
CCO. With regard to compensation, Better Markets commented that the
CCO's compensation should be set by the independent members of the
board and should not be the responsibility of the senior officer. Chris
Barnard also commented on compensation, stating that the compensation
of the CCO must be ``specifically designed in such a way that avoids
potential conflicts of interest with its compliance role.'' \210\
---------------------------------------------------------------------------
\209\ CL-Better Markets supra note 51 at 11.
\210\ CL-Barnard supra note 51 at 3.
---------------------------------------------------------------------------
Reval commented that a CCO should have ``a direct reporting line to
the senior officer of the company,'' but should also report to a
compliance or audit committee at the board level and have the ability
to take any compliance matters to this committee if the CCO does not
feel the senior officer has properly addressed the issue.\211\
Additionally, in response to the Commission's request for comment,
Reval commented that it was not necessary for the Commission to define
``senior officer.''
---------------------------------------------------------------------------
\211\ CL-Reval supra note 51 at 10.
---------------------------------------------------------------------------
As stated above, the proposal, in connection with the oversight and
reporting structure of the CCO, was modeled on section 21(e)(2)(A) of
the CEA, which requires a CCO to ``report directly to the board or to
the senior officer of the swap data repository.'' \212\ However, the
Commission notes that Sec. 49.22(c) sets forth the minimum standards,
so that SDRs may implement additional measures if deemed necessary to
insulate the CCO from influence. The Commission encourages SDRs to
review and enact conflict mitigation procedures as appropriate for
their specific corporate and/or organizational structure.
---------------------------------------------------------------------------
\212\ Section 21(e)(2)(A) of the CEA.
---------------------------------------------------------------------------
While a majority of commenters expressed their concern that the
proposed rules do not sufficiently protect the independence of the CCO,
the Commission believes that the package of protections offered in the
proposed rules are appropriately calibrated to insulate the CCO from
day-to-day commercial pressure. The proposed rules set forth detailed
appointment, supervisory and removal procedures that protect the CCO
from undue influence. Accordingly, the Commission does not believe it
is necessary to adopt commenters' recommendations. The Commission has
revised proposed Sec. 49.22(c)(1) in one respect, however, by
eliminating the requirement that a CCO's appointment and compensation
require the approval of a majority of an SDR's board of directors. The
Commission believes that board approval is a sufficient requirement,
and that SDRs should have appropriate discretion to determine the
voting percentage necessary to appoint a CCO or determine their salary.
However, to further protect the CCO, the Commission will clarify
and expand on the notification procedures regarding the appointment and
removal of a CCO. Proposed Sec. 49.22(c)(3) required an SDR to notify
the Commission within two business days of appointing any new CCO.
While this would effectively require an SDR to notify the Commission
whenever a CCO is removed, the Commission believes that an explicit
requirement is appropriate. Therefore, the Commission is adding the
following sentence to Sec. 49.22(c)(3): ``The swap data repository
shall notify the Commission of such removal within two business days.''
The Commission believes that the appointment, supervisory and
removal provisions of Sec. 49.22(c) will serve to effectively protect
the CCO from undue influence and will ensure that the CCO will be
sufficiently shielded against retaliatory termination by the board or
the senior officer of the SDR. Accordingly, the Commission is adopting
Sec. 49.22(c)(2) as proposed and is adopting Sec. Sec. 49.22(c)(1)
and 49.22(c)(3) subject to the above modifications.
4. Duties of the Chief Compliance Officer
Proposed Sec. 49.22(d) detailed the duties of a CCO and is based
on the CCO duties set forth in section 21(e)(2) of the CEA. The
proposed rule listed the following as duties of the CCO: (1) Overseeing
and reviewing compliance with the CEA and Commission regulations; (2)
in consultation with the board of directors or the senior officer,
resolving any conflicts of interest that may arise; (3) establishing
and administering written policies and procedures designed to prevent
violations of the CEA and Commission regulations; (4) ensuring
compliance with the CEA and Commission regulations relating to
agreements, contracts, or transactions, and with commission regulations
under section 21 of the CEA; (5) establishing procedures for the
remediation of noncompliance issues identified by the chief compliance
officer; (6) establishing and following appropriate procedures for the
handling, management response, remediation, retesting, and closing of
noncompliance issues; and (7) establishing and administering a written
code of ethics. In expanding on the CCO's duty to resolve conflicts of
[[Page 54560]]
interest, the proposed rule also listed a number of potential conflicts
that may confront a CCO.\213\ This list of conflicts of interest was
intended to indicate ``the types of conflicts that the Commission
believes an SDR's CCOs should be aware of, but [was] not exhaustive.''
\214\ Additionally, to assist the CCO in meeting these
responsibilities, proposed Sec. 49.22(b)(1), granted a CCO oversight
authority over all compliance functions and staff acting in furtherance
of those compliance functions.
---------------------------------------------------------------------------
\213\ SDR NPRM supra note 8 at 80934.
\214\ Id. at 80914.
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In the SDR NPRM, the Commission requested comment on any additional
CCO duties which the Commission should include, particularly addressing
a CCO's role in managing conflicts of interest within an SDR, the types
of conflicts which commenters believe might arise within an SDR, and
how and by whom those conflicts should be resolved. The Commission also
requested comment on whether the Commission should adopt a rule that
prohibits an officer, director or person employed by the SDR or related
person to coerce, manipulate, mislead, or fraudulently influence the
CCO in performing his or her duties.\215\
---------------------------------------------------------------------------
\215\ Id.
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The Commission received four comments relating to the duties of an
SDR's CCO.\216\ Three of the commenters--TriOptima, DTCC and CME--
expressed concern that the enumerated duties of the CCO may cause the
CCO to infringe on traditionally management functions. CME also stated
the Commission should not require the CCO to ``ensure'' compliance with
the CEA and Commission regulations. Additionally, as summarized below,
Better Markets and DTCC commented on the CCO's duty to resolve any
conflicts of interest that may arise.
---------------------------------------------------------------------------
\216\ See CL-TriOptima, CL-DTCC I, CL-CME and CL-Better Markets
supra note 51.
---------------------------------------------------------------------------
DTCC expressed its belief that the CCO should not be ``required to
be responsible for the overall operation of the SDR's business.'' \217\
DTCC noted that while there are regulatory components in many areas,
oversight of certain functions such as operational readiness and data
security should not be the responsibility of the CCO, but should
instead remain with senior management. TriOptima expressed similar
concerns and stated its belief that the CCO's duties should focus on
establishing, monitoring and reporting on the SDR's compliance
policies. CME took issue with what it believes is an overly broad set
of responsibilities assigned to CCOs; it objects to, among other
provisions, a CCO's duty to ``resolve conflicts of interest.'' \218\
While the CEA directs an SDR's CCO to, among other things, ``resolve
any conflicts of interest that may arise,'' \219\ CME believes that the
word ``resolving'' in proposed Sec. 49.22(d)(2) gives the CCO
authority that should be reserved for senior management.
---------------------------------------------------------------------------
\217\ CL-DTCC I supra note 51 at 27.
\218\ CL-CME supra note 51 at 7.
\219\ Section 21(e)(2)(C) of the CEA.
---------------------------------------------------------------------------
CME also commented on proposed Sec. 49.22(d)(4), which listed
``ensuring compliance with the Act and Commission regulations relating
to agreements, contracts, or transactions and with Commission
regulations under section 21 of the Act'' as one of the CCO's
duties.\220\ CME believes that instead of requiring the CCO to
``ensure'' compliance, the rule should require the CCO to ``establish
policies and procedures reasonably designed to ensure compliance.''
\221\
---------------------------------------------------------------------------
\220\ SDR NPRM supra note 8 at 80934.
\221\ CL-CME supra note 51 at 4.
---------------------------------------------------------------------------
DTCC also requested that the Commission provide greater detail as
to which conflicts of interest the CCO is responsible for resolving. It
believes that ``the Commission should clarify that the CCO's specific
responsibilities related to conflicts are limited to compliance with
the provisions of section 21 of the CEA and the final rules thereunder
as they relate to the swap operations of an SDR.'' \222\ DTCC also
suggested a materiality threshold for conflicts that require the CCO to
consult with the board of directors. Lastly, Better Markets requested
that the CCO be required to consult with both the independent members
of the board of directors and the senior officer of the SDR when
resolving conflicts of interest.
---------------------------------------------------------------------------
\222\ CL-DTCC I supra note 51 at 28.
---------------------------------------------------------------------------
The Commission does not agree with those commenters that suggest
that the proposed duties of the CCO improperly infringe on areas that
are traditionally management functions. Many of the commenters based
their objections on their view that the role of a CCO should be limited
to monitoring compliance and advising management on compliance issues.
The Commission does not believe that this limited view is appropriate
for the CCO of an SDR. In listing the duties of a CCO, section 21(e)(2)
of the CEA specifies that the CCO shall ``resolve any conflicts of
interest that may arise'' and ``ensure compliance with this Act.''
\223\ As stated above, successful execution of these duties will
require that a CCO have the ability to enforce compliance with the CEA
and Commission regulations. The Commission believes the language of the
CEA suggests that the CCO is more than just an advisor to management on
compliance issues.
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\223\ Sections 21(e)(2)(C) and (E) of the CEA, 7 U.S.C.
24a(e)(2)(C) and (E).
---------------------------------------------------------------------------
In that regard, the Commission understands that a single individual
cannot guarantee an SDR's compliance with the CEA and Commission
regulations. However, an individual can take reasonable steps to ensure
compliance. Accordingly, the Commission is revising Sec. 49.22(d)(4)
to state that one of the CCO's duties shall include ``taking reasonable
steps to ensure compliance with the Act and Commission regulations
relating to agreements, contracts, or transactions, and with Commission
regulations under Section 21 of the Act, including confidentiality and
indemnification agreements entered into with foreign or domestic
regulators pursuant to Section 21(d) of the Act.''
The Commission also disagrees with DTCC's comment that a CCO's duty
to resolve conflicts of interest should be limited to those conflicts
that relate to the swap operations of an SDR or that there be a
materiality threshold for the CCO to consult with the board of the SDR.
The Commission based this duty on the language of section 21(e)(2)(C)
of the CEA. This section does not limit the CCO's duty to resolve
conflicts to only those that relate to the swap operations of an SDR,
nor does it suggest that there be a materiality threshold for
consultation with the board of directors. Similarly, the Commission
does not agree with Better Market's recommendation to add a requirement
that the CCO consult with both the independent members of the board and
the senior officer when resolving conflicts of interest. However, the
Commission notes that while section 21(e)(2)(C) of the CEA and Sec.
49.22(d)(2) do not require SDRs to consult both the independent members
of the board and the senior officer when resolving conflicts of
interest, the Commission would be supportive of any SDR that enacts
this measure.
In proposed Sec. Sec. 49.22(d)(2)(i)-(iii), the Commission
identified a number of potential conflicts that may confront a
CCO.\224\ While the SDR NPRM expressly stated that this list of
conflicts ``is not exhaustive,'' the Commission believes that Sec.
49.22(d)(2) should be modified to clarify this point.\225\ Therefore,
the
[[Page 54561]]
Commission has revised proposed Sec. 49.22(d)(2) to add the word
``including'' before the list of potential conflicts of interest.
---------------------------------------------------------------------------
\224\ SDR NPRM supra note 8 at 80934.
\225\ See SDR NPRM supra note 8 at 80914 which states: ``The
proposed Regulation also lists a number of potential conflicts that
may confront a CCO. The list of conflicts of interest indicates the
types of conflicts that the Commission believes an SDR's CCOs should
be aware of, but it is not exhaustive.''
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The Commission believes the revisions to Sec. 49.22(d) discussed
above will provide greater clarity and effectiveness with respect to
the duties of an SDR's CCO. Accordingly, the Commission is adopting
Sec. 49.22(d) largely as proposed, with the modifications detailed
above for Sec. 49.22(d)(2), and Sec. 49.22(d)(4).
5. Preparation and Submission of Annual Compliance Report
The Commission in proposed Sec. 49.22(e) detailed the information
that must be included in the annual compliance report, including a
description of the SDR's written policies and procedures, an assessment
by the CCO of the effectiveness of the SDR's policies and procedures in
ensuring compliance with section 21 of the CEA and a description of any
material changes to the policies and procedures that were made to these
since the last annual compliance report.\226\ In addition, proposed
Sec. 49.22(e) also required the annual report to include a
certification by the CCO that, under penalty of law, the compliance
report is accurate and complete.\227\
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\226\ SDR NPRM supra note 8 at 80934.
\227\ Id. at 80934-80935.
---------------------------------------------------------------------------
Proposed Sec. 49.22(f)(1) set forth the procedures for review of
the annual compliance report by the board of directors or senior
officer of the SDR prior to submission to the Commission and proposed
Sec. 49.22(f)(2) described the process for the submission of the
report.\228\
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\228\ See proposed Sec. Sec. 49.22(f)(1) and(2). Id. at 80935.
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The Commission requested comment with respect to whether the annual
compliance report should contain additional content beyond what is
proposed in Sec. 49.22(e) and whether additional provisions are
necessary to ensure that an SDR's board of directors cannot adversely
influence the content of an annual compliance report as drafted by the
CCO.\229\ Alternatively, the Commission also requested comment on any
additional provisions that might be necessary to ensure that individual
directors or other SDR employees have an adequate opportunity to
register any concerns or objections they might have to the contents of
an annual compliance report. The Commission received three comments
regarding the preparation and submission of the annual compliance
report. Both CME and DTCC commented primarily on the required
provisions of the report, whereas Better Markets commented on the
procedures for review by the board and submission to the Commission.
---------------------------------------------------------------------------
\229\ Id. at 80915.
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CME suggested that the Commission require that the SDR's senior
officer, not its CCO, make the required certification under Sec.
49.22(e)(7). DTCC expressed its belief that the report should be
limited to detailing compliance with requirements of the CEA and the
policies and procedures of the SDR that relate to its swap activities.
Better Markets supported the requirement that the CCO present the
report to the board of directors prior to its submission to the
Commission and proposed that the Board be required to approve the
report in its entirety or detail where and why it disagrees with any
provision. Better Markets also proposed that this approval or statement
of disagreement be submitted to the Commission along with the report.
DTCC also expressed its concern about public release of the reports and
stated its belief that the annual report should be kept confidential by
the Commission and should not be available to the public or to market
participants.
The Commission understands that compliance with the CEA and
Commission regulations cannot be guaranteed by an individual or by any
policies or procedures and accordingly is revising proposed Sec.
49.22(e)(2)(i) to require that the annual compliance report identify
``the policies and procedures that are designed to ensure compliance
with each subsection and core principle, including each duty specified
in section 21(c).'' The Commission is also removing proposed Sec.
49.22(e)(6). While some commenters were supportive of the provision,
the Commission has determined that it is not necessary as a mandatory
requirement. The annual compliance report is a product of the CCO and
intended to reflect his or her assessment of an SDR's compliance. The
board of directors may append its own comments if desired, but the
statutory text and the Commission's implementing regulations do not
require it.
The Commission disagrees with CME's comment regarding the
certification requirement for the annual compliance report. While the
CEA does not explicitly require that the CCO certify the report, it
does require that the CCO ``annually prepare and sign'' and that the
report ``include a certification that, under penalty of law, the
compliance report is accurate and complete.'' \230\ The Commission
believes that these two requirements read together provide sufficient
basis for the CCO to certify that the report is accurate and complete.
However, the Commission is modifying Sec. 49.22(e) to explicitly state
that the CCO ``sign'' the annual compliance report in order to follow
the statutory text more closely. The Commission also disagrees with
DTCC's comment regarding limiting the scope of the report. There is no
indication in the CEA that the report should be limited to only the
swap activities of the SDR and the Commission believes there is no
reason for the report to be limited in such a manner.
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\230\ Section 21(e)(3) of the CEA.
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The Commission also disagrees with Better Market's suggestion to
require the board to approve the report in its entirety or submit a
statement detailing its objection. The Commission believes that
requiring the board to approve the report would increase the risk that
the CCO would be subject to undue influence by the board or by
management. The proposed rule, as modified above, strikes the
appropriate balance between ensuring that the board cannot adversely
influence the content of a report and giving the board the opportunity
to express their opinion of the report to the Commission. Additionally,
the Commission acknowledges DTCC's concerns regarding public release of
the report but believes that part 145 of Commission regulations
sufficiently ensures that the annual compliance report will remain
confidential. The Commission also does not believe Sec. 49.22(f)(5) is
necessary to protect the report from unnecessary release to the public
or market participants. Therefore, the Commission has modified Sec.
49.22(f) to remove Sec. 49.22(f)(5).
Section 21(e)(3)(B)(i) of the CEA requires that an annual
compliance report ``accompany each appropriate financial report of the
swap data repository that is required to be furnished to the Commission
pursuant to this section.'' \231\ Under the proposed rules, since an
SDR's year-end financial information must be submitted as an exhibit to
Form SDR, the annual compliance report was required to accompany this
annual amendment to Form SDR.\232\ Because this language was missing
from proposed Sec. 49.22(f)(2), the Commission has revised Sec.
49.22(f)(2) to state that ``The annual compliance report shall be
provided electronically
[[Page 54562]]
to the Commission not more than 60 days after the end of the registered
swap data repository's fiscal year, concurrently with the filing of the
annual amendment to Form SDR that must be submitted to the Commission
pursuant to Sec. 49.3(a)(5) of this part.''
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\231\ Section 21(e)(3)(B)(i) of the CEA.
\232\ See Exhibits M and N of proposed Form SDR set forth in the
SDR NPRM supra note 8 at 80943.
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The Commission believes that Sec. Sec. 49.22(e) and (f)
successfully establish requirements to ensure that the annual
compliance report accomplishes the regulatory goal of providing the
Commission with a complete and accurate picture of an SDR's regulatory
compliance program. Accordingly, the Commission is adopting Sec. Sec.
49.22(e) and (f) as proposed, with the exception that Sec. Sec.
49.22(e), 49.22(e)(2)(i), 49.22(e)(6), 49.22(f)(2), and 49.22(f)(5) are
revised as detailed above.
6. Recordkeeping
Proposed Sec. 49.22(g) detailed recordkeeping requirements for
records relating to a CCO's areas of responsibility. This proposed
regulation required an SDR to maintain: (1) A copy of its written
policies and procedures, including its code of ethics and conflicts of
interest policies; (2) copies of all materials, including written
reports provided to the board of directors in connection with review of
the annual report, as well as the board minutes or other similar
written records, that record the submission of the annual compliance
report to an SDR's board of directors or its senior officer; and (3)
any records relevant to an SDR's annual report. The proposed rule
required SDRs to maintain these records in accordance with Sec. 1.31
of the Commission's regulations.
The Commission received one comment regarding the compliance
recordkeeping provisions in proposed Sec. 49.22(g) from Chris Barnard,
who recommended that compliance records be kept indefinitely.
As stated in the SDR NPRM, the Commission designed Sec. 49.22(g)
to ensure that Commission staff would be able to obtain the information
necessary to determine whether an SDR has complied with the CEA and
applicable regulations.\233\ The Commission believes that proposed
Sec. 49.22(g) successfully accomplishes this goal in accordance with
existing Commission regulation Sec. 1.31 which requires that regulated
entities maintain records for five years. Accordingly, the Commission
is adopting Sec. 49.22(g) as proposed.
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\233\ Id. at 80915.
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D. Core Principles Applicable to SDRs--Sec. 49.19
Proposed Sec. Sec. 49.19-49.21 implement the three substantive
core principles prescribed by section 21(f) of the CEA for registered
SDRs.\234\ The Commission is largely adopting the core principles as
proposed. Each core principle is discussed in turn below.
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\234\ Section 21(f)(4), 7 U.S.C. 24a(f)(4), establishes as a
fourth core principle Commission authority to establish additional
rules for registered SDRs. The Commission proposed and is today
adopting Sec. Sec. 49.25-49.27 pursuant to this authority. These
rules are discussed in section E, below.
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1. Antitrust Considerations (Core Principle 1)
Core Principle 1 directs SDRs to consider competition issues in
connection with its rules and/or activities.\235\ The Commission is
adopting as proposed Sec. 49.19 (Core Principle 1),\236\ which
provides that unless appropriate to achieve the purposes of the CEA, a
registered SDR shall avoid adopting any rule or taking any action that
results in any unreasonable restraint of trade, or imposing any
material anticompetitive burden on trading, clearing or reporting
swaps. Like all core principles, Sec. 49.19 directly incorporates
statutory language, and the absence of particular guidance or safe
harbors at this time does not diminish an SDR's obligation to comply
with the core principle itself.
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\235\ The Commission itself is required to consider the
antitrust laws in fulfilling its statutory obligations. Section
15(b) of the CEA provides that the Commission shall take into
consideration the public interest to be protected by the
antitrustlaws and endeavor to take the least anticompetitive means
of achieving the objective of this chapter, as well as the policies
and purposes of this chapter, in issuing any order or adopting any
Commission rule or regulation * * * or in requiring or approving any
bylaw, rule or regulation of a contract market or registered futures
association * * *
\236\ The Commission received no comments in connection with
proposed Sec. 49.19.
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2. Governance Arrangements (Core Principle 2) and Conflicts of Interest
(Core Principle 3)
Section 21(f)(2) of the CEA, Core Principle 2, requires that each
SDR establish governance arrangements that are transparent to fulfill
public interest requirements and to support the objectives of the
Federal Government, owners, and participants. Section 21(f)(3) of the
CEA, Core Principle 3, provides that each SDR must establish and
enforce rules to minimize conflicts of interest in the decision-making
process of the SDR and to establish a process for resolving such
conflicts. In the SDR NPRM, the Commission proposed regulations
regarding (i) the transparency of SDR governance arrangements (Proposed
Sec. 49.20) and (ii) SDR identification and mitigation of existing and
potential conflicts of interest (Proposed Sec. 49.21), in order to
implement Core Principles 2 and 3, respectively.
The Commission received ten comments from interested parties.\237\
As discussed below, the Commission is adopting Sec. 49.20 and Sec.
49.21 substantially as proposed, subject to the revisions described
below.
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\237\ See CL-AFR, CL-CME, CL-Council, CL-DTCC I, CL-DTCC II, CL-
Reval II, CL-TriOptima, CL-Better Markets, CL-ABC/CIEBA and CL-
Barnard supra note 51.
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3. Governance Arrangements (Core Principle 2)--Sec. 49.20
(a) Transparency of Governance Arrangements
Proposed Sec. 49.20(a) required each registered SDR to establish
governance arrangements that are well-defined and include a clear
organizational structure with consistent lines of responsibility and
effective internal controls.\238\ In addition, proposed Sec. 49.20(b)
mandated certain minimum standards for the transparency of SDR
governance arrangements. These minimum standards required an SDR to:
(1) Include a statement in its charter documents regarding the
transparency of its governance arrangements, and the manner in which
such transparency supports the objectives of the Federal Government;
(2) make available certain information to the public and relevant
authorities;\239\ (3) ensure that the information made available is
current, accurate, clear and readily accessible; and (4) disclose
summaries of significant decisions in a sufficiently comprehensive and
detailed fashion so that the public and relevant authorities would have
the ability to discern the SDR policies or procedures implicated and
the manner in which SDR decisions
[[Page 54563]]
implement or amend such policies or procedures.\240\ Proposed Sec.
49.20(b) would not require SDRs to publicly disclose minutes of board
of directors or committee meetings, however, disclosure to the
Commission would be required upon request.
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\238\ See SDR NPRM supra note 8 at 80932-80933.
\239\ Such information includes: (i) The registered SDR mission
statement; (ii) the mission statement and/or charter of the
registered SDR Board of Directors and certain committees; (iii) the
board of directors nominations process of the registered SDR, as
well as the process for assigning members of the board of directors
or other persons to certain committees; (iv) names of all members of
(a) the board of directors and (b) certain committees; (v) a
description of how the board of directors and certain committees
consider an independent perspective in their decision-making
processes; (vi) the lines of responsibility and accountability for
each operational unit of the registered SDR; and (vii) summaries of
significant decisions implicating the public interest, the rationale
for such decisions, and the process for reaching such decisions.
These significant decisions include decisions relating to pricing of
repository services, the offering of ancillary services, access to
data, and the use of SDR Information. SDR NPRM supra note 8 at
80916.
\240\ SDR NPRM supra note 8 at 80933 n.116.
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The Commission received no comments addressing proposed Sec.
49.20(a), but received two comment letters related to proposed Sec.
49.20(b). One comment, from the Council, discussed the need for greater
transparency in certain areas including SDR director independence.
TriOptima's comment related to the public disclosure of summaries of
significant decisions implicating the public interest.
The Council commented that the Commission's proposal relating to
the public disclosure of an SDR's mission statement, board nomination
process and board committee assignment process is consistent with the
Council's best practices for corporate boards.\241\ However, the
Council requested that the Commission consider whether there should be
greater transparency with respect to: (1) Director independence; (2)
the board's role in risk oversight; and (3) director compensation in
the final rule.\242\
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\241\ CL-Council supra note 51 at 1.
\242\ Id. at 2.
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TriOptima expressed its concern regarding proposed Sec.
49.20(b)(vii), which required each registered SDR to make available to
the public and relevant authorities, including the Commission,
summaries of significant decisions implicating the public
interest.\243\ As an alternative to public disclosure, TriOptima
proposed that the Commission require SDRs to make ongoing reports to
the Commission regarding board of directors and committee decisions
that affect SDR compliance with the applicable regulations,
particularly changes to its procedures and compliance status.\244\
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\243\ CL-TriOptima supra note 51 at 5.
\244\ Id.
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The Commission has considered the Council's comments regarding the
need for greater transparency with respect to: (1) Director
independence; (2) the board's role in risk oversight and (3) director
compensation, and has concluded that the proposed minimum transparency
requirements are sufficient to support the objectives of the Federal
Government and fulfill the public interest. With respect to TriOptima's
proposed alternative regarding the public disclosure of significant
decisions, the Commission declines to adopt TriOptima's recommendation
to report only SDR board of directors or committee decisions that would
affect the SDR's compliance with the Commission's regulations and to
limit such reporting to the Commission solely. Since an SDR is required
to have governance arrangements that are transparent to fulfill the
public interest,\245\ the Commission believes that the public should be
fully informed of the manner in which an SDR satisfies such
requirement. The Commission emphasizes, however, that SDRs should not
be required to disclose Section 8 Material (as defined in Sec.
49.2(a)(14)) or, where appropriate, information that the SDR may have
received on a confidential basis from a reporting entity. Accordingly,
the Commission has adopted Sec. 49.20(a) as proposed and has revised
Sec. 49.20(b) to exclude the disclosure of Section 8 Material and,
where appropriate, information received by an SDR from a reporting
entity on a confidential basis.
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\245\ Section 21(f)(2) of the CEA, 7 U.S.C. 24a(f)(2).
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(b) Consideration of an Independent Perspective
In proposed Sec. 49.20(c)(1)(i)(A), the Commission required that
each registered SDR establish, maintain, and enforce policies and
procedures to ensure that (i) its board of directors, as well as (ii)
any SDR committee that has the authority to (A) act on behalf of the
board of directors or (B) amend or constrain the action thereof,
adequately considers a perspective independent of competitive,
commercial, or industry interests in its deliberations.\246\ As
discussed in the SDR NPRM, ``the Commission believes that the board of
directors, as well as each abovementioned committee, would be more
likely to contemplate the manner in which a decision might affect all
constituencies, and less likely to concentrate on the manner in which a
decision affects the interests of the control group, if it integrates
an independent perspective in its deliberations.'' \247\ Therefore, in
counterbalancing the perspective of certain reporting entities
controlling an SDR, the Commission believes that the integration of an
independent perspective would aid in addressing the conflicts of
interest identified in the SDR NPRM. The Commission also proposed that
the independent perspective be reflected in the nominations process for
the board of directors, as well as the process for assigning members of
the board of directors or other persons to the abovementioned class of
committees. Thus, proposed Sec. 49.20(c)(1)(i)(B) also required each
registered SDR to establish, maintain, and enforce policies and
procedures to ensure that such nominations and assignment processes
adequately incorporate an independent perspective. In addition to the
independent perspective requirement, the Commission proposed to promote
the transparency of governance arrangements through proposed Sec.
49.20(c)(1)(ii), which required that a registered SDR meet certain
reporting requirements relating to its board of directors, as well as
each SDR committee of the type mentioned above.\248\
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\246\ SDR NPRM supra note 8 at 80917 (discussing the importance
of the independent perspective in mitigating conflicts of interest).
\247\ Id.
\248\ Specifically, the Commission proposed to require an SDR to
submit the following within thirty (30) days after an election of
the board of directors: (i) For the board of directors, as well as
each such committee, a list of all members; (ii) a description of
the relationship, if any, between such members and the SDR or its
affiliates; and (iii) any amendments to the policies and procedures
that the SDR maintains with respect to consideration of the
independent perspective. See SDR NPRM supra note 8 at 80933.
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The Commission received no comments regarding the reporting
requirements in Sec. 49.20(c)(1)(ii) and has adopted this regulation
as proposed. The Commission received three comment letters regarding
its proposed independent perspective requirement.\249\
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\249\ See CL-DTCC II, CL-Barnard and CL-Reval II supra note 51.
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DTCC recommended that SDR conflicts of interest be mitigated
through the imposition of structural governance requirements designed
to ensure an independent perspective on the board of directors and
committees, as well as broad representation from all classes of market
participants.\250\ In addition, DTCC indicated that an SDR should have
governance that is independent from its affiliates and that such
independence and the broad representation of market participants would
support the Commission's open access provisions.\251\ Barnard suggested
that the Commission require an SDR to have independent public directors
on their boards of directors and any committee that has authority to
act on behalf of the board directors or amend or constrain the action
of the board of directors.\252\ Reval recommended that the Commission
prohibit a representative of a reporting entity from sitting on a board
committee that
[[Page 54564]]
nominates public directors or governs compliance, or on any other
relevant committee.\253\
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\250\ CL-DTCC I supra note 51 at 16.
\251\ Id.
\252\ CL-Barnard supra note 51 at 3.
\253\ CL-Reval supra note 51 at 5.
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The Commission agrees with DTCC regarding the importance of open
access, and notes that proposed Sec. Sec. 49.20 and 49.21 complement
the proposed SDR open access requirements set forth in Sec. 49.27. The
Commission notes that an SDR could choose to have governance that is
independent from affiliates, as one of a number of complementary
methods to ensure the consideration of an independent perspective.
However, the Commission declines to include a ``fair representation''
requirement as DTCC recommends. Section 21(f)(2) of the CEA requires an
SDR to establish governance arrangements that are transparent (i) to
fulfill public interest requirements; and (ii) to support the
objectives of the Federal Government, owners, and participants. The
Commission observes that even if an SDR is governed by a broad cross-
section of market participants, such governance may not serve the
public interest. For example, if an SDR is governed by three
constituencies with equal voice and two are conflicted (but in the same
direction), the decision of such conflicted constituencies would stand.
With respect to requiring an SDR to include public directors on its
board of directors and any committee that has authority to act on
behalf of the board directors or amend or constrain the action of the
board of directors, the Commission declines to mandate the method in
which an SDR incorporates the consideration of an independent
perspective on its board of directors or committees. As discussed
below, the Commission believes that it is appropriate to afford SDRs
more flexibility in determining their ownership, and governance,
structures. The Commission notes that an SDR's implementation of the
``public director'' concept (e.g., as explicitly set forth for DCOs,
DCMs and SEFs) would be one method of meeting the requirement to
consider an independent perspective with a greater degree of certainty.
The Commission also declines to adopt Reval's recommendation with
respect to the board and committee nominations processes. The
Commission believes that the inclusion of an independent perspective in
the board nominations process, as well as on board committees that
govern compliance (or other relevant committees), is sufficient to
counterbalance the perspective of reporting entities that sit on such
bodies, especially given the Commission's preference to afford SDRs
flexibility. Accordingly, the Commission is adopting the ``independent
perspective'' requirement in Sec. 49.20(c)(1) as proposed.
(c) Structural Governance Requirements and Limitations on Ownership of
Voting Equity and the Exercise of Voting Rights
Although the Commission did not propose specific structural
governance requirements relating to the composition of the Board of
Directors and the establishment of board committees for SDRs or
limitations on ownership of SDR voting equity and the exercise of
voting rights, the Commission requested comment on the imposition of
such requirements and limitations in the SDR NPRM.\254\ Six commenters
\255\ addressed the necessity of such requirements for SDRs, and two
commenters \256\ discussed the effect of such requirements on
competition.
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\254\ SDR NPRM supra note 8 at 80917.
\255\ See CL-AFR, CL-Barnard, CL-Better Markets, CL-DTCC I, CL-
Reval and CL-TriOptima supra note 51.
\256\ See CL-Reval and CL-TriOptima supra note 51.
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AFR, Barnard and Better Markets \257\ suggested that, at a minimum,
the SDR governance regulations should contain the same board
composition requirements and ownership and voting limitations that the
Commission proposed for DCOs, DCMs, and SEFs in the Conflicts of
Interest Notice of Proposed Rulemaking.\258\ AFR submitted that ``the
information controlled by SDRs can create conflicts that are
potentially as great as many of the conflicts that could exist for
other derivatives infrastructure organizations'' such as DCOs, DCMs,
and SEFs,\259\ while Better Markets submitted that the potential
conflicts of interest for an SDR stem from the SDR being dominated by
or subject to the direct or indirect influence of their major
customers--large financial institutions which generate the data that an
SDR collects, manages and distributes.\260\ For these reasons, both AFR
and Better Markets believe that SDR governance regulations should
parallel the governance rules of a DCO, DCM and SEF.
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\257\ CL-AFR supra note 51 at 2; CL-Barnard, supra note 51 at 3
(stating that there should be a level playing field between SDRs and
DCOs with respect to board membership requirements and ownership and
voting limits); and CL-Better Markets supra note 51 at 10.
\258\ Commission, Notice of Proposed Rulemaking: Requirements
For Derivatives Clearing Organizations, Designated Contract Markets,
And Swap Execution Facilities Regarding The Mitigation Of Conflicts
Of Interest, 75 FR 63732 (Oct. 18, 2010) (``Conflicts of Interest
NPRM''). In the Conflicts of Interest NPRM, the Commission proposed
rules to mitigate potential conflicts of interest in the operation
of a DCO, DCM, and SEF through (i) structural governance
requirements and (ii) limits on the ownership of voting equity and
the exercise of voting power. The proposed structural governance
requirements include composition requirements for DCO, DCM, or SEF
Boards of Directors. Specifically, such boards must be composed of
at least 35 percent, but no less than two, public directors. With
respect to limits on ownership of voting equity and the exercise of
voting power, the proposed rules limit DCM or SEF members (and
related persons) from beneficially owning more than twenty (20)
percent of any class of voting equity in the registered entity or
from directly or indirectly voting an interest exceeding twenty (20)
percent of the voting power of any class of equity interest in the
registered entity. With respect to a DCO only, the proposed rules
require a DCO to choose one of two alternative limits on the
ownership of voting equity or the exercise of voting power. Under
the first alternative, no individual member may beneficially own
more than twenty (20) percent of any class of voting equity in the
DCO or directly or indirectly vote an interest exceeding twenty (20)
percent of the voting power of any class of equity interest in the
DCO. In addition, the enumerated entities, whether or not they are
DCO members, may not collectively own on a beneficial basis more
than forty (40) percent of any class of voting equity in a DCO, or
directly or indirectly vote an interest exceeding forty (40) percent
of the voting power of any class of equity interest in the DCO.
Under the second alternative, no DCO member or enumerated entity,
regardless of whether it is a DCO member, may own more than five (5)
percent of any class of voting equity in the DCO or directly or
indirectly vote an interest exceeding five (5) percent of the voting
power of any class of equity interest in the DCO. The proposed rules
also provide a procedure for the DCO to apply for, and the
Commission to grant, a waiver of the limits specified in the first
and second alternative.
\259\ CL-AFR supra note 51 at 2.
\260\ CL-Better Markets supra note 51 at 9-10.
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Only one commenter stated that ownership and voting limitations
should not be considered for SDRs.\261\ DTCC indicated that the
imposition of such limitations ``would be an imprecise tool with which
to achieve the policy goals of the Commission regarding conflicts of
interest.'' \262\
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\261\ See CL-DTCC I and CL-DTCC II supra note 51 at 16 and 2,
respectively.
\262\ Id.
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Reval and TriOptima expressed the concern that, as proposed,
Sec. Sec. 49.20 and 49.21 would create an ``uncompetitive
environment'' by deterring independent service providers from
registering as SDRs.\263\ Both Reval and TriOptima recommended that the
Commission impose certain structural governance requirements and/or
ownership and voting limitations to market participants that own or
control an SDR to mitigate such an anticompetitive effect.
Specifically, Reval recommended that the Commission require that (i) no
financial entity, swap dealer, or major swap participant be allowed to
become an SDR, (ii) no SDR permit its equity or
[[Page 54565]]
debt to be held by any market participant that, together with its
related persons, would have more than 5 percent of the notional
principal swap volume in the asset class for which the SDR is
registering, and (iii) no SDR permit any market participant to hold
more than 5 percent of its equity (or alternatively, 20 percent, if the
Commission believes that 5 percent is too low a threshold).\264\
TriOptima recommended that potential conflicts of interest and
compliance with the applicable Core Principles be addressed by more
tailored rules that distinguish between ``Independent SDRs'' and ``Tied
SDRs,'' which are actually or presumptively, controlled by swap market
participants.\265\ Therefore, TriOptima suggested that the Commission
adopt a two-tiered approach to mitigating SDR conflicts of
interest.\266\ Under this approach, ``Tied SDRs'' would be subject to
the full panoply of conflicts of interest and governance requirements,
including (i) restrictions on ownership and voting rights, (ii)
provisions for board nominations procedures and public directors, and
(iii) requirements for policies and procedures to ensure that board
members and certain committees do not favor the interests of a control
group. In contrast, ``Independent SDRs'' would be subject only to
requirements that concentrate on procedures, reporting and examination,
which would ensure that changes in the SDR's business, governance
structure or organization do not adversely affect impartiality.\267\
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\263\ CL-Reval supra note 51 at 5 and CL-TriOptima supra note 51
at 4.
\264\ CL-Reval supra note 51 at 4. Reval suggested that bank-
related trade repositories be permitted to be a third-party
reporting entity that can, on behalf of its owners, report to a
registered SDR.
\265\ CL-TriOptima supra note 51 at 4. TriOptima defines a Tied
SDR as an SDR with voting stock that is more than 50 percent owned
or controlled, directly or indirectly, by one or more market
participants, or where a majority of its board was nominated or
appointed, directly or indirectly, by one or more market
participants, or where the Commission has determined, after
examination and review, that an SDR is under effective control of
one or more market participants. TriOptima defines an Independent
SDR as one that meets none of the above criteria.
\266\ CL-TriOptima supra note 51 at 4.
\267\ Id.
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In determining the appropriate regulatory approach for the
governance and the mitigation of potential conflicts of interest in the
operation of DCOs, DCMs, SEFs and SDRs, the Commission examined the
ways in which such entities exercised discretion in performing their
respective functions. The Commission notes that the discretion
exercised by a DCO, DCM or SEF with respect to their ability to
influence participation on the entity (e.g., execution, clearing
membership, portfolio compression) or the acceptance of all trades in
an asset class differs significantly from that of an SDR. The
Commission agrees with DTCC that an SDR lacks discretion similar to
that exercised by DCOs, DCMs and SEFs in its collection and maintenance
of data related to swap transactions in that ``the SDR is not defining
the reporting party, timeliness, or content for public dissemination,
and similarly the SDR is not defining the reporting party, content, or
process for regulatory access. The SDR does not have significant
influence over the inclusion or omission of information in the
reporting process, nor does it control the output of the process.''
\268\ Accordingly, the Commission believes that it is appropriate to
afford SDRs more flexibility in determining their ownership and
governance structures, in contrast to DCOs, DCMs and SEFs and declines
to impose additional structural governance requirements and ownership
and voting limitations on SDRs. However, the Commission may in the
future re-examine SDR governance requirements based on changing
conditions and/or market developments.
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\268\ CL-DTCC I supra note 51 at 16.
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The Commission has also considered and rejected Reval and
TriOptima's recommendations to impose limitations on SDR ownership and
voting equity as well as separate regulatory schemes for independent
and tied/market participant owned or controlled SDRs. Preliminarily,
the Commission notes that the Dodd-Frank Act neither endorses nor
discourages a particular SDR market structure (e.g., the ``public
utility'' or the ``for-profit'' model); from a policy perspective, so
long as an entity complies with the CEA and the regulations thereunder,
the Commission has no preference whether the entity is an ``Independent
SDR,'' a ``Tied SDR,'' or a market-participant owned or controlled SDR.
The Commission acknowledges that control of an SDR by one or more
reporting entities may lead to conflicts of interest; however, the
Commission notes that ownership is only one form of control. The
Commission believes that the substantive requirements (e.g.,
transparency of governance arrangements, consideration of an
independent perspective, policies and procedures on conflicts of
interest) proposed in part 49 appropriately mitigate SDR conflicts of
interest, especially in conjunction with (i) non-discrimination
requirements regarding access and fees; and (ii) limitations on
disclosure and use of non-public information. Moreover, the Commission
notes that these substantive requirements are the minimum requirements
necessary to ensure the adequacy of governance arrangements and the
amelioration of conflicts of interest, for an ``Independent SDR,'' a
``Tied SDR,'' or a market-participant owned or controlled SDR.
(d) Substantive Requirements for SDR Boards of Directors (and
Certain SDR Committees)
The Commission proposed a number of substantive requirements for
SDR boards of directors and certain SDR committees to mitigate existing
and potential conflicts of interest. Proposed Sec. 49.20(c)(5)
required that the SDR board of directors, SDR senior management, and
members of any SDR committee that has the authority to (i) act on
behalf of the board of directors; or (ii) amend or constrain the
actions thereof, in each case, have the following attributes: (a)
Sufficiently good reputations; (b) the requisite skills and expertise
to fulfill their responsibilities in the management and governance of
the registered SDR; (c) a clear understanding of such responsibilities;
and (d) the ability to exercise sound judgment about SDR affairs.
In addition to the expertise requirement, the Commission proposed
other substantive requirements in Sec. 49.20(c) to enhance the
accountability of SDR boards of directors to the Commission.
The Commission received one comment regarding the substantive
requirements for SDR boards of directors and certain committees. DTCC
addressed the expertise requirement in proposed Sec. 49.20(c)(5). DTCC
recognized the value of requiring that an SDR board incorporate an
independent perspective, but questioned whether potential directors
that do not directly participate in the markets would have
``sufficient, timely, and comprehensive expertise on issues critical to
the extraordinarily complex financial operations of an SDR.'' \269\
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\269\ CL-DTCC I supra note 51 at 16-17.
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Since the operations of an SDR are not specialized in the same
manner as, for example, a DCO, the Commission questions whether the
``comprehensive'' expertise referenced by DTCC is necessary. The
Commission is not persuaded that it will be difficult to find directors
that can (i) bring an independent perspective; and (ii) sufficient,
timely and comprehensive expertise. In addition, the Commission is not
convinced that directors with an independent perspective would lack
incentive to acquire any necessary
[[Page 54566]]
expertise (especially because such directors may be removed).
Accordingly, the Commission is adopting Sec. 49.20(c)(5) as proposed.
The Commission received no comments on the proposed substantive
requirements mandated by Sec. 49.20(c)(1)(i)(C) and Sec. 49.20(c)(2)-
(4) and is adopting these regulations as proposed.
4. Conflicts of Interest (Core Principle 3)--Sec. 49.21
In the SDR NPRM, the Commission discussed the conflicts of interest
that a registered SDR may confront in its operations.\270\ As the
Commission noted, such conflicts may involve (i) discrimination against
certain reporting entities in SDR access, pricing, and provision of
services; and (ii) unfair or anticompetitive disclosure or use of SDR
Information.\271\ The Commission noted that such conflicts of interest
may originate in the control of an SDR by one reporting entity or a
small subset of reporting entities (a ``control group''). Such control
may result from representation on SDR governing bodies, whether through
(i) ownership of voting equity or the exercise of voting rights; or
(ii) other direct or indirect means. As the Commission stated, a
control group may compete with other reporting entities in the
execution or clearing of swap transactions and may have an incentive to
leverage its influence over the registered SDR to gain a competitive
advantage in relation to other reporting entities.
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\270\ SDR NPRM supra note 8 at 80918-80919.
\271\ Id. at 80916 n.106. In addition, the Commission stated
that ``the existence of such conflicts may frustrate the public
interest, as well as the objectives of the Federal Government,
certain owners, and participants, in facilitating the reporting of
swap transactions. Therefore, in establishing governance
arrangements that are transparent as to (i) the sources of such
control and (ii) the decisions resulting from such control, the SDR
may be satisfying Core Principles 2 and 3 simultaneously.'' Id.
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In addition, the Commission discussed the commercial value of swap
data and SDR analyses of SDR information and the incentive that a
control group may have to ``(i) limit or burden access to such analyses
on a discriminatory basis; or (ii) disclose or use the data of other
reporting entities for its own competitive purposes (e.g., front-
running).'' \272\ The Commission also stated that ``the control group
may also have an incentive to cause the SDR to provide such data to an
affiliate for derivative applications or ancillary services (especially
if such applications or services are bundled).'' \273\
---------------------------------------------------------------------------
\272\ Id. at 80919.
\273\ Id.
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The Commission is concerned that a control group can dominate an
SDR to further its economic interests to the detriment of other
reporting entities. The Commission proposed Sec. 49.21 to implement
Core Principle 3 and to mitigate this and other conflicts that may
arise in the operation of an SDR. Proposed Sec. 49.21(a) required each
registered SDR to establish and enforce rules to minimize conflicts of
interest in the decision-making process of the SDR, and establish a
process for resolving such conflicts of interest. The Commission also
proposed in Sec. 49.21(b) that each registered SDR maintain and
enforce rules (i) that would identify, on an ongoing basis, existing
and potential conflicts of interest; and (ii) that would enable the SDR
to make decisions if a conflict exists. As stated in the SDR NPRM, the
Commission believes such rules should require, at a minimum, the
recusal of any person involved in the conflict from such decision-
making.
The Commission received three comments on the identification of
conflicts of interest and proposed Sec. 49.21.\274\ AFR expressed
concern regarding the vulnerability of SDRs to significant conflicts of
interest that could interfere with their public utility mission.\275\
Specifically, AFR expressed concern that ``the owners of SDRs could use
preferential access to the information gathered to favor some market
participants at the expense of others, or to deny transparent pricing
information to customers.'' \276\ DTCC reiterated its view that
potential conflicts of interest are best addressed by open access
provisions, governance that is independent from its affiliates, and a
market participant owned SDR.\277\ ABC/CIEBA voiced concerns relating
to swap counterparties who are SDs/MSPs electing the SDR to be used
where the SD/MSP has an ownership or governance interest in the SDR.
---------------------------------------------------------------------------
\274\ See CL-AFR, CL-DTCC I and CL-ABC/CIEBA supra note 51.
\275\ CL-AFR supra note 51 at 1.
\276\ Id. at 2.
\277\ CL-DTCC I and CL-DTCC II supra note 51 at 17 and 2,
respectively.
---------------------------------------------------------------------------
For swaps that could be cleared by multiple SDRs, ABC/CIEBA
suggested that, if the Commission required the swap counterparty that
is not the SD/MSP to elect the SDR to be used, then such requirement
may address potential conflicts of interest where the SD/MSP has an
ownership or governance interest in a particular SDR and then attempts
to steer reported trades to the SDR.\278\
---------------------------------------------------------------------------
\278\ CL-ABC/CIEBA supra note 51 at 13.
---------------------------------------------------------------------------
The Commission is adopting Sec. 49.21(a) and (b) as proposed. The
Commission believes that the substantive requirements of Sec. Sec.
49.20 and 49.21 (e.g., transparency of governance arrangements,
consideration of an independent perspective, policies and procedures on
conflicts of interest) appropriately mitigate SDR conflicts of
interest, especially in conjunction with (i) non-discrimination
requirements regarding access and fees; and (ii) limitations on
disclosure and use of non-public information. In addition, Sec. 49.21
simply requires an SDR to have policies and procedures to (i) identify,
on an ongoing basis, existing and potential conflicts of interest; and
(ii) make decisions in the event of a conflict of interest. Even
assuming that the specified requirements resolve all current conflicts
of interest, they may not be sufficient to address future conflicts.
Thus, the Commission believes that having policies and procedures to
resolve future as well as current conflicts is central to compliance
with Core Principle 3. With respect to ABC/CIEBA's comment, the
Commission believes that if an SD/MSP elects to report transactions at
an SDR that it owns or governs, that action may constitute a SD/MSP
conflict (presuming that such election does not serve the interests of
its swap counterparties), but not an SDR conflict under Core Principle
3. The Commission will consider this comment in connection with its
final rulemaking for Swap Data Recordkeeping and Reporting
Requirements.\279\
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\279\ See Data NPRM supra note 6.
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5. Core Principle Compliance
Both proposed Sec. 49.20(d) and Sec. 49.21(c) required the SDR's
CCO to review the compliance of the SDR with Core Principles 2 and 3,
respectively. The Commission received one comment letter discussing SDR
and DCO core principle compliance. CME suggested that a DCO that is
also registered as an SDR should be able to achieve compliance with SDR
core principles by demonstrating compliance with applicable DCO core
principles.\280\ The Commission has considered CME's comment and
maintains that DCOs which are SDRs are responsible for compliance with
the SDR core principles. Should a particular DCO core principle be
identical in its requirements to an SDR core principle, compliance with
the latter could be demonstrated by showing compliance with the
former.\281\
---------------------------------------------------------------------------
\280\ CL-CME supra note 51 at 2-3.
\281\ The Commission reiterates that if a DCO registers as an
SDR the DCO would be expected to meet the more stringent set of
rules to the extent that the SDR and DCO final rules on governance
and conflicts of interest differ. See also SDR NPRM supra note 8 at
80899 n.9.
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[[Page 54567]]
E. Additional Duties
In addition to the core principles set forth above in section D,
section 21(f)(4) of the CEA authorized the Commission to prescribe
additional duties for SDRs for the purpose of minimizing conflicts of
interest, protecting data, ensuring compliance and guaranteeing the
safety and security of the SDR. In its SDR NPRM, the Commission
proposed four additional duties that would require an SDR to (i) adopt
and implement system safeguards, including BC-DR plans; (ii) maintain
sufficient financial resources; (iii) furnish to market participants a
disclosure document setting forth the risks and costs associated with
using the services of the SDR; and (iv) provide fair and open access to
the SDR and fees that are equitable and non-discriminatory. In
connection with final part 49 regulations, the Commission has adopted
only three of the four proposed additional duties pursuant to section
21(f)(4). The Commission has determined that the statutory authority
for adopting proposed Sec. 49.24 relating to system safeguards is
properly and adequately established in section 21(c)(8) of the CEA, and
this is not an additional duty imposed under the authority of section
21(f)(4). Accordingly, the Commission believes that it is unnecessary
to use its discretion under section 21(f)(4) of the CEA to adopt Sec.
49.24. A description of the three additional duties and related
comments are discussed in turn below.
1. Financial Resources--Sec. 49.25
Proposed Sec. 49.25(a)(1) required an SDR to maintain sufficient
financial resources to fulfill its responsibilities as set forth in
proposed Sec. 49.9 and the core principles set forth in proposed Sec.
49.19. As described in the SDR NPRM, the Commission believes that
``requiring SDRs to maintain sufficient financial resources will help
to ensure the protection of the swap data maintained by the SDR as well
as the safety and security of the SDR.'' \282\
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\282\ SDR NPRM supra note 8 at 80937.
---------------------------------------------------------------------------
Proposed Sec. 49.25(b) established that the financial resources
relied upon by the SDR to meet its obligations under paragraph (a) may
include the SDR's own capital and any other financial resource
acceptable to the Commission.\283\ Additionally, proposed Sec.
49.25(c) provided that an SDR must compute, at least on a quarterly
basis, its financial resource requirement, making a reasonable
calculation of its projected operating costs over a 12-month period.
The proposed rule allowed the SDR reasonable discretion in determining
the methodology used to compute such projected operating costs,
although the Commission reserved the right to review the methodology
utilized by the SDR and require changes as appropriate.\284\ Similarly,
under proposed Sec. 49.25(d), an SDR must undertake to compute, at
least quarterly, ``the current market value of each financial resource
used to meet its obligations under [Sec. 49.25(a)]'' with appropriate
reductions in value (haircuts) applied to reflect market and credit
risk.
---------------------------------------------------------------------------
\283\ Id.
\284\ Id.
---------------------------------------------------------------------------
The Commission requested comment on ``whether the methodology set
forth [in Sec. 49.25] for determining sufficient financial resources
would provide the necessary resources to ensure the financial integrity
of the SDR.'' \285\ If not, the Commission requested that commenters
submit different methodologies or manner for calculating sufficient SDR
financial resources.\286\
---------------------------------------------------------------------------
\285\ SDR NPRM supra note 8 at 80920.
\286\ Id.
---------------------------------------------------------------------------
The Commission received three comments relating to the financial
resources required of SDRs.\287\ While the letters were generally
supportive of the proposed rules and their objectives, the commenters
articulated concern with respect to (1) the length of the resource
requirement; (2) the types of financial resources required by the
Commission; (3) the use of a parent company's financial resources for
purposes of Sec. 49.25; and (4) the reporting of an SDR's solvency
ratio.
---------------------------------------------------------------------------
\287\ See CL-Barnard, CL-Reval and CL-TriOptima supra note 51.
---------------------------------------------------------------------------
One area of concern was the proposed requirement in Sec.
49.25(a)(3) that an SDR's financial resources would only be considered
sufficient if their value were equal to the total operating costs of
the SDR for a period of at least one year. Reval believed that SDRs
should not be required to have 12 months of operating expenses on an
on-going basis. It argued that requiring 12 months of operating
expenses on hand ``would not be how most businesses operate and would
be prohibitive to many new businesses from forming an SDR * * * .''
\288\ In addition, it noted that such a requirement would ``be a
constraint limiting the SDRs from: improving technology, having the
proper resources, and making other long-term investments.'' \289\ Chris
Barnard, on the other hand, articulated support for the ``requirement
that an SDR maintain financial resources exceeding the total amount
that would cover its operating costs for a 1-year rolling period.''
\290\
---------------------------------------------------------------------------
\288\ CL-Reval supra note 51 at 10.
\289\ Id.
\290\ CL-Barnard supra note 51 at 4. The Commission notes that
its proposal under Sec. 49.25(a)(3) required that the financial
resource of an SDR be at least equal to its operating costs for at
least one year, calculated on a rolling basis.
---------------------------------------------------------------------------
A second area of concern was the types of financial resources
deemed acceptable by the Commission in proposed Sec. 49.25(b). Reval's
comment letter argued for broader allowances in the measures used to
determine whether an SDR has sufficient resources. It suggested the
Commission consider an SDR's profitability, level of positive operating
cash flow, and cash balance. Reval also suggested that perhaps
initially an SDR should be allowed to demonstrate sufficient working
capital either directly, or through its parent company, or from debt,
letters of credit or capital call structures. Under Reval's plan, after
an initial 12-month period an SDR should ``be able to demonstrate that
it has adequate financial support from one or more of the following:
positive operating cash flow, six months of operating expenses on hand,
or profitability on a quarterly basis.'' \291\
---------------------------------------------------------------------------
\291\ CL-Reval supra note 51 at 10-11.
---------------------------------------------------------------------------
Reval and TriOptima offered comments on parent company
contributions to SDR resources and, conversely, on their contribution
to an SDR's calculated resource requirements for purposes of Sec.
49.25. Reval suggested that ``[n]ot allowing the SDR to be financially
supported by a parent company may also limit the pool of companies
willing to register to become an SDR as it would involve raising new
capital for a start-up business.'' \292\ TriOptima believes that the
``proposed rule should be drafted broadly enough to recognize that an
SDR may be a stand-alone entity or a unit or division of a larger
entity'' and that the financial resource requirements be limited to the
activities of the SDR ``and not to the broader activities of the entity
as a whole.'' \293\
---------------------------------------------------------------------------
\292\ CL-Reval supra note 51 at 10.
\293\ CL-TriOptima letter supra note 51 at 6.
---------------------------------------------------------------------------
Lastly, Chris Barnard suggested that, in addition to the proposed
requirements in Sec. 49.25, an SDR should be required to calculate and
regularly publish a solvency ratio and that such ratio should not fall
below 105%.\294\ Barnard also believes that the ``CFTC should be
immediately notified when the Solvency Ratio falls below 105%.'' \295\
---------------------------------------------------------------------------
\294\ CL-Barnard supra note 51 at 4.
\295\ CL-Barnard supra note 51 at 4.
---------------------------------------------------------------------------
Proposed Sec. 49.25 was intended to ensure the protection of the
swap data maintained by the SDRs, the financial
[[Page 54568]]
safety and security of SDRs, and an orderly wind-down of individual
SDRs without disruption to the markets., The framework established by
the Dodd-Frank Act and envisioned in the Commission's proposed
regulations places important responsibilities upon all SDRs to serve as
centralized storehouses of swap transaction data, facilitate
regulators' surveillance of swaps markets, and help mitigate systemic
risk in the financial system. As described above, SDRs'
responsibilities will include accepting swap data from counterparties,
confirming the accuracy of the swap data, and maintaining data
according to standards prescribed by the Commission. SDRs may also
disseminate swap transaction data to the public, on a real-time basis,
and will engage in monitoring, screening, and analyzing swap data to
assist the Commission in the fulfillment of its regulatory objectives
with respect to the swap markets. Given the vital importance of the
functions described above, the Commission believes that adequate
financial resource requirements are of the upmost importance for all
SDRs. Accordingly, the Commission disagrees with Reval's suggestion
that an SDR should be subject to the proposed financial resource
requirements only for the initial 12 months, and to a lower standard
after the first year of operation, as the important responsibilities
placed upon an SDR continue past its first year of operation.
Additionally, sufficient resources to execute an orderly wind-down will
be crucial to any SDR no matter how long it has been in business. The
Commission believes that proposed Sec. 49.25(a) strikes a proper
balance between the potential barrier to entry posed by its financial
resources requirements, on the one hand, and the protection of a
systemically important entity, on the other.\296\
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\296\ The Commission in the final adoption of Sec. 49.25(a)(2),
relating to DCOs that also operate as SDRs, revised the reference to
DCO financial resource requirements to refer to Sec. 39.11 of the
Commission's Regulations rather than ``core principles.''
---------------------------------------------------------------------------
The Commission acknowledges the detailed alternatives articulated
in Reval's comment letter regarding the types of financial resources
that should be acceptable in satisfaction of the requirements proposed
in Sec. 49.25(a). In particular, Reval suggested that measures to
determine if an SDR has sufficient resources to ensure the financial
integrity of the SDR could include the SDRs profitability, level of
positive operating cash flow, and cash balance. After considering these
alternative measures, however, the Commission has determined to adopt
Sec. 49.25(b) as proposed. The Commission again notes that the purpose
of proposed Sec. 49.25 was not only to ensure the continued viability
of an operating SDR, but also the orderly wind-down of a failing SDR.
As such, the intent of the rule is to be certain that each SDR has
sufficient capital on hand to cover its operating costs for one year,
regardless of its profitability or cash flow; Reval's proposed
alternatives do not capture this intent. The Commission emphasizes that
the provision Sec. 49.25(b)(2) stating that the acceptable financial
resources include an SDR's own capital and ``any other financial
resources deemed acceptable by the Commission'' was meant to capture
other types of resources on a case-by-case basis and provide
flexibility to SDRs and the Commission.\297\
---------------------------------------------------------------------------
\297\ For example, the Commission believes that commitments from
equity investors to provide the resources necessary to fulfill the
SDR's responsibilities would satisfy the requirements of Sec.
49.25(b).
---------------------------------------------------------------------------
The Commission also disagrees with Reval that, at least initially,
an SDR should be able to demonstrate sufficient working capital through
a letter of credit or similar type of credit facility. The Commission
clarifies that a letter of credit should not be taken into account in
calculating the financial resource requirement in proposed Sec.
49.25(a). However, an SDR may be able to take into account a committed
letter of credit or line of credit for the six month liquidity
requirement in proposed Sec. 49.25(e) if there are no, or very few,
restrictions on the credit and, for example, the credit is available
even if the SDR's financial position changes in a materially adverse
manner.
Finally, the Commission is not adopting Reval's recommendation that
an SDR should be allowed to be financially supported by a parent
company. The Commission believes that when relying on the resources of
a parent company, there is a risk that future capital contributions,
even if contractually obligated, will not be paid if an SDR must wind-
down its business. Due to the risk of potential harm caused from
possible data loss and market disruptions, the Commission does not view
this as a viable alternative. Conversely, the Commission does agree
with TriOptima that an SDR's financial resource requirements should be
limited to the activities of the SDR and not to the broader activities
of the parent company.
The Commission also declines to adopt Barnard's recommendation that
an SDR be required to calculate and publish its solvency ratio.
Accordingly, for the reasons discussed above, the Commission is
adopting Sec. 49.25 as proposed.
3. Disclosure Requirements of Swap Data Repositories--Sec. 49.25
The Commission proposed that SDRs furnish market participants a
disclosure document (``SDR Disclosure Document'') setting forth the
risks and costs associated with using the services of the SDR.
Specifically, Sec. 49.26 required that each SDR Disclosure Document
contain the following information:
The SDR's criteria for providing others with access to
services offered and data maintained by the SDR;
The SDR's criteria for those seeking to connect to or link
with the SDR;
A description of the SDR's policies and procedures
regarding its safeguarding of data and operational reliability, as
described in proposed Sec. 49.24;
The SDR's policies and procedures designed to protect the
privacy and confidentiality of any and all swap transaction information
that the SDR receives from market participants, as described in
proposed Sec. 49.16;
The SDR's policies and procedures regarding its non-
commercial and/or commercial use of the swap data;
The SDR's dispute resolution procedures involving market
participant;
A description of all the SDR's services, including any
ancillary services;
The SDR's updated schedule of any fees, rates, dues,
unbundled prices, or other charges for all of its services, including
any ancillary services; any discounts or rebates offered; and the
criteria to benefit from such discounts or rebates; and
A description of the SDR's governance arrangements.
The Commission in proposing this disclosure requirement believed it
would benefit market participants and the swap market generally by
helping to (i) minimize conflicts of interest; and (ii) ensure SDR
compliance with its statutory responsibilities and duties.
The Commission received a comment from DTCC related to the proposal
that SDRs furnish a disclosure document outlining the costs and risks
of using such services.\298\ DTCC noted in particular the requirements
set forth in Sec. 49.26 and indicated that they provide market
participants with sufficient disclosure of the costs and risks through
disclosure documents and other information provided on their Web site.
[[Page 54569]]
The Commission believes that the prominent posting of the SDR
Disclosure Document itself or the information contained in the SDR
Disclosure Document on an SDR's Web site is sufficient for compliance
with this Sec. 49.26.
---------------------------------------------------------------------------
\298\ CL-DTCC I supra note 51 at 25.
---------------------------------------------------------------------------
The Commission notes that the disclosure of SDR costs and risks
will provide market participants with information regarding SDR
operations that is essential for informed decision-making.
Specifically, the Commission believes that it is especially important
for market participants to know an SDR's policies and procedures
relating to the safeguarding and use of reported data as well as the
operational capability and reliability of the SDR.
After reviewing Sec. 49.26 generally and the comment received, the
Commission is adopting Sec. 49.26 as proposed.
4. Access and Fees--Sec. 49.27
The Commission proposed in Sec. 49.27 to establish open, non-
discriminatory access to the services provided by SDRs. The Commission
believes that the Dodd-Frank Act requires SDRs to provide services on a
non-discriminatory basis based largely on the requirement in section
2(a)(13)(G) of the CEA \299\ that all swap transactions be reported to
an SDR. The Commission further believes that the intent and purpose of
section 21 of the CEA \300\ is for SDRs to provide open and equal
access to its services. Consistent with the principles of open and
equal access to SDR services, the Commission submits that the fees or
charges adopted by an SDR must also be equitable and otherwise non-
discriminatory.
---------------------------------------------------------------------------
\299\ See section 727 of the Dodd-Frank Act.
\300\ See section 728 of the Dodd-Frank Act.
---------------------------------------------------------------------------
(a) Access
As proposed, Sec. 49.27(a) required that the services provided by
SDRs be available to all market participants, such as DCMs, SEFs, DCOs,
SDs, MSPs and any other counterparty, on a fair, open and equal basis.
SDRs that register and agree to accept swap data in a particular asset
class (such as interest rates or commodities) could not offer their
services on a discriminatory basis to select market participants or
select categories of market participants. The Commission continues to
believe that access should be fair, open and equal.
The Commission received four comment letters from interested
parties relating to open access.\301\ Several additional comments
relating to fees (discussed below) that raise open access issues will
also be discussed in connection with the fee provisions of Sec.
49.27(b).
---------------------------------------------------------------------------
\301\ See CL-ABC/CIEBA, CL-DTCC II and CL-MarkitServ I supra
note 51.
---------------------------------------------------------------------------
ABC/CIEBA asserted that the ``open access'' provision set forth in
proposed Sec. 49.27(a) could allow an SDR to set discriminatory
restrictions on the type of swap transaction terms it could receive to
the detriment of benefit and pension plans. ABC/CIEBA requested the
Commission in its adoption of Sec. 49.27(a) provide additional clarity
that an SDR may not ``* * * require, as a condition to reporting a swap
transaction or providing information to an SDR, that a counterparty be
exposed to more liability (via a user agreement or otherwise) than it
would have otherwise been exposed to had its transaction not been
reported to the SDR.'' \302\
---------------------------------------------------------------------------
\302\ CL-ABC/CIEBA supra note 51 at 5.
---------------------------------------------------------------------------
The Commission in the SDR NPRM recognized the potential difficulty
for plan fiduciaries in managing benefit plans, and accordingly,
proposed Sec. 49.10(c) to partly address concerns regarding the
modification or invalidation of swap transaction terms. In addition,
Sec. 49.27(a), as proposed, was intended to prevent discriminatory
access to SDR services.
The Commission believes that ABC/CIEBA's proposed clarification is
overly broad, and may place an SDR in a position to determine whether
any given counterparty will be exposed to additional liability--even a
non- reporting counterparty's. The Commission submits that this could
place the SDR in a position of evaluating risks outside of the
statutory mandate imposed by the Dodd-Frank Act. Therefore, the
Commission believes that the measures proposed in Sec. Sec. 49.10(c)
and 49.27(a) to prevent modification and invalidation and to ensure
fair and equal access adequately address ABC/CIEBA's concerns.
DTCC commented that SDRs should provide open access to services
offered while also preserving the trading parties' control over the
reported data maintained by the SDR.\303\ DTCC specifically believes
that agents of a reporting party (such as a SEF, DCO, confirmation
facility or other service provider) must be acting on behalf of the
reporting counterparty and submits that the particular SDR for which
the trade is reported should be based on the counterparty's selection
and not by the SEF, DCO, confirmation facility or other service
provider.
---------------------------------------------------------------------------
\303\ CL-DTCC II supra note 51 at 3.
---------------------------------------------------------------------------
Although the Commission largely shares DTCC's views regarding the
authority of the reporting counterparty to choose or select the
particular SDR for the reporting of swaps, the Commission submits that
this authority to select a particular SDR may be contractually
delegated to other parties. In addition, the rules and regulations of a
particular SEF, DCM or DCO may provide for the reporting to a
particular SDR. However, the Commission notes that this would not
prevent the counterparties from also reporting their swap transaction
data to an additional SDR for recordkeeping and other risk management
or ancillary purposes consistent with the requirements set forth in
proposed part 45 of the Commission's Regulations. Accordingly, the
Commission believes that the reporting of swap transaction data to SDRs
is adequately addressed in proposed part 45 of the Commission's
Regulations \304\ and section 4r(3) of the CEA.
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\304\ See Data NPRM supra note 6.
---------------------------------------------------------------------------
MarkitSERV commented that it generally supports the proposed open
access and fee provision set forth in Sec. 49.27.\305\ However,
MarkitSERV believes that if Sec. 49.27 is implemented, as proposed, it
may have some unintended consequences. In particular, MarkitSERV
asserted that without clarification as to the meaning of ``non-
discriminatory'' fees and ``preferential pricing arrangements,'' the
``dealer-pays'' fee structure historically used by SDR-like entities
could be seen as preferential.
---------------------------------------------------------------------------
\305\ CL-MarkitServ I supra note 51.
---------------------------------------------------------------------------
MarkitSERV believes that the current ``dealer pays'' pricing model
ensures fair and open access because buy-side participants are often
smaller entities that may find it difficult to afford SDR fees.
MarkitSERV is concerned that without clarification the proposed
regulation could cause an increase in costs for buy-side market
participants, and thereby, discourage the use of SDRs. The Commission
believes that this argument ignores the statutory mandate that all
swaps whether cleared or uncleared must be reported to an SDR.\306\
---------------------------------------------------------------------------
\306\ Section 2(a)(13)(G) of the CEA, 7 U.S.C. 2(a)(13)(G).
---------------------------------------------------------------------------
The Commission further believes that, consistent with fair, open
and equal access, an SDR may appropriately utilize any pricing model
subject to Sec. 49.27(b)'s requirement that such fees be non-
discriminatory. The Commission notes that ``open access'' and ``non-
discriminatory'' fees are complementary notions of fair dealing and
open market access that are necessary in order for compliance with the
statutory mandate
[[Page 54570]]
set forth in the Dodd-Frank Act that all swaps be reported to an SDR.
The Commission also received several comments in connection with
the issue of bundling or tying of SDR regulatory services with
ancillary services.\307\ DTCC urged the Commission to prohibit the
bundling of core regulatory services mandated by the Dodd-Frank and
part 49 with non-core or ancillary services. Similarly, MarkitSERV also
recommended that the SDR regulations be amended to explicitly prohibit
tying of core services and ancillary services. MarkitSERV also
commented that SDRs be allowed (but not required) to offer an array of
services that are ancillary to those narrowly defined duties outlined
in the Dodd-Frank Act and part 49. TriOptima requested clarification on
the ability of an SDR or its affiliates to offer ancillary services on
terms commercially agreed to between the SDR and its customer/
subscriber.
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\307\ See CL-DTCC, CL-MarkitSERV, CL-MarkitSERV II and CL-
TriOptima supra note 51. The Commission understands ancillary
services to consist of asset servicing; confirmation, verification
and affirmation facilities; collateral management, settlement, trade
compression and netting services; valuation, pricing and
reconciliation functionalities; position limits management; dispute
resolution; and counterparty identify verification.
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The Commission believes that it is appropriate for SDRs to offer
ancillary services to market participants. However, SDRs in offering
such ancillary services are prohibited from bundling these services
with mandated regulatory services such as swap data reporting.
Accordingly, the Commission is revising Sec. 49.27 to clarify that
SDRs are prohibited from requiring market participants to make use of
SDR ancillary services in order to gain access to the SDR's mandated
regulatory services.
For the reasons discussed above, the Commission is adopting Sec.
49.27(a) largely as proposed with the modification relating to bundling
noted above.
(b) Fees
As proposed, Sec. 49.27(b) ensured that fees or other charges
established by an SDR are not used as a means to deny access to some
market participants by employing disparate and/or discriminatory
pricing. The Commission continues to be concerned that SDRs could
attempt to adopt disparate pricing for performing their statutory
duties and obligations set forth in section 21 of the CEA. The
Commission believes that such action would be inconsistent with Core
Principle 3 discussed above, the CEA generally, and the guiding
principles set forth in the Dodd-Frank Act.
The Commission recognizes that SDRs will be subjected to
significant costs both in connection with part 49, as well as the
recordkeeping and reporting of swap data as proposed in part 45 and
real-time public reporting as proposed in part 43.\308\ These costs, in
part, include the ability to accept and maintain reported swaps data,
technology, personnel, technical support and appropriate BC-DR plans.
Accordingly, Sec. 49.27(b), as proposed, seeks to ensure that the fees
charged to reporting parties are equitable and do not become an
artificial barrier to access. The Commission is concerned that the
swaps markets are dominated by a select number of financial entities
and related utilities, and therefore, sought through proposed Sec.
49.27 to promote fair and open competition for SDR services.
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\308\ See SDR NPRM supra note 8 and Real-Time NPRM supra note
28.
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As proposed, Sec. 49.27(b) prohibited SDRs from offering
preferential pricing arrangements to any market participant, including
volume discounts or reductions, unless such discounts or reductions
apply to all market participants uniformly and are not otherwise
established in a manner that would effectively limit the application of
such discount or reduction to a market participant or a select number
of market participants. Proposed Sec. 49.27 also would require SDRs to
provide fee transparency to market participants through its Web site as
well as in the Disclosure Document discussed above in Sec. 49.26.
The Commission received seven comment letters relating to SDR
pricing from various interested parties.\309\
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\309\ See CL-Reval I, CL-MarkitSERV I, CL-Sungard, CL-DTCC I,
CL-AFR and CL-Better Market supra note 51.
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Reval commented that the core component of pricing will be a per
transaction charge with each SDR having varying costs and quality of
service. Reval thought that a comparison of pricing among SDRs may be
difficult because of the many aspects that will comprise SDR pricing.
Reval submitted that SDRs should be able to charge for client
implementation, consulting or development services that are separate
and apart from the ``core'' regulatory services of SDR reporting. Given
the level of transparency as proposed by the Commission in Sec. 49.27,
Reval expects robust price competition under the assumption that
several SDRs become registered.
MarkitSERV generally supported the principle set forth in proposed
Sec. 49.27 that fees charged by SDRs must be equitable and established
in a uniform and non-discriminatory manner. However, as discussed
above, MarkitSERV questioned the application of ``non-discriminatory''
fees and ``preferential pricing arrangements,'' based on its belief
that current repository fee structures are preferential. For example,
MarkitSERV commented that current trade repositories commonly require
only dealer participants to pay for the cost of reporting swaps.\310\
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\310\ CL-MarkitSERV I supra note 51 at 4. The Commission submits
in a reporting party fee pricing model that reporting fees paid by
SD/MSP reporting counterparties to an SDR would be factored into the
pricing between the SD/MSP and its buy-side customer so that the
buy-side customer does not directly pay for reporting.
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As discussed above, MarkitSERV is concerned that, without
clarification, the regulation as proposed could increase the costs for
end-users (buy-side participants) and thereby discourage end-users from
using SDRs. In addition to the reasons discussed above, the Commission
believes that this argument fails to address the reporting regime set
forth in the Data NPRM and section 4r of the CEA, and further, assumes
that a single entity serves as the SDR so that buy-side participants
are unable to ``shop'' for competitive pricing.
MarkitSERV recommended that the Commission explicitly endorse the
``dealer pays'' commercial model. DTCC echoed MarkitSERV's approach
with its view that fee structures should reflect an ``at cost'' pricing
model with only SDs subject to fees.\311\ Alternatively, MarkitSERV
thought the Commission could clarify Sec. 49.27, as proposed, so that
different fee structures for different classes of participants would
not be deemed discriminatory as long as the pricing model is not
discriminatory within those classes. In addition, MarkitSERV also
asserted that adopting a ``reporting party pays'' pricing model would
meet the Commission's objectives of uniform and non-discriminatory
fees. Lastly, MarkitSERV asserted that the application of Sec. 49.27
to ancillary services may prove detrimental to the market. MarkitSERV
believes that because ancillary services are non-core services, and
therefore, may be provided independently by un-regulated third-party
service providers, these services should be priced commercially and
consistently with market practices if they are also offered by SDRs.
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\311\ CL-DTCC I supra note 51 at 3.
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Sungard acknowledged the Commission's rationale for applying an
[[Page 54571]]
equitable standard to fees charged by SDRs and supports the
Commission's decision in Sec. 49.27 to refrain from acting as a ``rate
setter'' with respect to the establishment of SDR fees. Sungard
specifically noted that proposed Sec. 49.27(b)(3) does not call for
specific Commission review and approval of fees. The Commission notes
that although SDR fees would not be ``approved,'' any and all fees
charged by SDRs will be filed with the Commission and subject to
sufficient transparency and disclosure via the SDR's Web site and SDR
Disclosure Document. AFR recommended that all market participants be
treated equally by requiring SDRs to provide the Commission with a
justification for its fees.
The Commission does not endorse or adopt any particular business or
pricing model but instead believes that any regulation should permit a
variety of business models to flourish. Accordingly, the Commission is
adopting Sec. 49.27 as proposed. The Commission submits that a
determination of what may constitute an ``equitable'' and ``non-
discriminatory'' price must be performed on a case-by-case basis. In
response to DTCC, the Commission believes that the cost of offering a
service or product is not determinative, but is one factor in this
analysis.\312\ The Commission in proposing Sec. 49.27 was careful not
to designate or sanction any particular pricing or business model
relating to SDRs. Instead, the Commission seeks to foster or encourage
competition as the best way in which to keep swap reporting costs to a
minimum.
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\312\ See e.g. Report of SEC Advisory Committee On Market
Information: A Blueprint For Responsible Change (September 14, 2001)
(known as the ``Seligman Report'') available at http://www.sec.gov/divisions/marketreg/marketinfo/finalreport.htm. See also, SEC,
Concept Release: Regulation of Market Information Fees and Revenues,
Securities Exchange Act Release No. 42208 (December 9, 1999), 64 FR
70613 (December 17, 1999). Cost basis pricing in connection with
national securities exchange market data fees was recently discussed
in NetCoalition v. Securities and Exchange Commission, 615 F.3d 525
(DC Cir. 2010).
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Given the varying cost structures and business models that may
emerge, the Commission will not approve or set ``fees.'' In addition,
the Commission believes that the Dodd-Frank Act and the CEA requires
the Commission, to the extent possible, to promote competition between
and among various SDRs. The Commission notes that Sec. 49.27 would
prohibit SDRs from establishing fees in a manner that restrict fair,
free and open access to SDR services.
Both AFR and Better Markets argue that the Commission should
prohibit volume discounts in SDR pricing based on their belief that
most reporting flow will be ``dealer dominated,'' and therefore,
unfairly discriminate against non-SDs/MSPs (i.e. end-users). This may
be true for more ``customized'' swap transactions; however, for those
more standardized transactions that may be executed on a SEF or DCM,
reporting to an SDR would be part of the SEF's or DCM's transaction
services. Accordingly, the reporting flow in these cases would be
determined by the SEF or DCM and not the SD/MSP. In addition, SDs/MSPs
will be required to negotiate customer agreements with non-SD/MSP
counterparties so that volume pricing discounts should otherwise be
reflected in the pricing structure to the non-SD/MSP counterparty. This
will especially be the case because any fees charged by SDRs for
services must be transparent and disclosed publicly.
Accordingly, the Commission will permit volume discounts as long as
these discounts are not structured in a way that is anti-competitive.
However, the Commission expects to study the effect of volume discounts
that are offered by SDRs, and will re-evaluate both its view and Sec.
49.27, if warranted.
With respect to MarkitSERV and DTCC's comments relating to the
``dealer pays'' commercial pricing model, the Commission is not
entirely persuaded regarding this recommendation but does agree that an
SDR may appropriately utilize a pricing model by which the reporting
entity is required to pay the SDR reporting fees. In this manner, the
reporting entity--SD, MSP or non-SD/MSP--and its counterparty will as
part of their agreement negotiate the payment of SDR fees. Consistent
with MarkitSERV's comments, the Commission believes that SDRs may
charge participants a reasonable fee to recoup additional costs
associated with accepting and processing ``customized'' reportable
transactions to the SDR.
F. Procedures for Implementing Swap Data Repository Rules
The Commission's part 40 regulations contain provisions related to
submissions to the Commission by registered entities of new products
and rules. In order to implement new statutory provisions imposed by
the Dodd-Frank Act, the Commission has adopted amendments to its part
40 rules.\313\ These amendments implement a new statutory framework for
certification and approval procedures for new products, new rules and
rule amendments submitted to the Commission by registered entities and,
as relevant to this rulemaking, include new registered entities such as
SDRs.
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\313\ See Part 40 supra note 21.
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In this connection, the Commission proposed Sec. 49.8 to conform
to the framework established in the part 40 rules. The proposed rule
provided that an applicant for registration as an SDR may request that
the Commission approve, pursuant to section 5c(c) of the CEA, any or
all of its rules and subsequent amendments, either prior to
implementation or, notwithstanding the provisions of section 5c(c)(2)
of the CEA, at any time thereafter, under the procedures established in
Sec. 40.5 of the Commission's Regulations. Under the proposal, rules
of an SDR not voluntarily submitted for prior Commission approval as
described above must be submitted to the Commission with a
certification that the rule or rule amendment complies with the CEA and
Commission Regulations under the procedures specified in Sec. 40.6.
The Commission received no comments on Sec. 49.8. Based on its
review of the proposed regulation and the absence of comments, the
Commission is adopting Sec. 49.8 as proposed.
III. Effectiveness and Transition Period
Consistent with section 754 of the Dodd-Frank Act, part 49 of the
Commission's Regulations will be effective on October 31, 2011
(``Effective Date''). Once part 49 is effective, the Commission will
accept applications to register as an SDR on new Form SDR adopted by
the Commission in this Adopting Release.\314\ As explained below and as
noted elsewhere in this Adopting Release, the compliance date for
various regulatory requirements is contingent upon the adoption and
effectiveness of other, related, regulatory provisions and definitions.
Because the Commission believes that the suite of rules implementing
the Dodd-Frank Act are complex and interconnected, it has determined
that implementation can best be accomplished through a separate
rulemaking. The Commission expects in this separate rulemaking to
establish an implementation and phase-in plan for
[[Page 54572]]
the numerous rulemakings related to the Dodd-Frank Act.\315\
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\314\ The Commission notes that although it is unable to mandate
registration as an SDR prior to the effective date of the swap
definition rulemaking, SDRs can file applications with, and be
granted approval, on a provisional basis, prior to that date. See
Commission and SEC, Notice of Proposed Joint Rulemaking: Further
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-
Based Swap Agreement;'' Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, 76 FR 29818 (May 23, 2011). Authority for
registration in advance of an effective date is provided in section
712(f) of the Dodd-Frank Act, 15 U.S.C. 8302(f).
\315\ In connection with the SDR Rulemaking, the Commission
received fourteen comments that directly relate to implementation
and phase-in. These comments resulted from the Commission re-opening
of the comment period for several rulemakings, including the SDR
Rulemaking, and a request for comment on the order in which it
should consider final rulemakings made under the Dodd-Frank Act. See
Commission, Reopening and Extension of Comment Periods for
Rulemakings Implementing the Dodd-Frank Wall Street Reform and
Consumer Protection Act, 76 FR 25274 (May 4, 2011). Comments
addressing implementation and phase-in were received from: (1)
Working Group of Commercial Energy Firms (``WGCEF'') on March 23,
2011; (2) CME on March 23, 2011; (3) Financial Services Roundtable
on April 6, 2011; (4) Financial Services Forum, Futures Industry
Association, International Swaps and Derivatives Association and the
Securities Industry and Financial Markets Association on May 4,
2011; (5) Financial Services Roundtable, on May 12, 2011; (6) Swaps
& Derivatives Market Association on June 1, 2011; (7) AII on June 2,
2011; (8) Wholesale Markets Brokers' Association Americas on June 3,
2011; (9) Encana on June 7, 2011; (10) Chris Barnard on June 8,
2011; (11) Alternative Investment Management Association on June 10,
2011; (12) Futures Industry Association, Institute of International
Bankers, International Swaps and Derivatives Association, Investment
Company Institute, Securities Industry and Financial Markets
Association, U.S. Chamber of Commerce on June 10, 2011; (13) AII on
June 10, 2011; and (14) MarkitSERV on June 10, 2011. All comment
letters are available through the Commission Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=939.
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The Commission in this Adopting Release has not established a
``compliance date'' for SDRs that differs from the effective date of
part 49. The Commission believes that the adoption of registration
requirements (including a provisional registration) and applicable
statutory duties and core principles does not itself necessitate a
delayed compliance date with part 49 for registered SDRs. In
particular, the adoption of the provisional registration process set
forth in Sec. 49.3(b) should provide SDR applicants with sufficient
time to fully comply with part 49 while at the same time permitting
those SDR that are operational to function. Entities that currently
operate in a manner similar to an SDR and seek to be registered under
part 49 will require operational and systems changes in order to comply
with part 49. For those entities that do not currently operate as a
repository or in a similar capacity, the Commission believes that
significant operational and technology resources would be required in
order for such entities to register and comply with part 49.
The Commission notes that SDRs will not otherwise be fully
operational as of the effective date of part 49 but instead will
require an implementation or compliance period based on requirements
for reporting swap transaction data as well as the real-time
dissemination of swap data that are the subject of separate rulemakings
by the Commission.\316\ In both the Data and Real-Time Rulemakings, a
delayed effectiveness date or compliance date is likely given the
complexities and technology changes that must be implemented on an
industry-wide basis.
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\316\ See Data NRPM and Real-Time NPRM supra notes 6 and 28,
respectively.
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IV. Related Matters
A. Paperwork Reduction Act
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid control number issued by the Office of Management and
Budget (``OMB''). The final part 49 rules result in information
collection requirements within the meaning of the Paperwork Reduction
Act of 1995 (``PRA'').\317\ The Commission submitted its proposing
release and supporting documentation to OMB for review in accordance
with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The Commission requested that
OMB approve, and assign a new control number for, the collections of
information covered by the proposing release. The information
collection burdens created by the Commission's proposed rules, which
were discussed in detail in the proposing release,\318\ are identical
to the collective information collection burdens of the final rules.
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\317\ 44 U.S.C. 3301 et seq.
\318\ SDR NPRM supra note 8 at 80923-80925.
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The Commission invited the public and other Federal agencies to
comment on any aspect of the information collection requirements
discussed in the NPRM.\319\ Pursuant to 44 U.S.C. 3506(c)(2)(B), the
Commission solicited comments in order to: (i) Evaluate whether the
proposed collections of information were 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 estimates of the burden of the proposed 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 collections of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology. The Commission
received no comment on its burden estimates or on any other aspect of
the information collection requirements contained in its proposing
release.
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\319\ Id. at 80925.
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The title for the collection of information under part 49 is ``Swap
Data Repositories Registration and Regulatory Requirements.'' OMB has
approved and assigned OMB control number 3038-0086 to this collection
of information.
B. Cost-Benefit Considerations
Section 15(a) of the CEA explicitly requires the Commission to
consider the costs and benefits of its actions before promulgating a
regulation under the CEA. In particular, costs and benefits must be
evaluated in light of five broad areas of market and public concern:
(1) Protection of market participants and the public; (2) efficiency,
competitiveness and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission may, in its discretion, give
greater weight to any one of the five enumerated areas depending upon
the nature of the regulatory action.
Section 728 of the Dodd-Frank Act provides the Commission with
authority to adopt and implement rules and regulations regarding the
registration and regulation of SDRs. Pursuant to that authority the
Commission proposed the adoption of new part 49 to the Commission's
regulations to require persons that meet the definition of an SDR to
register and comply with specific duties and core principles enumerated
in section 21 as well as other requirements that the Commission may
prescribe by regulation. In particular, the Commission proposed to (1)
create a new part 49 of its regulations for the registration and
regulation of SDRs and (2) the adoption of a new form, Form SDR, to
register as an SDR with the Commission.
The cost-benefit discussion in the proposing release \320\ analyzed
the costs and benefits of adopting new part 49 to the market generally
and to the limited number of potential entities expected to register as
SDRs. Specifically, the Commission determined that the proposed
regulations would benefit market participants and the public by
improving transparency in the swaps market and fostering competition in
the data and trade repository industries. In addition, by providing
regulators with access to the data maintained by SDRs, the Commission
believed that its proposal would promote greater risk management and
give global regulators a better measure of systematic risk
[[Page 54573]]
throughout the financial markets.\321\ The Commission stated in the SDR
NPRM that the failure to enact proposed part 49 regulations would be a
cost measured by the absence of transparency in the swaps market. This
determination was based on the belief that costs would appear as a
result of market inefficiencies related to price discovery and risk
management and the inability of regulators to properly monitor systemic
risk.\322\
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\320\ SDR NPRM supra note 8 at 80925.
\321\ Id.
\322\ Id.
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The Commission has considered the costs and benefits of the final
regulations pursuant to section 15(a) of the Act. The Commission has
considered the public comments received regarding costs and benefits in
response to the SDR NPRM. A discussion of the final regulations in
light of section 15(a) factors is set out immediately below, followed
by a discussion of comments on cost-benefit considerations received in
response to the SDR NRPM.
1. Protection of Market Participants and the Public
The Commission believes that the registration and regulation of
SDRs under part 49 of the Commission's Regulations will serve to better
protect market participants by providing the Commission and other
regulators with important oversight tools to monitor, measure, and
comprehend the swaps markets. It is expected that the Commission's
surveillance and enforcement capabilities will accordingly be enhanced
by the adoption of part 49. In addition, the greater transparency to be
furnished by mandated reporting to SDRs will also better improve the
management of systemic risk throughout the financial markets by the
Commission as well as the FSOC and OFR.
The Commission has estimated that the initial start up cost for the
estimated 15 SDR registrants to become registered under part 49 is
between $105.5 and $135.5 million, including between $60 and $90
million for initial technological capital costs.\323\ Ongoing
operations are estimated to be between $47.07 and $77.072 million
annually for all SDRs, which includes between $30 and $60 million
dedicated to ongoing annual technological costs.\324\
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\323\ These estimates were provided to the Office of Management
and Budget in compliance with the Paperwork Reduction Act of 1995
(``PRA''), 44 U.S.C. 3501 et seq. The estimates were arrived at by
considering the document entitled ``Possible Role for NFA as a
Utility for Swap Transactions,'' which appears on the NFA Web site
at http://www.cftc.gov/idc/groups/public@swaps/documents/file/derivative13sub083110-nfa.pdf. These estimates do not include
personnel costs. Because the Commission has not regulated the swap
market, it has not previously collected data on actual costs.
Accordingly, the Commission solicited comment on any aspect of the
reporting and recordkeeping burdens associated with the proposed
rules, including the accuracy of the Commission's estimates of the
burdens, in connection with OMB's review of the proposed rules and
the attendant information collections. See SDR NPRM supra note 8 at
80925. No comments were received. The Commission's submissions to
OMB, including supporting documentation, may be obtained by visiting
the Web site RegInfo.gov.
\324\ This estimate was obtained in consultation with the
Commission's IT staff.
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The Commission is unable to estimate accurately the cost of
recordkeeping given existing technologies, the current state of the
swaps market and the potential growth in the future. The difficulty in
estimating future and ongoing costs for SDRs is significantly related
to the range of duties that can vary by asset class as well as the
probability that SDR responsibilities will increase and change over
time.
2. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
The Commission believes that the adoption of the SDR regulation set
forth in part 49 together with the swap data recordkeeping and
reporting requirements proposed in part 45 will provide a robust source
of information on activities in the swaps market that is expected to
promote increased efficiency and competition. To date, the swaps market
generally has been characterized by a lack of transparency with a
select number of dealers dominating the business. Although dealers will
likely continue to have a significant presence in the swaps market, the
transparency that is envisioned in the Dodd-Frank Act and thereby
implemented by part 49 is expected to provide enhanced competition for
services, and accordingly, lead to greater efficiencies for market
participants executing swap transactions.
In addition, greater transparency for the Commission and other
regulators will provide better oversight of the swaps market and its
various market participants. Specifically, based on Sec. 49.17, SDRs
will provide transaction data, including price points and counterparty
matches, to a host of regulatory agencies (including the Commission)
providing regulators additional tools for various surveillance and
enforcement programs. This type of transparency is currently
unavailable to regulators monitoring the swaps market. In addition,
empirical data obtained from SDRs will also be employed by the
Commission and other regulatory agencies to further study the behavior
of the swaps market.
The Commission also believes that the introduction of SDRs will
further automate the execution and reporting of swap transactions. This
is likely to benefit market participants and reduce transactional risks
through SDRs and related service providers offering important ancillary
services such as confirmation and matching services, valuations,
pricing, reconciliation functions, position limits management, dispute
resolution and counterparty identification. The ability of regulators
to access the swap data maintained by SDRs will assist regulators to,
among other things, monitor risk exposures of individual counterparties
to swap transactions, monitor concentrations of risk exposure, and
evaluate systemic risk. In addition, the ability of DCOs to also
register as SDRs will help regulators better identify the significant
participants in the swap market and better assess their financial
exposures.
The Commission believes that the ``cost'' of the ``public'' or
regulatory function of an SDR could potentially conflict with its
commercial interests. This is especially true for those SDRs that seek
registration that are privately-owned and managed. As a result, the
Commission in adopting Sec. 49.17(g) and Sec. 49.21 has sought to
identify various conflicts inherent in SDR operations with the
expectation that these conflicts be minimized to the greatest extent
possible.
The Commission notes that SDRs could potentially commercialize the
swap transactional data that is reported to it through relationships
and alliances with various market data vendors and similar firms.
Moreover, the disclosure of certain proprietary swap data potentially
could compromise the submitters' intellectual property rights or
proprietary interests--for example, investment strategies, technology
systems and algorithmic trading systems. The Commission has attempted
to minimize this possibility through the adoption of Sec. 49.17(g)
which prohibits the commercial use of data by SDRs unless consented to
by the reporting party. The Commission believes that ancillary services
provided by SDRs or related entities may also create incentives for
SDRs to further promote such ancillary services. This conflict could be
manifested in the manner in which swaps are required to be reported and
through various legal provisions in user agreements between the SDR and
reporting party.
In the Commission's view, fees charged by SDRs for reporting and
storage of data will depend upon a
[[Page 54574]]
number of factors including, but not limited to, the (1) SDR's cost
structure; (2) availability of competitors; and (3) regulatory
oversight of fees. A variety of different business models could develop
whereby the reporting and storage of data to the SDR is but one facet
of the SDR's operations with various ancillary services taking on
greater importance.
Because of the global nature of the swaps market, ``regulatory
arbitrage'' could occur in connection with the reporting of swap data
to an SDR or repository if there are significant differences in the
regulatory regimes in the U.S. and abroad. In such a scenario, SDs
could find it advantageous to report their trades to a foreign-based
repository that is not subject to the stringent requirements embodied
in the Dodd-Frank Act. The Commission and other regulators globally
have been working to reduce the instances of regulatory arbitrage that
may occur in connection with the regulation of the swaps markets. In
particular, regulators have focused on SDRs and the reporting of swaps
as an area that should be relatively consistent or uniform worldwide.
The Commission continues to work with other regulators to coordinate
and harmonize laws and regulations relating to SDRs or repositories.
3. Price Discovery
The Commission believes that part 49, together with such Dodd-Frank
Act requirements as mandatory clearing and trading, will promote
greater price efficiency and increased competition for swaps and other
related financial instruments. Part 49's provisions relating to
regulator access will permit the Commission, other domestic regulators
and foreign regulators to examine potential price discrepancies and
other trading inconsistencies in the swaps market.
The Commission notes that requirements set forth in Sec. 49.13,
relating to an SDR's obligation to confirm the accuracy of reported
data, will create additional cost burdens for SDRs that may marginally
increase based on the scope and volume of data transmitted. In adopting
Sec. 49.13, the Commission recognizes the potential cost burdens of
this regulation based on section 21(c)(2) of the CEA, and has sought to
reduce the effect on SDRs by permitting an SDR to rely on the accuracy
of reported data if submitted by an electronic matching/confirmation
platform.
Where there are multiple SDRs for a particular asset class, the
Commission is concerned that swap data may be vulnerable to
fragmentation due to the potential for swaps in such an asset class to
be reported to more than one SDR. In addition, the Commission submits
that permitting a DCO acting as an SDR to limit its reporting to
``cleared'' swap transactions would further fragment data
reporting.\325\ The Commission also notes that if SDR regulations
adopted by the Commission and the SEC significantly diverge, SDRs and
market participants would accordingly be subject to potentially higher
fees and charges because of conflicting and/or duplicative
requirements.
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\325\ See CL-CME supra note 51.
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4. Sound Risk Management Practices
The Commission believes that part 49 and related part 45, which
addresses the reporting and recordkeeping of swap transactions by all
market participants, will greatly strengthen the risk management
practices of the swap industry. Prior to this time, participants in the
swaps markets have operated largely unregulated and without obligation
to disclose transactions to regulators and/or the public. The Dodd-
Frank Act specifically changed the transparency of the swaps market
with the adoption of section 21 of the CEA and the establishment of
SDRs as the entity to which swap transaction data will be reported and
maintained for the use of regulators. The Commission believes that the
reporting of all swap transactions to an SDR will serve to improve risk
management practices by market participants through better knowledge of
open positions and SDR services related to various trade, collateral,
and risk management practices that are likely to be offered. The
Commission notes that total transaction costs incurred by market
participants will invariably increase as a result of additional
reporting and business conduct obligations.
As adopted, Sec. 49.17 (c) provides the Commission with direct
electronic access to SDR data on a real-time basis. This access will
enable the Commission to better monitor the swap market and promptly
react to potential market emergencies from unreasonable risks and
exposures. In addition, the requirement that SDRs have in place a CCO--
mandated by section 21(e) of the CEA and implemented in Sec. 49.22--
will further support the importance of risk management and proper
conflict of interest management going forward.
Consistent with the Dodd-Frank Act, part 49 provides that swap data
reported and maintained by SDRs will be made available to both U.S. and
foreign regulators in an effort to increase global transparency and
reduce systemic risk. Because of the global and international aspects
of the swaps market, the Commission has sought, to the extent possible,
to coordinate and cooperate with foreign regulators in order to
facilitate access to swap data.
To ensure that swap data will not impermissibly be disclosed or
breached, potentially subjecting SDRs and the Commission to litigation
risks and expenses, the Dodd-Frank Act in section 21(d) of the CEA
mandated that domestic and foreign regulators (except for Supervisory
Appropriate Foreign Regulators) must execute a confidentiality and
indemnification agreement with the SDR prior to receiving access to SDR
information. Section 49.18, implementing section 21(d) of the CEA,
provides that other domestic and foreign regulators must comply with
the confidentiality requirements set forth in section 8 of the CEA
relating to the swap data that is to be provided by the registered SDR.
This confidentiality and indemnification agreement would require the
regulator to indemnify the SDR and the Commission for any expenses
arising from litigation relating to the information provided under
section 8 of the CEA. The Commission received a comment regarding
access to SDR data by foreign regulators that raised concerns with
respect to confidentiality and the role of the Commission as a
gatekeeper.\326\
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\326\ See CL-MFA supra note 51 at 3-4. MFA urged that the
Commission actively participate in verifying the validity of access
requests by foreign regulators. The Commission believes it is
inappropriate to place unnecessary burdens on foreign regulators'
access to swap data held by U.S. SDRs. The confidentiality and
indemnification agreement required to be executed between the SDR
and foreign regulators, as well as any memorandum of understanding
MOU between the Commission and foreign regulators, should ensure
that data is accessed appropriately and maintained confidentially.
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The Commission believes that regulator access (both domestic and
foreign) to the data held by an SDR is essential for appropriate risk
management to be performed by regulators. This is especially important
for regulators to be able to monitor the swap market and certain
participants relating to systemic risk.
5. Other Public Interest Considerations
The Commission believes that increased transparency resulting from
the data collected from SDRs will facilitate greater understanding of
how the swaps market interacts with and affects financial markets and
the overall economy. Increased transparency and disclosure through SDRs
to various
[[Page 54575]]
regulators will support oversight and enforcement efforts and
capabilities. In addition, empirical data that will be provided to the
Commission from SDRs in all asset classes should provide the
Commission, legislators and the public with a better understanding of
the market, thereby producing more effective public policy to reduce
overall systemic risk.
The Dodd-Frank Act and implementing regulations such as part 49
will likely have extraterritorial effects because of the global nature
of the swaps market and market participant operations. Consequently,
the Commission is cognizant of the potential for part 49 to overlap
with foreign regulations with respect to repositories or SDRs that also
operate in foreign jurisdictions. Duplicative or overlapping
regulations would potentially burden SDRs and firms that operate
globally. The Commission in implementing part 49 expects to rely on
foreign regulators and regulations to the extent possible consistent
with the Dodd-Frank Act. However, section 4(c) of the CEA, as amended
by the Dodd-Frank Act, severely limits the Commission's ability to
accommodate SDRs because of the prohibition against providing any
exemptive relief under section 21.
Pursuant to section 2(a)(13)(G) and proposed part 43 of the
Commission's regulations, the Commission expects SDRs to play a
significant role in the public dissemination of swap data. Because it
is likely that SDRs will assume a major role in the real time
dissemination of swap data, SDRs may incur greater costs in the
development of increased technology and operational resources. The
Commission is unable presently to quantify those costs; they will be
addressed in the context of the part 43 rules.
6. Comments
In the SDR NPRM, the Commission solicited comment on its
consideration of these costs and benefits. The Commission received two
comments with respect to the cost benefit analysis in the SDR
NPRM.\327\ In addition, several market participants commented more
generally that the registration procedures as proposed by the
Commission in part 49 are burdensome and could be revised to reduce the
burden on applicants for registration.\328\ CME Group asserted that the
Commission's primary focus in implementing the Dodd-Frank Act should be
on the least costly, least burdensome and most efficient alternatives
available. In that regard, CME suggested that DCOs that are also SDRs
can achieve compliance with SDR core principles by demonstrating
compliance with analogous DCO core principles. By the same token, CME
urges that the Commission offer registration relief to DCOs wishing to
register as SDRs in order to reduce the burden of filing duplicative
materials. After careful consideration, the Commission has concluded,
first, that the burden of filing duplicative materials is limited to
the costs of providing these materials electronically. Second, with
respect to core principle compliance, where a particular DCO core
principle is identical in its requirements to an SDR core principle,
the Commission believes that compliance with the latter could be
demonstrated by compliance with the former. Potential non-U.S. SDRs
expressed concern with respect to the burden of registering in multiple
countries or jurisdictions. The Dodd-Frank Act does not permit
exceptions to its registration requirements; however, as noted above in
the discussion related to registration, the Commission is undertaking
to work cooperatively with foreign regulators toward establishing,
where appropriate, a form of recognition regime to partly alleviate the
perceived burden.\329\
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\327\ CL-CME and CL-NFPE Coalition supra note 51.
\328\ See CL-CME, CL-Foreign Banks, CL-TriOptima, CL-Regis-TR
and CL-DTCC I supra note 51. These comments are discussed above in
connection with the Commission's registration procedures set forth
in Sec. 49.3.
\329\ See CL-NFPE Coalition supra note 51. As a separate matter,
the NFPE Coalition highlighted what it views as the potential
increased burden on end-users who employ swaps to hedge against
commercial risk. The NFPE Coalition expressed concern that non-
financial entities would be treated in a substantially similar
manner as swap dealers or financial services firms, thereby
unnecessarily increasing the burdens on such non-financial entities.
The Commission believes that these concerns are more properly
addressed in the Data and Real-Time Reporting rulemakings. See Data
NPRM supra note 6 and Real-Time NPRM supra note 28.
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Consistent with section 15(a) of the CEA, the Commission believes
that part 49 as adopted is in the public interest and will further
protect participants and the public, promote efficiency, competition
and the financial integrity of financial markets, promote accurate and
efficient price discovery, enhance sound risk management practices and
address other public interest considerations such as access to SDR data
by other domestic and foreign regulators.
C. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.,
requires that agencies consider the impact of their rules on small
businesses. The Commission noted in the proposing release that although
it has established certain definitions of ``small entity'' to be used
in evaluating the impact of its rules under the RFA,\330\ it had not
previously addressed the question of whether SDRs are small entities
for purposes of the RFA. For the reasons set forth in the proposing
release, the Commission determined that, similar to DCOs and DCMs, SDRs
are not ``small entities'' for purposes of the RFA. Accordingly, the
Chairman, on behalf of the Commission, certified in the NPRM pursuant
to 5 U.S.C. 605(b) that the actions to be taken herein will not have a
significant economic impact on a substantial number of small
entities.\331\
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\330\ The Commission previously has established that, because of
the central role they play in the regulatory scheme concerning
futures trading, the importance of futures trading in the national
economy, and the stringent requirements of the CEA, DCOs and DCMs
are not small entities. See SDR NPRM supra note 8 at 80926.
\331\ SDR NPRM supra note 8 at 80926.
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V. List of Subjects
List of Subjects in 17 CFR Part 49
Swap data repositories; registration and regulatory requirements.
In consideration of the foregoing, and pursuant to the authority in
the Commodity Exchange Act, as amended, and in particular sections
8a(5) and 21 of the Act, the Commission hereby adopts an amendment to
Chapter I of Title 17 of the Code of Federal Regulation by adding a new
part 49 as follows:
PART 49--SWAP DATA REPOSITORIES
Sec.
49.1 Scope.
49.2 Definitions.
49.3 Procedures for registration.
49.4 Withdrawal from registration.
49.5 Equity interest transfers.
49.6 Registration of successor entities.
49.7 Swap data repositories located in foreign jurisdictions.
49.8 Procedures for implementing registered swap data repository
rules.
49.9 Duties of registered swap data repositories.
49.10 Acceptance of data.
49.11 Confirmation of data accuracy.
49.12 Swap data repository recordkeeping requirements.
49.13 Monitoring, screening and analyzing swap data.
49.14 Monitoring, screening and analyzing end-user clearing
exemption claims by individual and affiliated entities.
49.15 Real-time public reporting of swap data.
49.16 Privacy and confidentiality requirements of swap data
repositories.
[[Page 54576]]
49.17 Access to SDR data.
49.18 Confidentiality and indemnification agreement.
49.19 Core principles applicable to registered swap data
repositories.
49.20 Governance arrangements (Core Principle 2).
49.21 Conflicts of interest (Core Principle 3).
49.22 Chief compliance officer.
49.23 Emergency policies and procedures.
49.24 System safeguards.
49.25 Financial resources.
49.26 Disclosure requirements of swap data repositories.
49.27 Access and fees.
Appendix A to Part 49--Form SDR
Authority: 7 U.S.C. 12a and 24a, as amended by Title VII of the
Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,
124 Stat. 1376 (2010), unless otherwise noted.
Sec. 49.1 Scope.
The provisions of this part apply to any swap data repository as
defined under Section 1a(48) of the Act which is registered or is
required to register as such with the Commission pursuant to Section
21(a) of the Act.
Sec. 49.2 Definitions.
(a) As used in this part:
(1) Affiliate. The term ``affiliate'' means a person that directly,
or indirectly, controls, is controlled by, or is under common control
with, the swap data repository.
(2) Asset Class. The term ``asset class'' means the particular
broad category of goods, services or commodities underlying a swap. The
asset classes include credit, equity, interest rates, foreign exchange,
other commodities, and such other asset classes as may be determined by
the Commission.
(3) Commercial Use. The term ``commercial use'' means the use of
swap data held and maintained by a registered swap data repository for
a profit or business purposes. The use of swap data for regulatory
purposes and/or responsibilities by a registered swap data repository
would not be considered a commercial use regardless of whether the
registered swap data repository charges a fee for reporting such swap
data.
(4) Control. The term ``control'' (including the terms ``controlled
by'' and ``under common control with'') means the possession, direct or
indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of
voting securities, by contract, or otherwise.
(5) Foreign Regulator. The term ``foreign regulator'' means a
foreign futures authority as defined in Section 1a(26) of the Act,
foreign financial supervisors, foreign central banks and foreign
ministries.
(6) Independent Perspective. The term ``independent perspective''
means a viewpoint that is impartial regarding competitive, commercial,
or industry concerns and contemplates the effect of a decision on all
constituencies involved.
(7) Market Participant. The term ``market participant'' means any
person participating in the swap market, including, but not limited to,
designated contract markets, derivatives clearing organizations, swaps
execution facilities, swap dealers, major swap participants, and any
other counterparties to a swap transaction.
(8) Non-affiliated third party. The term ``non-affiliated third
party'' means any person except:
(i) The swap data repository;
(ii) The swap data repository's affiliate; or
(iii) A person employed by a swap data repository and any entity
that is not the swap data repository's affiliate (and ``non-affiliated
third party'' includes such entity that jointly employs the person).
(9) Person Associated with a Swap Data Repository. The term
``person associated with a swap data repository'' means:
(i) Any partner, officer, or director of such swap data repository
(or any person occupying a similar status or performing similar
functions);
(ii) Any person directly or indirectly controlling, controlled by,
or under common control with such swap data repository; or
(iii) Any person employed by such swap data repository.
(10) Position. The term ``position'' means the gross and net
notional amounts of open swap transactions aggregated by one or more
attributes, including, but not limited to, the:
(i) Underlying instrument;
(ii) Index, or reference entity;
(iii) Counterparty;
(iv) Asset class;
(v) Long risk of the underlying instrument, index, or reference
entity; and
(vi) Short risk of the underlying instrument, index, or reference
entity.
(11) Registered Swap Data Repository. The term ``registered swap
data repository'' means a swap data repository that is registered under
Section 21 of the Act.
(12) Reporting Entity. The term ``reporting entity'' means those
entities that are required to report swap data to a registered swap
data repository. These reporting entities include designated contract
markets, swaps execution facilities, derivatives clearing
organizations, swap dealers, major swap participants and certain non-
swap dealers/non-major swap participant counterparties.
(13) SDR Information. The term ``SDR Information'' means any
information that the swap data repository receives or maintains.
(14) Section 8 Material. The term ``Section 8 Material'' means the
business transactions, trade data, or market positions of any person
and trade secrets or names of customers.
(15) Swap Data. The term ``swap data'' means the specific data
elements and information set forth in part 45 of this chapter that is
required to be reported by a reporting entity to a registered swap data
repository.
(b) Defined Terms. Capitalized terms not defined in this part shall
have the meanings assigned to them in Sec. 1.3 of this chapter.
Sec. 49.3 Procedures for registration.
(a) Application Procedures. (1) An applicant, person or entity
desiring to be registered as a swap data repository shall file
electronically an application for registration on Form SDR provided in
appendix A to this part, with the Secretary of the Commission at its
headquarters in Washington, DC in a format and in the manner specified
by the Secretary of the Commission in accordance with the instructions
contained therein.
(2) The application shall include information sufficient to
demonstrate compliance with core principles specified in Section 21 of
the Act and the regulations thereunder. Form SDR consists of
instructions, general questions and a list of Exhibits (documents,
information and evidence) required by the Commission in order to
determine whether an applicant is able to comply with the core
principles. An application will not be considered to be materially
complete unless the applicant has submitted, at a minimum, the exhibits
as required in Form SDR. If the application is not materially complete,
the Commission shall notify the applicant that the application will not
be deemed to have been submitted for purposes of the 180-day review
procedures.
(3) 180-Day Review Procedures. The Commission will review the
application for registration as a swap data repository within 180 days
of the date of the filing of such application. In considering an
application for registration as a swap data repository, the staff of
the Commission shall include in its review, an applicant's past
relevant submissions and compliance history. At or prior to
[[Page 54577]]
the conclusion of the 180-day period, the Commission will either by
order grant registration; extend, by order, the 180-day review period
for good cause; or deny the application for registration as a swap data
repository. The 180-day review period shall commence once a completed
submission on Form SDR is submitted to the Commission. The
determination of when such submission on Form SDR is complete shall be
at the sole discretion of the Commission. If deemed appropriate, the
Commission may grant registration as a swap data repository subject to
conditions. If the Commission denies an application for registration as
a swap data repository, it shall specify the grounds for such denial.
In the event of a denial of registration for a swap data repository,
any person so denied shall be afforded an opportunity for a hearing
before the Commission.
(4) Standard for Approval. The Commission shall grant the
registration of a swap data repository if the Commission finds that
such swap data repository is appropriately organized, and has the
capacity: to ensure the prompt, accurate and reliable performance of
its functions as a swap data repository; comply with any applicable
provisions of the Act and regulations thereunder; carry out its
functions in a manner consistent with the purposes of Section 21 of the
Act and the regulations thereunder; and operate in a fair, equitable
and consistent manner. The Commission shall deny registration of a swap
data repository if it appears that the application is materially
incomplete; fails in form or substance to meet the requirements of
Section 21 of the Act and part 49; or is amended or supplemented in a
manner that is inconsistent with this Sec. 49.3. The Commission shall
notify the applicant seeking registration that the Commission is
denying the application setting forth the deficiencies in the
application, and/or the manner in which the application fails to meet
the requirements of this part.
(5) Amendments and Annual Filing. If any information reported on
Form SDR or in any amendment thereto is or becomes inaccurate for any
reason, whether before or after the application for registration has
been granted, the swap data repository shall promptly file an amendment
on Form SDR updating such information. In addition, the swap data
repository shall annually file an amendment on Form SDR within 60 days
after the end of each fiscal year.
(6) Service of Process. Each swap data repository shall designate
and authorize on Form SDR an agent in the United States, other than a
Commission official, who shall accept any notice or service of process,
pleadings, or other documents in any action or proceedings brought
against the swap data repository to enforce the Act and the regulations
thereunder.
(b) Provisional Registration. The Commission, upon the request of
an applicant, may grant provisional registration of a swap data
repository if such applicant is in substantial compliance with the
standards set forth in paragraph (a)(4) of this section and is able to
demonstrate operational capability, real-time processing, multiple
redundancy and robust security controls. Such provisional registration
of a swap data repository shall expire on the earlier of: the date that
the Commission grants or denies registration of the swap data
repository; or the date that the Commission rescinds the temporary
registration of the swap data repository. This paragraph (b) shall
terminate within such time as determined by the Commission. A
provisional registration granted by the Commission does not affect the
right of the Commission to grant or deny permanent registration as
provided under paragraph (a)(3) of this section.
(c) Withdrawal of Application for Registration. An applicant for
registration may withdraw its application submitted pursuant to
paragraph (a) of this section by filing with the Commission such a
request. Withdrawal of an application for registration shall not affect
any action taken or to be taken by the Commission based upon actions,
activities, or events occurring during the time that the application
for registration was pending with the Commission, and shall not
prejudice the filing of a new application by such applicant.
(d) Reinstatement of Dormant Registration. Before accepting or re-
accepting swap transaction data, a dormant registered swap data
repository as defined in Sec. 40.1(e) of this chapter shall reinstate
its registration under the procedures set forth in paragraph (a) of
this section; provided, however, that an application for reinstatement
may rely upon previously submitted materials that still pertain to, and
accurately describe, current conditions.
(e) Delegation of Authority. (1) The Commission hereby delegates,
until it orders otherwise, to the Director of the Division of Market
Oversight or the Director's delegates, with the consultation of the
General Counsel or the General Counsel's delegates, the authority to
notify an applicant seeking registration as a swap data repository
pursuant to Section 21 of the Act that the application is materially
incomplete and the 180-day period review period is extended.
(2) The Director of the Division of Market Oversight may submit to
the Commission for its consideration any matter which has been
delegated in this paragraph.
(3) Nothing in this paragraph prohibits the Commission, at its
election, from exercising the authority delegated in paragraph (e)(1)
of this section.
(f) Request for Confidential Treatment. An applicant for
registration may request confidential treatment for materials submitted
in its application as set forth in Sec. Sec. 40.8 and 145.9 of this
chapter. The applicant shall identify with particularity information in
the application that will be subject to a request for confidential
treatment.
Sec. 49.4 Withdrawal from registration.
(a)(1) A registered swap data repository may withdraw its
registration by giving notice in writing to the Commission requesting
that its registration as a swap data repository be withdrawn, which
notice shall be served at least sixty days prior to the date named
therein as the date when the withdrawal of registration shall take
effect. The request to withdraw shall be made by a person duly
authorized by the registrant and shall specify:
(i) The name of the registrant for which withdrawal of registration
is being requested;
(ii) The name, address and telephone number of the swap data
repository that will have custody of data and records of the
registrant;
(iii) The address where such data and records will be located; and
(iv) A statement that the custodial swap data repository is
authorized to make such data and records available in accordance with
Sec. 1.44.
(2) Prior to filing a request to withdraw, a registered swap data
repository shall file an amended Form SDR to update any inaccurate
information. A withdrawal of registration shall not affect any action
taken or to be taken by the Commission based upon actions, activities
or events occurring during the time that the facility was designated by
the Commission.
(b) A notice of withdrawal from registration filed by a swap data
repository shall become effective for all matters (except as provided
in this paragraph (b)) on the 60th day after the filing thereof with
the Commission, within such longer period of time as to which such swap
data repository
[[Page 54578]]
consents or which the Commission, by order, may determine as necessary
or appropriate in the public interest.
(c) Revocation of Registration for False Application. If, after
notice and opportunity for hearing, the Commission finds that any
registered swap data repository has obtained its registration by making
any false or misleading statements with respect to any material fact or
has violated or failed to comply with any provision of the Act and
regulations thereunder, the Commission, by order, may revoke the
registration. Pending final determination whether any registration
shall be revoked, the Commission, by order, may suspend such
registration, if such suspension appears to the Commission, after
notice and opportunity for hearing, to be necessary or appropriate and
in the public interest.
Sec. 49.5 Equity interest transfers.
(a) Equity transfer notification. Upon entering into any
agreement(s) that could result in an equity interest transfer of ten
percent or more in the swap data repository, the swap data repository
shall file a notification of the equity interest transfer with the
Secretary of the Commission at its headquarters in Washington, DC in a
format and in the manner specified by the Secretary of the Commission,
no later than the business day, as defined in Sec. 40.1 of this
chapter, following the date on which the swap data repository enters
into a firm obligation to transfer the equity interest. The swap data
repository shall also amend any information that is no longer accurate
on Form SDR consistent with the procedures set forth in Sec. 49.3 of
this part.
(b) Required information. The notification must include and be
accompanied by: any relevant agreement(s), including any preliminary
agreements; any associated changes to relevant corporate documents; a
chart outlining any new ownership or corporate or organizational
structure; a brief description of the purpose and any impact of the
equity interest transfer; and a representation from the swap data
repository that it meets all of the requirements of Section 21 of the
Act and Commission regulations adopted thereunder. The swap data
repository shall keep the Commission apprised of the projected date
that the transaction resulting in the equity interest transfer will be
consummated, and must provide to the Commission any new agreements or
modifications to the original agreement(s) filed pursuant to this
section. The swap data repository shall notify the Commission of the
consummation of the transaction on the day in which it occurs.
(c) Certification. (1) Upon a transfer of an equity interest of ten
percent or more in a registered swap data repository, the registered
swap data repository shall file with the Secretary of the Commission at
its headquarters in Washington, DC in a format and in the manner
specified by the Secretary of the Commission, a certification that the
registered swap data repository meets all of the requirements of
Section 21 of the Act and Commission regulations adopted thereunder, no
later than two business days, as defined in Sec. 40.1 of this chapter,
following the date on which the equity interest of ten percent or more
was acquired. Such certification shall state whether changes to any
aspects of the swap data repository's operations were made as a result
of such change in ownership, and include a description of any such
change(s).
(2) The certification required under this paragraph may rely on and
be supported by reference to an application for registration as a swap
data repository or prior filings made pursuant to a rule submission
requirement, along with any necessary new filings, including new
filings that provide any and all material updates of prior submissions.
Sec. 49.6 Registration of successor entities.
(a) In the event of a corporate transaction, such as a re-
organization, merger, acquisition, bankruptcy or other similar
corporate event, that creates a new entity, in which the swap data
repository continues to operate, the swap data repository shall request
a transfer of the registration, rules, and other matters, no later than
30 days after the succession. The registration of the predecessor shall
be deemed to remain effective as the registration of the successor if
the successor, within 30 days after such succession, files an
application for registration on Form SDR, and the predecessor files a
request for vacation of registration on Form SDR provided, however,
that the registration of the predecessor swap data repository shall
cease to be effective 90 days after the application for registration on
Form SDR is filed by the successor swap data repository.
(b) If the succession is based solely on a change in the
predecessor's date or state of incorporation, form of organization, or
composition of a partnership, the successor may, within 30 days after
the succession, amend the registration of the predecessor swap data
repository on Form SDR to reflect these changes. This amendment shall
be an application for registration filed by the predecessor and adopted
by the successor.
Sec. 49.7 Swap data repositories located in foreign jurisdictions.
Any swap data repository located outside of the United States
applying for registration pursuant to Sec. 49.3 of this part shall
certify on Form SDR and provide an opinion of counsel that the swap
data repository, as a matter of law, is able to provide the Commission
with prompt access to the books and records of such swap data
repository and that the swap data repository can submit to onsite
inspection and examination by the Commission.
Sec. 49.8 Procedures for implementing registered swap data repository
rules.
(a) Request for Commission approval of rules. An applicant for
registration as a swap data repository may request that the Commission
approve under Section 5c(c) of the Act, any or all of its rules and
subsequent amendments thereto, prior to their implementation or,
notwithstanding the provisions of Section 5c(c)(2) of the Act, at
anytime thereafter, under the procedures of Sec. 40.5 of this chapter.
(b) Notwithstanding the timeline under Sec. 40.5(c) of this
chapter, the rules of a swap data repository that have been submitted
for Commission approval at the same time as an application for
registration under Sec. 49.3 of this part or to reinstate the
registration of a dormant registered swap data repository, as defined
in Sec. 40.1 of this chapter, will be deemed approved by the
Commission no earlier than when the swap data repository is deemed to
be registered or reinstated.
(c) Self-certification of rules. Rules of a registered swap data
repository not voluntarily submitted for prior Commission approval
pursuant to paragraph (a) of this section must be submitted to the
Commission with a certification that the rule or rule amendment
complies with the Act or rules thereunder pursuant to the procedures of
Sec. 40.6 of this chapter, as applicable.
Sec. 49.9 Duties of registered swap data repositories.
(a) Duties. To be registered, and maintain registration, as a swap
data repository, a registered swap data repository shall:
(1) Accept swap data as prescribed in Sec. 49.10 for each swap;
(2) Confirm, as prescribed in Sec. 49.11, with both counterparties
to the swap the accuracy of the swap data that was submitted;
(3) Maintain, as prescribed in Sec. 49.12, the swap data described
in part 45 of the
[[Page 54579]]
Commission's Regulations in such form and manner as provided therein
and in the Act and the rules and regulations thereunder;
(4) Provide direct electronic access to the Commission (or any
designee of the Commission, including another registered entity) as
prescribed in Sec. 49.17;
(5) Provide the information set forth in Sec. 49.15 to comply with
the public reporting requirements set forth in Section 2(a)(13) of the
Act;
(6) Establish automated systems for monitoring, screening, and
analyzing swap data as prescribed in Sec. 49.13;
(7) Establish automated systems for monitoring, screening and
analyzing end-user clearing exemption claims as prescribed in Sec.
49.14;
(8) Maintain the privacy of any and all swap data and any other
related information that the swap data repository receives from a
reporting entity as prescribed in Sec. 49.16;
(9) Upon request of certain appropriate domestic and foreign
regulators, provide access to swap data and information held and
maintained by the swap data repository as prescribed in Sec. 49.17;
(10) Adopt and establish appropriate emergency policies and
procedures, including business continuity and disaster recovery plans,
as prescribed in Sec. 49.23 and Sec. 49.24.
(11) Designate an individual to serve as a chief compliance officer
who shall comply with Sec. 49.22; and
(12) Subject itself to inspection and examination by the
Commission.
(b) This Regulation is not intended to limit, or restrict, the
applicability of other provisions of the Act, including, but not
limited to, Section 2(a)(13) of the Act and rules and regulations
promulgated thereunder.
Sec. 49.10 Acceptance of data.
(a) A registered swap data repository shall establish, maintain,
and enforce policies and procedures for the reporting of swap data to
the registered swap data repository and shall accept and promptly
record all swap data in its selected asset class and other regulatory
information that is required to be reported pursuant to part 45 and
part 43 of this chapter by designated contract markets, derivatives
clearing organizations, swap execution facilities, swap dealers, major
swap participants and/or non-swap dealer/non-major swap participant
counterparties.
(1) Electronic Connectivity. For the purpose of accepting all swap
data as required by part 45 and part 43, the registered swap data
repository shall adopt policies and procedures, including technological
protocols, which provide for electronic connectivity between the swap
data repository and designated contract markets, derivatives clearing
organizations, swaps execution facilities, swap dealers, major swap
participants and/or certain other non-swap dealer/non-major swap
participant counterparties who report such data. The technological
protocols established by a swap data repository shall provide for the
receipt of swap creation data, swap continuation data, real-time public
reporting data, and all other data and information required to be
reported to such swap data repository. The swap data repository shall
ensure that its mechanisms for swap data acceptance are reliable and
secure.
(b) A registered swap data repository shall set forth in its
application for registration as described in Sec. 49.3 the specific
asset class or classes for which it will accept swaps data. If a swap
data repository accepts swap data of a particular asset class, then it
shall accept data from all swaps of that asset class, unless otherwise
prescribed by the Commission.
(c) A registered swap data repository shall establish policies and
procedures reasonably designed to prevent any provision in a valid swap
from being invalidated or modified through the confirmation or
recording process of the swap data repository. The policies and
procedures must ensure that the swap data repository's user agreements
are designed to prevent any such invalidation or modification.
(d) A registered swap data repository shall establish procedures
and provide facilities for effectively resolving disputes over the
accuracy of the swap data and positions that are recorded in the
registered swap data repository.
Sec. 49.11 Confirmation of data accuracy.
(a) A registered swap data repository shall establish policies and
procedures to ensure the accuracy of swap data and other regulatory
information required to be reported by part 45 that it receives from
reporting entities or certain third-party service providers acting on
their behalf, such as confirmation or matching service providers.
(b) A registered swap data repository shall confirm the accuracy of
all swap data that is submitted pursuant to part 45.
(1) Confirmation of data accuracy for swap creation data as defined
in part 45.
(i) A registered swap data repository has confirmed the accuracy of
swap creation data that was submitted directly by a counterparty if the
swap data repository has notified both counterparties of the data that
was submitted and received from both counterparties acknowledgement of
the accuracy of the swap data and corrections for any errors.
(ii) A registered swap data repository has confirmed the accuracy
of swap creation data that was submitted by a swap execution facility,
designated contract market, derivatives clearing organization, or
third-party service provider who is acting on behalf of a counterparty,
if the swap data repository has complied with each of the following:
(A) The swap data repository has formed a reasonable belief that
the swap data is accurate;
(B) The swap data that was submitted, or any accompanying
information, evidences that both counterparties agreed to the data; and
(C) The swap data repository has provided both counterparties with
a 48 hour correction period after which a counterparty is assumed to
have acknowledged the accuracy of the swap data.
(2) Confirmation of data accuracy for swap continuation data as
defined in part 45.
(i) A registered swap data repository has confirmed the accuracy of
the swap continuation data that was submitted directly by a
counterparty if the swap data repository has notified both
counterparties of the data that was submitted and provided both
counterparties with a 48 hour correction period after which a
counterparty is assumed to have acknowledged the accuracy of the data.
(ii) A registered swap data repository has confirmed the accuracy
of swap continuation data that was submitted by a swap execution
facility, designated contract market, derivatives clearing
organization, or third-party service provider who is acting on behalf
of a counterparty, if the swap data repository has complied with each
of the following:
(A) The swap data repository has formed a reasonable belief that
the swap data is accurate; and
(B) The swap data repository has provided both counterparties with
a 48 hour correction period after which a counterparty is assumed to
have acknowledged the accuracy of the swap data.
(c) A registered swap data repository shall keep a record of
corrected errors that is available upon request to the Commission.
[[Page 54580]]
Sec. 49.12 Swap data repository recordkeeping requirements.
(a) A registered swap data repository shall maintain its books and
records in accordance with the requirements of part 45 of this chapter
regarding the swap data required to be reported to the swap data
repository.
(b) A registered swap data repository shall maintain swap data
(including all historical positions) throughout the existence of the
swap and for five years following final termination of the swap, during
which time the records must be readily accessible by the swap data
repository and available to the Commission via real-time electronic
access; and in archival storage for which such swap data is retrievable
by the swap data repository within three business days.
(c) All records required to be kept pursuant to this Regulation
shall be open to inspection upon request by any representative of the
Commission and the United States Department of Justice. Copies of all
such records shall be provided, at the expense of the swap data
repository or person required to keep the record, to any representative
of the Commission upon request, either by electronic means, in hard
copy, or both, as requested by the Commission.
(d) A registered swap data repository shall comply with the real
time public reporting and recordkeeping requirements prescribed in
Sec. 49.15 and part 43 of this chapter.
(e) A registered swap data repository shall establish policies and
procedures to calculate positions for position limits and any other
purpose as required by the Commission, for all persons with swaps that
have not expired maintained by the registered swap data repository.
Sec. 49.13 Monitoring, screening and analyzing swap data.
(a) Duty to Monitor, Screen and Analyze Data. A registered swap
data repository shall monitor, screen, and analyze all swap data in its
possession in such a manner as the Commission may require. A swap data
repository shall routinely monitor, screen, and analyze swap data for
the purpose of any standing swap surveillance objectives which the
Commission may establish as well as perform specific monitoring,
screening, and analysis tasks based on ad hoc requests by the
Commission.
(b) Capacity to Monitor, Screen and Analyze Data. A registered swap
data repository shall establish and maintain sufficient information
technology, staff, and other resources to fulfill the requirements in
this Sec. 49.13 in a manner prescribed by the Commission. A swap data
repository shall monitor the sufficiency of such resources at least
annually, and adjust its resources as its responsibilities, or the
volume of swap transactions subject to monitoring, screening, and
analysis, increase.
Sec. 49.14 Monitoring, screening and analyzing end-user clearing
exemption claims by individual and affiliated entities.
A registered swap data repository shall have automated systems
capable of identifying, aggregating, sorting, and filtering all swap
transactions that are reported to it which are exempt from clearing
pursuant to Section 2(h)(7) of the Act. Such capabilities shall be
applicable to any information provided to a swap data repository by or
on behalf of an end user regarding how such end user meets the
requirements of Sections 2(h)(7)(A)(i), 2(h)(7)(A)(ii), and
2(h)(7)(A)(iii) of the Act and any Commission regulations thereunder.
Sec. 49.15 Real-time public reporting of swap data.
(a) Scope. The provisions of this Sec. 49.15 apply to real-time
public reporting of swap data, as defined in part 43 of this chapter.
(b) Systems to Accept and Disseminate Swap Data In Connection With
Real-Time Public Reporting. A registered swap data repository shall
establish such electronic systems as are necessary to accept and
publicly disseminate real-time swap data submitted to meet the real-
time public reporting obligations of part 43 of this chapter. Any
electronic systems established for this purpose must be capable of
accepting and ensuring the public dissemination of all data fields
required by part 43 of this chapter.
(c) Duty to Notify the Commission of Untimely Data. A registered
swap data repository must notify the Commission of any swap transaction
for which the real-time swap data was not received by the swap data
repository in accordance with part 43 of this chapter.
Sec. 49.16 Privacy and confidentiality requirements of swap data
repositories.
(a) Each swap data repository shall:
(1) Establish, maintain, and enforce written policies and
procedures reasonably designed to protect the privacy and
confidentiality of any and all SDR Information that is not subject to
real-time public reporting set forth in part 43 of this chapter. Such
policies and procedures shall include, but are not limited to, policies
and procedures to protect the privacy and confidentiality of any and
all SDR Information (except for swap data disseminated under part 43)
that the swap data repository shares with affiliates and non-affiliated
third parties; and
(2) Establish and maintain safeguards, policies, and procedures
reasonably designed to prevent the misappropriation or misuse, directly
or indirectly, of:
(i) Section 8 Material;
(ii) Other SDR Information; and/or
(iii) Intellectual property, such as trading strategies or
portfolio positions, by the swap data repository or any person
associated with the swap data repository. Such safeguards, policies,
and procedures shall include, but are not limited to,
(A) limiting access to such Section 8 Material, other SDR
Information, and intellectual property,
(B) standards controlling persons associated with the swap data
repository trading for their personal benefit or the benefit of others,
and
(C) adequate oversight to ensure compliance with this subparagraph.
(b) Swap data repositories shall not, as a condition of accepting
swap data from reporting entities, require the waiver of any privacy
rights by such reporting entities.
(c) Subject to Section 8 of the Act, swap data repositories may
disclose aggregated swap data on a voluntary basis or as requested, in
the form and manner, prescribed by the Commission.
Sec. 49.17 Access to SDR data.
(a) Purpose. This Section provides a procedure by which the
Commission, other domestic regulators and foreign regulators may obtain
access to the swaps data held and maintained by registered swap data
repositories. Except as specifically set forth in this Regulation, the
Commission's duties and obligations regarding the confidentiality of
business transactions or market positions of any person and trade
secrets or names of customers identified in Section 8 of the Act are
not affected.
(b) Definitions. For purposes of this Sec. 49.17, the following
terms shall be defined as follows:
(1) Appropriate Domestic Regulator. The term ``Appropriate Domestic
Regulator'' shall mean:
(i) The Securities and Exchange Commission;
(ii) Each prudential regulator identified in Section 1a(39) of the
Act with respect to requests related to any of such regulator's
statutory authorities, without limitation to the activities listed for
each regulator in Section 1a(39);
(iii) The Financial Stability Oversight Council;
(iv) The Department of Justice;
(v) Any Federal Reserve Bank;
[[Page 54581]]
(vi) The Office of Financial Research; and
(vii) Any other person the Commission deems appropriate.
(2) Appropriate Foreign Regulator. The term ``Appropriate Foreign
Regulator'' shall mean those Foreign Regulators with an existing
memorandum of understanding or other similar type of information
sharing arrangement executed with the Commission and/or Foreign
Regulators without an MOU as determined on a case-by-case basis by the
Commission.
(i) Filing Requirements. For those Foreign Regulators who do not
currently have a memorandum of understanding with the Commission, the
Commission has determined to provide the following filing process for
those Foreign Regulators that may require swap data or information
maintained by a registered swap data repository. The filing requirement
set forth in this Sec. 49.17 will assist the Commission in its
analysis of whether a specific Foreign Regulator should be considered
``appropriate'' for purposes of Section 21(c)(7) of the Act.
(A) The Foreign Regulator is required to file an application in the
form and manner prescribed by the Commission.
(B) The Foreign Regulator in its application is required to provide
sufficient facts and procedures to permit the Commission to analyze
whether the Foreign Regulator employs appropriate confidentiality
procedures and to satisfy itself that the information will be disclosed
only as permitted by Section 8(e) of the Act.
(ii) The Commission in its analysis of Foreign Regulator
applications shall be satisfied that any information potentially
provided by a registered swap data repository will not be disclosed
except in limited circumstances, such as an adjudicatory action or
proceeding involving the Foreign Regulator, as identified in Section 8
of the Act.
(iii) The Commission reserves the right in connection with any
determination of an ``Appropriate Foreign Regulator'' to revisit or
reassess a prior determination consistent with the Act.
(3) Direct Electronic Access. For the purposes of this regulation,
the term ``direct electronic access'' shall mean an electronic system,
platform or framework that provides Internet or Web-based access to
real-time swap transaction data and also provides scheduled data
transfers to Commission electronic systems.
(c) Commission Access.
(1) Direct Electronic Access. A registered swap data repository
shall provide direct electronic access to the Commission or the
Commission's designee, including another registered entity, in order
for the Commission to carry out its legal and statutory
responsibilities under the Act and related regulations.
(2) Monitoring Tools. A registered swap data repository is required
to provide the Commission with proper tools for the monitoring,
screening and analyzing of swap transaction data, including, but not
limited to, Web-based services, services that provide automated
transfer of data to Commission systems, various software and access to
the staff of the swap data repository and/or third-party service
providers or agents familiar with the operations of the registered swap
data repository, which can provide assistance to the Commission
regarding data structure and content. These monitoring tools shall be
substantially similar in analytical capability as those provided to the
compliance staff and the Chief Compliance Officer of the swap data
repository.
(3) Authorized Users. The swap transaction data provided to the
Commission by a registered swap data repository shall be accessible
only by authorized users. The swap data repository shall maintain and
provide a list of authorized users in the manner and frequency
determined by the Commission.
(d) Other Regulators. (1) General Procedure for Gaining Access to
Registered Swap Data Repository Data. Appropriate Domestic Regulators
and Appropriate Foreign Regulators seeking to gain access to the swap
data maintained by a swap data repository are required to apply for
access by filing a request for access with the registered swap data
repository and certifying that it is acting within the scope of its
jurisdiction.
(2) Appropriate Domestic Regulator with Regulatory Responsibility
over a Swap Data Repository. An Appropriate Domestic Regulator that has
regulatory jurisdiction over a swap data repository registered with it
pursuant to a separate statutory authority that is also registered with
the Commission pursuant to this chapter is not subject to this
paragraph (d) and Sec. 49.18(b) as long as the following conditions
are met:
(i) The Appropriate Domestic Regulator executes a memorandum of
understanding or similar information sharing arrangement with the
Commission; and
(ii) The Commission, consistent with Section 21(c)(4)(A) of the
Act, designates the Appropriate Domestic Regulator to receive direct
electronic access.
(3) Appropriate Foreign Regulator with Regulatory Responsibility
over a Swap Data Repository. An Appropriate Foreign Regulator that has
supervisory authority over a swap data repository registered with it
pursuant to foreign law and/or regulation that is also registered with
the Commission pursuant to this chapter is not otherwise subject to
this paragraph (d) and Sec. 49.18(b).
(4) Obligations of the Registered Swap Data Repository in
Connection with Appropriate Domestic Regulator or Appropriate Foreign
Regulator Requests for Data Access.
(i) A registered swap data repository shall promptly notify the
Commission regarding any request received by an Appropriate Domestic
Regulator or Appropriate Foreign Regulator to gain access to the swaps
transaction data maintained by such swap data repository.
(ii) The registered swap data repository shall notify the
Commission electronically in a format specified by the Secretary of the
Commission.
(5) Timing. Once the swap data repository provides the Commission
with notification of a request for data access by an Appropriate
Domestic Regulator or Appropriate Foreign Regulator as required by
paragraph (d)(2) of this section, such swap data repository shall
provide access to the requested swap data.
(6) Confidentiality and Indemnification Agreement. Consistent with
Sec. 49.18 of this part, the Appropriate Domestic Regulator or
Appropriate Foreign Regulator prior to receipt of any requested data or
information shall execute a ``Confidentiality and Indemnification
Agreement'' with the registered swap data repository as set forth in
Section 21(d) of the Act.
(e) Third-Party Service Providers to a Registered Swap Data
Repository. Access to the data and information maintained by a
registered swap data repository may be necessary for certain third
parties that provide various technology and data-related services to a
registered swap data repository. Third-party access to the swap data
maintained by a swap data repository is permissible subject to the
following conditions:
(1) Both the registered swap data repository and the third party
service provider shall have strict confidentiality procedures that
protect data and information from improper disclosure.
(2) Prior to swap data access, the third-party service provider and
the
[[Page 54582]]
registered swap data repository shall execute a ``Confidentiality
Agreement'' setting forth minimum confidentiality procedures and
permissible uses of the information maintained by the swap data
repository that are equivalent to the privacy procedures for swap data
repositories outlined in Sec. 49.16.
(f) Access by Market Participants. (1) General. Access of swap data
maintained by the registered swap data repository to market
participants is generally prohibited.
(2) Exception. Data and information related to a particular swap
that is maintained by the registered swap data repository may be
accessed by either counterparty to that particular swap.
(g) Commercial Uses of Data Accepted and Maintained by the
Registered Swap Data Repository Prohibited. Swap data accepted and
maintained by the swap data repository generally may not be used for
commercial or business purposes by the swap data repository or any of
its affiliated entities.
(1) The registered swap data repository is required to adopt and
implement adequate ``firewalls'' or controls to protect the reported
swap data required to be maintained under Sec. 49.12 of this part and
Section 21(b) of the Act from any improper commercial use.
(2) Exception. (A) The swap dealer, counterparty or any other
registered entity that submits the swap data maintained by the
registered swap data repository may permit the commercial or business
use of that data by express written consent.
(B) Swap data repositories shall not as a condition of the
reporting of swap transaction data require a reporting party to consent
to the use of any reported data for commercial or business purposes.
(3) Swap data repositories responsible for the public dissemination
of real-time swap data shall not make commercial use of such data prior
to its public dissemination.
Sec. 49.18 Confidentiality and indemnification agreement.
(a) Purpose. This section sets forth the obligations of registered
swap data repositories to execute a ``Confidentiality and
Indemnification Agreement'' in connection with providing access to swap
data to certain domestic and foreign regulators.
(b) Confidentiality and Indemnification Agreement. Prior to the
registered swap data repository providing access to the swap data with
any Appropriate Domestic Regulator or Appropriate Foreign Regulator as
defined in Sec. 49.17(b), the swap data repository shall receive a
written agreement from each such entity stating that the entity shall
abide by the confidentiality requirements described in Section 8 of the
Act relating to the swap data that is provided; and each such entity
shall agree to indemnify the swap data repository and the Commission
for any expenses arising from litigation relating to the information
provided under Section 8 of the Act.
(c) Certain Appropriate Domestic and Foreign Regulators with
Regulatory Responsibility over a Swap Data Repository. The requirements
set forth above in paragraph (b) shall not apply to certain Appropriate
Domestic and Foreign Regulators with regulatory responsibility over a
swap data repository as described in Sec. 49.17(d)(2) and (3). The
swap data repository and such Appropriate Domestic or Foreign Regulator
in each case is required to comply with Section 8 of the Act and any
other relevant statutory confidentiality provisions.
Sec. 49.19 Core principles applicable to registered swap data
repositories.
(a) Compliance with Core Principles. To be registered, and maintain
registration, a swap data repository shall comply with the core
principles as described in this paragraph. Unless otherwise determined
by the Commission by rule or regulation, a swap data repository shall
have reasonable discretion in establishing the manner in which the swap
data repository complies with the core principles described in this
paragraph.
(b) Antitrust Considerations (Core Principle 1). Unless necessary
or appropriate to achieve the purposes of the Act, a registered swap
data repository shall avoid adopting any rule or taking any action that
results in any unreasonable restraint of trade; or imposing any
material anticompetitive burden on trading, clearing or reporting
swaps.
(c) Governance Arrangements (Core Principle 2). Registered swap
data repositories shall establish governance arrangements as set forth
in Sec. 49.20.
(d) Conflicts of Interest (Core Principle 3). Registered swap data
repositories shall manage and minimize conflicts of interest and
establish processes for resolving such conflicts of interest as set
forth in Sec. 49.21.
(e) Additional Duties (Core Principle 4). Registered swap data
repositories shall also comply with the following additional duties:
(1) Financial Resources. Registered swap data repositories shall
maintain sufficient financial resources as set forth in Sec. 49.25;
(2) Disclosure Requirements of Registered Swap Data Repositories.
Registered swap data repositories shall furnish an appropriate
disclosure document setting forth the risks and costs of swap data
repository services as detailed in Sec. 49.26; and
(3) Access and Fees. Registered swap data repositories shall adhere
to Commission requirements regarding fair and open access and the
charging of any fees, dues or other similar type charges as detailed in
Sec. 49.27.
Sec. 49.20 Governance arrangements (Core Principle 2).
(a) General. (1) Each registered swap data repository shall
establish governance arrangements that are transparent to fulfill
public interest requirements, and to support the objectives of the
Federal Government, owners, and participants.
(2) Each registered swap data repository shall establish governance
arrangements that are well-defined and include a clear organizational
structure with consistent lines of responsibility and effective
internal controls, including with respect to administration,
accounting, and the disclosure of confidential information. Sec. 49.22
of this part contains rules on internal controls applicable to
administration and accounting. Sec. 49.16 of this part contains rules
on internal controls applicable to the disclosure of confidential
information.
(b) Transparency of Governance Arrangements. (1) Each registered
swap data repository shall state in its charter documents that its
governance arrangements are transparent to support, among other things,
the objectives of the Federal Government pursuant to Section 21(f)(2)
of the Act.
(2) Each registered swap data repository shall, at a minimum, make
the following information available to the public and relevant
authorities, including the Commission:
(i) The mission statement of the registered swap data repository;
(ii) The mission statement and/or charter of the board of
directors, as well as of each committee of the registered swap data
repository that has:
(A) The authority to act on behalf of the board of directors or
(B) The authority to amend or constrain actions of the board of
directors;
(iii) The board of directors nomination process for the registered
swap data repository, as well as the process for assigning members of
the board of directors or other persons to
[[Page 54583]]
any committee referenced in paragraph (b)(2)(ii) of this section;
(iv) For the board of directors and each committee referenced in
paragraph (b)(2)(ii) of this section, the names of all members;
(v) A description of the manner in which the board of directors, as
well as any committee referenced in paragraph (b)(2)(ii) of this
section, considers an Independent Perspective in its decision-making
process, as Sec. 49.2(a)(14) of this part defines such term;
(vi) The lines of responsibility and accountability for each
operational unit of the registered swap data repository to any
committee thereof and/or the board of directors; and
(vii) Summaries of significant decisions implicating the public
interest, the rationale for such decisions, and the process for
reaching such decisions. Such significant decisions shall include
decisions relating to pricing of repository services, offering of
ancillary services, access to swap data, and use of Section 8 Material,
other SDR Information, and intellectual property (as referenced in
Sec. 49.16 of this part). Such summaries of significant decisions
shall not require the registered swap data repository to disclose
Section 8 Material or, where appropriate, information that the swap
data repository received on a confidential basis from a reporting
entity.
(3) The registered swap data repository shall ensure that the
information specified in paragraph (b)(2)(i) to (vii) of this section
is current, accurate, clear, and readily accessible, for example, on
its Web site. The swap data repository shall set forth such information
in a language commonly used in the commodity futures and swap markets
and at least one of the domestic language(s) of the jurisdiction in
which the swap data repository is located.
(4) Furthermore, the registered swap data repository shall disclose
the information specified in paragraph (b)(2)(vii) of this section in a
sufficiently comprehensive and detailed fashion so as to permit the
public and relevant authorities, including the Commission, to
understand the policies or procedures of the swap data repository
implicated and the manner in which the decision implements or amends
such policies or procedures. A swap data repository shall not disclose
minutes from meetings of its board of directors or committees to the
public, although it shall disclose such minutes to the Commission upon
request.
(c) The Board of Directors. (1) General. (i) Each registered swap
data repository shall establish, maintain, and enforce (including,
without limitation, pursuant to paragraph (c)(4) of this Regulation)
written policies or procedures:
(A) To ensure that its board of directors, as well as any committee
that has:
(1) Authority to act on behalf of its board of directors or
(2) Authority to amend or constrain actions of its board of
directors, adequately considers an Independent Perspective in its
decision-making process;
(B) To ensure that the nominations process for such board of
directors, as well as the process for assigning members of the board of
directors or other persons to such committees, adequately incorporates
an Independent Perspective; and
(C) To clearly articulate the roles and responsibilities of such
board of directors, as well as such committees, especially with respect
to the manner in which they ensure that a registered swap data
repository complies with all statutory and regulatory responsibilities
under the Act and the regulations promulgated thereunder.
(ii) Each registered swap data repository shall submit to the
Commission, within thirty days after each election of its board of
directors:
(A) For the board of directors, as well as each committee
referenced in paragraph (c)(1)(i)(A) of this section, a list of all
members;
(B) A description of the relationship, if any, between such members
and the registered swap data repository or any reporting entity thereof
(or, in each case, affiliates thereof, as Sec. 49.2(a)(1) of this part
defines such term); and
(C) Any amendments to the written policies and procedures
referenced in paragraph (c)(1)(i) of this section.
(2) Compensation. The compensation of non-executive members of the
board of directors of a registered swap data repository shall not be
linked to the business performance of such swap data repository.
(3) Annual Self-Review. The board of directors of a registered swap
data repository shall review its performance and that of its individual
members annually. It should consider periodically using external
facilitators for such reviews.
(4) Board Member Removal. A registered swap data repository shall
have procedures to remove a member from the board of directors, where
the conduct of such member is likely to be prejudicial to the sound and
prudent management of the swap data repository.
(5) Expertise. Each registered swap data repository shall ensure
that members of its board of directors, members of any committee
referenced in paragraph (c)(1)(i)(A) of this Regulation, and its senior
management, in each case, are of sufficiently good repute and possess
the requisite skills and expertise to fulfill their responsibilities in
the management and governance of the swap data repository, to have a
clear understanding of such responsibilities, and to exercise sound
judgment about the affairs of the swap data repository.
(d) Compliance with Core Principle. The chief compliance officer of
the registered swap data repository shall review the compliance of the
swap data repository with this core principle.
Sec. 49.21 Conflicts of interest (Core Principle 3).
(a) General. (1) Each registered swap data repository shall
establish and enforce rules to minimize conflicts of interest in the
decision-making process of the swap data repository, and establish a
process for resolving such conflicts of interest.
(2) Nothing in this section shall supersede any requirement
applicable to the swap data repository pursuant to Sec. 49.20 of this
part.
(b) Policies and Procedures. (1) Each registered swap data
repository shall establish, maintain, and enforce written procedures
to:
(i) Identify, on an ongoing basis, existing and potential conflicts
of interest; and
(ii) Make decisions in the event of a conflict of interest. Such
procedures shall include rules regarding the recusal, in applicable
circumstances, of parties involved in the making of decisions.
(2) As further described in Sec. 49.20 of this part, the chief
compliance officer of the registered swap data repository shall, in
consultation with the board of directors or a senior officer of the
swap data repository, as applicable, resolve any such conflicts of
interest.
(c) Compliance with Core Principle. The chief compliance officer of
the registered swap data repository shall review the compliance of the
swap data repository with this core principle.
Sec. 49.22 Chief compliance officer.
(a) Definition of Board of Directors. For purposes of this part 49,
the term ``board of directors'' means the board of directors of a
registered swap data repository, or for those swap data repositories
whose organizational structure does not include a board of directors, a
body performing a function similar to that of a board of directors.
[[Page 54584]]
(b) Designation and qualifications of chief compliance officer. (1)
Chief Compliance Officer Required. Each registered swap data repository
shall establish the position of chief compliance officer, and designate
an individual to serve in that capacity.
(i) The position of chief compliance officer shall carry with it
the authority and resources to develop and enforce policies and
procedures necessary to fulfill the duties set forth for chief
compliance officers in the Act and Commission regulations.
(ii) The chief compliance officer shall have supervisory authority
over all staff acting at the direction of the chief compliance officer.
(2) Qualifications of Chief Compliance Officer. The individual
designated to serve as chief compliance officer shall have the
background and skills appropriate for fulfilling the responsibilities
of the position and shall be subject to the following requirements:
(i) No individual disqualified from registration pursuant to
Sections 8a(2) or 8a(3) of the Act may serve as a chief compliance
officer.
(ii) The chief compliance officer may not be a member of the swap
data repository's legal department or serve as its general counsel.
(c) Appointment, Supervision, and Removal of Chief Compliance
Officer. (1) Appointment and Compensation of Chief Compliance Officer
Determined by Board of Directors. A registered swap data repository's
chief compliance officer shall be appointed by its board of directors.
The board of directors shall also approve the compensation of the chief
compliance officer and shall meet with the chief compliance officer at
least annually. The appointment of the chief compliance officer and
approval of the chief compliance officer's compensation shall require
the approval of the board of directors. The senior officer of the swap
data repository may fulfill these responsibilities. A swap data
repository shall notify the Commission of the appointment of a new
chief compliance officer within two business days of such appointment.
(2) Supervision of Chief Compliance Officer. A registered swap data
repository's chief compliance officer shall report directly to the
board of directors or to the senior officer of the swap data
repository, at the swap data repository's discretion.
(3) Removal of Chief Compliance Officer by Board of Directors. (i)
Removal of a registered swap data repository's chief compliance officer
shall require the approval of the swap data repository's board of
directors. If the swap data repository does not have a board of
directors, then the chief compliance officer may be removed by the
senior officer of the swap data repository;
(ii) The swap data repository shall notify the Commission of such
removal within two business days; and
(iii) The swap data repository shall notify the Commission within
two business days of appointing any new chief compliance officer,
whether interim or permanent.
(d) Duties of Chief Compliance Officer. The chief compliance
officer's duties shall include, but are not limited to, the following:
(1) Overseeing and reviewing the swap data repository's compliance
with Section 21 of the Act and any related rules adopted by the
Commission;
(2) In consultation with the board of directors, a body performing
a function similar to the board, or the senior officer of the swap data
repository, resolving any conflicts of interest that may arise
including:
(i) Conflicts between business considerations and compliance
requirements;
(ii) Conflicts between business considerations and the requirement
that the registered swap data repository provide fair and open access
as set forth in Sec. 49.27 of this part; and
(iii) Conflicts between a registered swap data repository's
management and members of the board of directors;
(3) Establishing and administering written policies and procedures
reasonably designed to prevent violation of the Act and any rules
adopted by the Commission;
(4) Taking reasonable steps to ensure compliance with the Act and
Commission regulations relating to agreements, contracts, or
transactions, and with Commission regulations under Section 21 of the
Act, including confidentiality and indemnification agreements entered
into with foreign or domestic regulators pursuant to Section 21(d) of
the Act;
(5) Establishing procedures for the remediation of noncompliance
issues identified by the chief compliance officer through a compliance
office review, look-back, internal or external audit finding, self-
reported error, or validated complaint;
(6) Establishing and following appropriate procedures for the
handling, management response, remediation, retesting, and closing of
noncompliance issues; and
(7) Establishing and administering a written code of ethics
designed to prevent ethical violations and to promote honesty and
ethical conduct.
(e) Annual Compliance Report Prepared by Chief Compliance Officer.
The chief compliance officer shall, not less than annually, prepare and
sign an annual compliance report, that at a minimum, contains the
following information covering the time period since the date on which
the swap data repository became registered with the Commission or since
the end of the period covered by a previously filed annual compliance
report, as applicable:
(1) A description of the registered swap data repository's written
policies and procedures, including the code of ethics and conflict of
interest policies;
(2) A review of applicable Commission regulations and each
subsection and core principle of Section 21 of the Act, that, with
respect to each:
(i) Identifies the policies and procedures that are designed to
ensure compliance with each subsection and core principle, including
each duty specified in Section 21(c);
(ii) Provides a self-assessment as to the effectiveness of these
policies and procedures; and
(iii) Discusses areas for improvement, and recommends potential or
prospective changes or improvements to its compliance program and
resources;
(3) A list of any material changes to compliance policies and
procedures since the last annual compliance report;
(4) A description of the financial, managerial, and operational
resources set aside for compliance with respect to the Act and
Commission regulations;
(5) A description of any material compliance matters, including
noncompliance issues identified through a compliance office review,
look-back, internal or external audit finding, self-reported error, or
validated complaint, and explains how they were resolved; and
(6) A certification by the chief compliance officer that, to the
best of his or her knowledge and reasonable belief, and under penalty
of law, the annual compliance report is accurate and complete.
(f) Submission of Annual Compliance Report by Chief Compliance
Officer to the Commission. (1) Prior to submission of the annual
compliance report to the Commission, the chief compliance officer shall
provide the annual compliance report to the board of the registered
swap data repository for its review. If the swap data repository does
not have a board, then the annual compliance report shall be provided
to the senior officer for their review. Members of the board and the
senior officer may not require the chief compliance officer to make any
changes to the report. Submission of the report
[[Page 54585]]
to the board or senior officer, and any subsequent discussion of the
report, shall be recorded in board minutes or similar written record,
as evidence of compliance with this requirement.
(2) The annual compliance report shall be provided electronically
to the Commission not more than 60 days after the end of the registered
swap data repository's fiscal year, concurrently with the filing of the
annual amendment to Form SDR that must be submitted to the Commission
pursuant to Sec. 49.3(a)(5) of this part.
(3) Promptly upon discovery of any material error or omission made
in a previously filed compliance report, the chief compliance officer
shall file an amendment with the Commission to correct any material
error or omission. An amendment shall contain the oath or certification
required under paragraph (e)(67) of this section.
(4) A registered swap data repository may request the Commission
for an extension of time to file its compliance report based on
substantial, undue hardship. Extensions for the filing deadline may be
granted at the discretion of the Commission.
(g) Recordkeeping. (1) The registered swap data repository shall
maintain:
(i) A copy of the written policies and procedures, including the
code of ethics and conflicts of interest policies adopted in
furtherance of compliance with the Act and Commission regulations;
(ii) Copies of all materials, including written reports provided to
the board of directors or senior officer in connection with the review
of the annual compliance report under paragraph (f)(1) of this section
and the board minutes or similar written record of such review, that
record the submission of the annual compliance report to the board of
directors or senior officer; and
(iii) Any records relevant to the registered swap data repository's
annual compliance report, including, but not limited to, work papers
and other documents that form the basis of the report, and memoranda,
correspondence, other documents, and records that are:
(A) Created, sent or received in connection with the annual
compliance report and
(B) Contain conclusions, opinions, analyses, or financial data
related to the annual compliance report.
(2) The registered swap data repository shall maintain records in
accordance with Sec. 1.31 of this chapter.
Sec. 49.23 Emergency authority policies and procedures.
(a) Emergency Policies and Procedures Required. A registered swap
data repository shall establish policies and procedures for the
exercise of emergency authority in the event of any emergency,
including but not limited to natural, man-made, and information
technology emergencies. Such policies and procedures shall also require
a swap data repository to exercise its emergency authority upon request
by the Commission. A swap data repository's policies and procedures for
the exercise of emergency authority shall be transparent to the
Commission and to market participants whose swap transaction data
resides at the swap data repository.
(b) Invocation of Emergency Authority. A registered swap data
repository's policies and procedures for the exercise of emergency
authority shall enumerate the circumstances under which the swap data
repository is authorized to invoke its emergency authority and the
procedures that it shall follow to declare an emergency. Such policies
and procedures shall also address the range of measures that it is
authorized to take when exercising such emergency authority.
(c) Designation of Persons Authorized to Act in an Emergency. A
registered swap data repository shall designate one or more officials
of the swap data repository as persons authorized to exercise emergency
authority on its behalf. A swap data repository shall also establish a
chain of command to be used in the event that the designated person(s)
is unavailable. A swap data repository shall notify the Commission of
the person(s) designated to exercise emergency authority.
(d) Conflicts of Interest. A registered swap data repository's
policies and procedures for the exercise of emergency authority shall
include provisions to avoid conflicts of interest in any decisions made
pursuant to emergency authority. Such policies and procedures shall
also include provisions to consult the swap data repository's chief
compliance officer in any emergency decision that may raise potential
conflicts of interest.
(e) Notification to the Commission. A registered swap data
repository's policies and procedures for the exercise of emergency
authority shall include provisions to notify the Commission as soon as
reasonably practicable regarding any invocation of emergency authority.
When notifying the Commission of any exercise of emergency authority, a
swap data repository shall explain the reasons for taking such
emergency action, explain how conflicts of interest were minimized, and
document the decision-making process. Underlying documentation shall be
made available to the Commission upon request.
Sec. 49.24 System safeguards.
(a) Each registered swap data repository shall, with respect to all
swap data in its custody:
(1) Establish and maintain a program of risk analysis and oversight
to identify and minimize sources of operational risk through the
development of appropriate controls and procedures and the development
of automated systems that are reliable, secure, and have adequate
scalable capacity;
(2) Establish and maintain emergency procedures, backup facilities,
and a business continuity-disaster recovery plan that allow for the
timely recovery and resumption of operations and the fulfillment of the
duties and obligations of the swap data repository; and
(3) Periodically conduct tests to verify that backup resources are
sufficient to ensure continued fulfillment of all duties of the swap
data repository established by the Act or the Commission's regulations.
(b) A registered swap data repository's program of risk analysis
and oversight with respect to its operations and automated systems
shall address each of the following categories of risk analysis and
oversight:
(1) Information security;
(2) Business continuity--disaster recovery planning and resources;
(3) Capacity and performance planning;
(4) Systems operations;
(5) Systems development and quality assurance; and
(6) Physical security and environmental controls.
(c) In addressing the categories of risk analysis and oversight
required under paragraph (b) of this section, a registered swap data
repository should follow generally accepted standards and best
practices with respect to the development, operation, reliability,
security, and capacity of automated systems.
(d) A registered swap data repository shall maintain a business
continuity--disaster recovery plan and business continuity--disaster
recovery resources, emergency procedures, and backup facilities
sufficient to enable timely recovery and resumption of its operations
and resumption of its ongoing fulfillment of its duties and obligations
as a swap data repository following any disruption of its operations.
Such duties and obligations include, without limitation, the duties
[[Page 54586]]
set forth in Sec. 49.9 and the core principles set forth in Sec.
49.19; and maintenance of a comprehensive audit trail. The swap data
repository's business continuity--disaster recovery plan and resources
generally should enable resumption of the swap data repository's
operations and resumption of ongoing fulfillment of the swap data
repository's duties and obligations during the next business day
following the disruption.
(e) Registered swap data repositories determined by the Commission
to be critical swap data repositories are subject to more stringent
requirements as set forth below.
(1) Each swap data repository that the Commission determines is
critical must maintain a disaster recovery plan and business continuity
and disaster recovery resources, including infrastructure and
personnel, sufficient to enable it to achieve a same-day recovery time
objective in the event that its normal capabilities become temporarily
inoperable for any reason up to and including a wide-scale disruption.
(2) A same-day recovery time objective is a recovery time objective
within the same business day on which normal capabilities become
temporarily inoperable for any reason up to and including a wide-scale
disruption.
(3) To ensure its ability to achieve a same-day recovery time
objective in the event of a wide-scale disruption, each swap data
repository that the Commission determines is critical must maintain a
degree of geographic dispersal of both infrastructure and personnel
such that:
(i) Infrastructure sufficient to enable the swap data repository to
meet a same-day recovery time objective after interruption is located
outside the relevant area of the infrastructure the entity normally
relies upon to conduct activities necessary to the reporting,
recordkeeping and/or dissemination of swap data, and does not rely on
the same critical transportation, telecommunications, power, water, or
other critical infrastructure components the entity normally relies
upon for such activities; and
(ii) Personnel sufficient to enable the swap data repository to
meet a same-day recovery time objective, after interruption of normal
swap data reporting, recordkeeping and/or dissemination by a wide-scale
disruption affecting the relevant area in which the personnel the
entity normally relies upon to engage in such activities are located,
live and work outside that relevant area.
(4) Each swap data repository that the Commission determines is
critical must conduct regular, periodic tests of its business
continuity and disaster recovery plans and resources and its capacity
to achieve a same-day recovery time objective in the event of a wide-
scale disruption. The swap data repository shall keep records of the
results of such tests, and make the results available to the Commission
upon request.
(f) A registered swap data repository that is not determined by the
Commission to be a critical swap data repository satisfies the
requirement to be able to resume operations and resume ongoing
fulfillment of the swap data repository's duties and obligations during
the next business day following a disruption by maintaining either:
(1) Infrastructure and personnel resources of its own that are
sufficient to ensure timely recovery and resumption of its operations,
duties and obligations as a registered swap data repository following
any disruption of its operations; or
(2) Contractual arrangements with other registered swap data
repositories or disaster recovery service providers, as appropriate,
that are sufficient to ensure continued fulfillment of all of the swap
data repository's duties and obligations following any disruption of
its operations, both with respect to all swaps reported to the swap
data repository and with respect to all swap data contained in the swap
data repository.
(g) A registered swap data repository shall notify Commission staff
promptly of all:
(1) Systems malfunctions;
(2) Cyber security incidents or targeted threats that actually or
potentially jeopardize automated system operation, reliability,
security, or capacity; and
(3) Any activation of the swap data repository's business
continuity-disaster recovery plan.
(h) A registered swap data repository shall give Commission staff
timely advance notice of all:
(1) Planned changes to automated systems that may impact the
reliability, security, or adequate scalable capacity of such systems;
and
(2) Planned changes to the swap data repository's program of risk
analysis and oversight.
(i) A registered swap data repository shall provide to the
Commission upon request current copies of its business continuity and
disaster recovery plan and other emergency procedures, its assessments
of its operational risks, and other documents requested by Commission
staff for the purpose of maintaining a current profile of the swap data
repository's automated systems.
(j) A registered swap data repository shall conduct regular,
periodic, objective testing and review of its automated systems to
ensure that they are reliable, secure, and have adequate scalable
capacity. It shall also conduct regular, periodic testing and review of
its business continuity-disaster recovery capabilities. Both types of
testing should be conducted by qualified, independent professionals.
Such qualified independent professionals may be independent contractors
or employees of the swap data repository, but should not be persons
responsible for development or operation of the systems or capabilities
being tested. Pursuant to Sec. Sec. 1.31, 49.12 and 45.2 of the
Commission's Regulations, the swap data repository shall keep records
of all such tests, and make all test results available to the
Commission upon request.
(k) To the extent practicable, a registered swap data repository
should:
(1) Coordinate its business continuity-disaster recovery plan with
those of swap execution facilities, designated contract markets,
derivatives clearing organizations, swap dealers, and major swap
participants who report swap data to the swap data repository, and with
those regulators identified in Section 21(c)(7) of the Act, in a manner
adequate to enable effective resumption of the registered swap data
repository's fulfillment of its duties and obligations following a
disruption causing activation of the swap data repository's business
continuity and disaster recovery plan;
(2) Participate in periodic, synchronized testing of its business
continuity--disaster recovery plan and the business continuity--
disaster recovery plans of swap execution facilities, designated
contract markets, derivatives clearing organizations, swap dealers, and
major swap participants who report swap data to the registered swap
data repository, and the business continuity--disaster recovery plans
required by the regulators identified in Section 21(c)(7) of the Act;
and
(3) Ensure that its business continuity--disaster recovery plan
takes into account the business continuity--disaster recovery plans of
its telecommunications, power, water, and other essential service
providers.
Sec. 49.25 Financial resources.
(a) General rule. (1) A registered swap data repository shall
maintain sufficient financial resources to perform its
[[Page 54587]]
statutory duties set forth in Sec. 49.9 and the core principles set
forth in Sec. 49.19.
(2) An entity that operates as both a swap data repository and a
derivatives clearing organization shall also comply with the financial
resource requirements applicable to derivatives clearing organizations
under Sec. 39.11 of this chapter.
(3) Financial resources shall be considered sufficient if their
value is at least equal to a total amount that would enable the swap
data repository, or applicant for registration, to cover its operating
costs for a period of at least one year, calculated on a rolling basis.
(4) The financial resources described in this paragraph (a) must be
independent and separately dedicated to ensure that assets and capital
are not used for multiple purposes.
(b) Types of financial resources. Financial resources available to
satisfy the requirements of paragraph (a) of this section may include:
(1) The swap data repository's own capital; and
(2) Any other financial resource deemed acceptable by the
Commission.
(c) Computation of financial resource requirement. A registered
swap data repository shall, on a quarterly basis, based upon its fiscal
year, make a reasonable calculation of its projected operating costs
over a 12-month period in order to determine the amount needed to meet
the requirements of paragraph (a) of this section. The swap data
repository shall have reasonable discretion in determining the
methodology used to compute such projected operating costs. The
Commission may review the methodology and require changes as
appropriate.
(d) Valuation of financial resources. At appropriate intervals, but
not less than quarterly, a registered swap data repository shall
compute the current market value of each financial resource used to
meet its obligations under paragraph (a) of this section. Reductions in
value to reflect market and credit risk (haircuts) shall be applied as
appropriate.
(e) Liquidity of financial resources. The financial resources
allocated by the registered swap data repository to meet the
requirements of paragraph (a) shall include unencumbered, liquid
financial assets (i.e., cash and/or highly liquid securities) equal to
at least six months' operating costs. If any portion of such financial
resources is not sufficiently liquid, the swap data repository may take
into account a committed line of credit or similar facility for the
purpose of meeting this requirement.
(f) Reporting requirements. (1) Each fiscal quarter, or at any time
upon Commission request, a registered swap data repository shall report
to the Commission the amount of financial resources necessary to meet
the requirements of paragraph (a), the value of each financial resource
available, computed in accordance with the requirements of paragraph
(d); and provide the Commission with a financial statement, including
the balance sheet, income statement, and statement of cash flows of the
swap data repository or of its parent company. Financial statements
shall be prepared in conformity with generally accepted accounting
principles (GAAP) applied on a basis consistent with that of the
preceding financial statement.
(2) The calculations required by this paragraph shall be made as of
the last business day of the swap data repository's fiscal quarter.
(3) The report shall be filed not later than 17 business days after
the end of the swap data repository's fiscal quarter, or at such later
time as the Commission may permit, in its discretion, upon request by
the swap data repository.
Sec. 49.26 Disclosure requirements of swap data repositories.
Before accepting any swap data from a reporting entity or upon a
reporting entity's request, a registered swap data repository shall
furnish to the reporting entity a disclosure document that contains the
following written information, which shall reasonably enable the
reporting entity to identify and evaluate accurately the risks and
costs associated with using the services of the swap data repository:
(a) The registered swap data repository's criteria for providing
others with access to services offered and swap data maintained by the
swap data repository;
(b) The registered swap data repository's criteria for those
seeking to connect to or link with the swap data repository;
(c) A description of the registered swap data repository's policies
and procedures regarding its safeguarding of swap data and operational
reliability to protect the confidentiality and security of such data,
as described in Sec. 49.24;
(d) The registered swap data repository's policies and procedures
reasonably designed to protect the privacy of any and all swap data
that the swap data repository receives from a reporting entity, as
described in Sec. 49.16;
(e) The registered swap data repository's policies and procedures
regarding its non-commercial and/or commercial use of the swap data
that it receives from a market participant, any registered entity, or
any other person;
(f) The registered swap data repository's dispute resolution
procedures;
(g) A description of all the registered swap data repository's
services, including any ancillary services;
(h) The registered swap data repository's updated schedule of any
fees, rates, dues, unbundled prices, or other charges for all of its
services, including any ancillary services; any discounts or rebates
offered; and the criteria to benefit from such discounts or rebates;
and
(i) A description of the registered swap data repository's
governance arrangements.
Sec. 49.27 Access and fees.
(a) Fair, Open and Equal Access. (1) A registered swap data
repository, consistent with Section 21 of the Act, shall provide its
services to market participants, including but not limited to
designated contract markets, swap execution facilities, derivatives
clearing organizations, swap dealers, major swap participants and any
other counterparties, on a fair, open and equal basis. For this
purpose, a swap data repository shall not provide access to its
services on a discriminatory basis but is required to provide its
services to all market participants for swaps it accepts in an asset
class.
(2) Consistent with the principles of open access set forth in
paragraph (a)(1) of this Regulation, a registered swap data repository
shall not tie or bundle the offering of mandated regulatory services
with other ancillary services that a swap data repository may provide
to market participants.
(b) Fees. (1) Any fees or charges imposed by a registered swap data
repository in connection with the reporting of swap data and any other
supplemental or ancillary services provided by such swap data
repository shall be equitable and established in a uniform and non-
discriminatory manner. Fees or charges shall not be used as an
artificial barrier to access to the swap data repository. Swap data
repositories shall not offer preferential pricing arrangements to any
market participant on any basis, including volume discounts or
reductions unless such discounts or reductions apply to all market
participants uniformly and are not otherwise established in a manner
that would effectively limit the application of such discount or
reduction to a select number of market participants.
(2) All fees or charges are to be fully disclosed and transparent
to market
[[Page 54588]]
participants. At a minimum, the registered swap data repository shall
provide a schedule of fees and charges that is accessible by all market
participants on its Web site.
(3) The Commission notes that it will not specifically approve the
fees charged by registered swap data repositories. However, any and all
fees charged by swap data repositories must be consistent with the
principles set forth in paragraph (b)(1) of this section.
Appendix A to Part 49--Form SDR
COMMODITY FUTURES TRADING COMMISSION
FORM SDR
SWAP DATA REPOSITORY APPLICATION OR AMENDMENT TO APPLICATION FOR
REGISTRATION REGISTRATION INSTRUCTIONS
Intentional misstatements or omissions of material fact may constitute
federal criminal violations (7 U.S.C. Sec. 13 and 18 U.S.C. Sec.
1001) or grounds for disqualification from registration.
DEFINITIONS
Unless the context requires otherwise, all terms used in this Form
SDR have the same meaning as in the Commodity Exchange Act, as amended,
and in the Regulations of the Commission thereunder.
For the purposes of this Form SDR, the term ``Applicant'' shall
include any applicant for registration as a swap data repository or any
registered swap data repository that is amending Form SDR.
GENERAL INSTRUCTIONS
1. Form SDR and Exhibits thereto are to be filed with the Commodity
Futures Trading Commission by Applicants for registration as a swap
data repository, or by a registered swap data repository amending such
registration, pursuant to Section 21 of the Commodity Exchange Act and
the regulations thereunder. Upon the filing of an application for
registration, the Commission will publish notice of the filing and
afford interested persons an opportunity to submit written data, views
and arguments concerning such application. No application for
registration shall be effective unless the Commission, by order, grants
such registration.
2. Individuals' names shall be given in full (Last Name, First
Name, Middle Name).
3. Signatures must accompany each copy of the Form SDR filed with
the Commission. If this Form SDR is filed by a corporation, it must be
signed in the name of the corporation by a principal officer duly
authorized; if filed by a limited liability company, this Form SDR must
be signed in the name of the limited liability company by a member duly
authorized to sign on the limited liability company's behalf; if filed
by a partnership, this Form SDR must be signed in the name of the
partnership by a general partner authorized; if filed by an
unincorporated organization or association which is not a partnership,
it must be signed in the name of the organization or association by the
managing agent, i.e., a duly authorized person who directs, manages or
who participates in the directing or managing of its affairs.
4. If Form SDR is being filed as an initial application for
registration, all applicable items must be answered in full. If any
item is not applicable, indicate by ``none,'' ``not applicable,'' or
``N/A'' as appropriate.
5. Under Section 21 of the Commodity Exchange Act and the
regulations thereunder, the Commission is authorized to solicit the
information required to be supplied by this form from Applicants for
registration as a swap data repository and from registered swap data
repositories amending their registration. Disclosure of the information
specified on this form is mandatory prior to processing of an
application for registration as a swap data repository. The information
will be used for the principal purpose of determining whether the
Commission should grant or deny registration to an Applicant. The
Commission may determine that additional information is required from
the Applicant in order to process its application. An Applicant is
therefore encouraged to supplement this Form SDR with any additional
information that may be significant to its operation as a swap data
repository and to the Commission's review of its application. A Form
SDR which is not prepared and executed in compliance with applicable
requirements and instructions may be returned as not acceptable for
filing. Acceptance of this Form SDR, however, shall not constitute any
finding that the Form SDR has been filed as required or that the
information submitted is true, current or complete.
6. Except in cases where confidential treatment is requested by the
Applicant and granted by the Commission pursuant to the Freedom of
Information Act and Commission Regulation Sec. 145.9, information
supplied on this form will be included routinely in the public files of
the Commission and will be available for inspection by any interested
person. The Applicant must identify with particularity the information
in these exhibits that will be subject to a request for confidential
treatment and supporting documentation for such request pursuant to
Commission Regulations Sec. 40.8, and Sec. 145.9.
UPDATING INFORMATION ON THE FORM SDR
1. Section 21 requires that if any information contained in Items 1
through 17, 23, 29, and Item 53 of this application, or any supplement
or amendment thereto, is or becomes inaccurate for any reason, an
amendment must be filed promptly, unless otherwise specified, on Form
SDR correcting such information.
2. Registrants filing Form SDR as an amendment (other than an
annual amendment) need file only the first page of Form SDR, the
signature page (Item 13), and any pages on which an answer is being
amended, together with such exhibits as are being amended. The
submission of an amendment represents that all unamended items and
exhibits remain true, current and complete as previously filed.
ANNUAL AMENDMENT ON THE FORM SDR
Annual amendments on the Form SDR shall be submitted within 60 days
of the end of the Applicant's fiscal year. Applicants must complete the
first page and provide updated information or exhibits.
An Applicant may request an extension of time for submitting the
annual amendment with the Secretary of the Commission based on
substantial, undue hardship. Extensions for filing annual amendments
may be granted at the discretion of the Commission.
WHERE TO FILE
File registration application and appropriate exhibits
electronically with the Commission at the Washington, D.C. headquarters
in a format and in the manner specified by the Secretary of the
Commission.
BILLING CODE 6351-01-P
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Issued in Washington, DC, on August 4, 2011, by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendix To Swap Data Repositories: Registration Standards, Duties and
Core
Principles--Commission Voting Summary
Note: The following Appendix will not appear in the Code of
Federal Regulations.
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Dunn, Chilton
and O'Malia voted in the affirmative; Commissioner Sommers voted in
the negative.
Appendix 2--Chairman Gary Gensler Statement
I support the final rulemaking to establish registration and
regulatory requirements for swap data repositories (SDRs). When this
rule is fully implemented, all swaps--whether cleared or uncleared--
will be reported to an SDR registered with the Commodity Futures
Trading Commission (CFTC). Registration will enable the Commission
and other regulators to monitor market participants for compliance
with the Dodd-Frank Wall Street Reform and Consumer Protection Act
as well as CFTC regulations. The rule implements congressional
direction that the Commission and other regulators have direct
access to the information maintained by SDRs. It requires SDRs to
verify the accuracy and completeness of all of the swaps data they
accept. It also contains provisions to permit SDRs to aggregate
certain information for regulators and the public. This rule will
enhance transparency in the swaps market and help reduce systemic
risk.
[FR Doc. 2011-20817 Filed 8-31-11; 8:45 am]
BILLING CODE 6351-01-C
Last Updated: September 1, 2011