2010-27532

FR Doc 2010-27532[Federal Register: November 2, 2010 (Volume 75, Number 211)]

[Proposed Rules]

[Page 67277-67282]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr02no10-14]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 39 and 140

RIN 3038-AD00

Process for Review of Swaps for Mandatory Clearing

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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

is proposing rules to implement new statutory provisions enacted by

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

Act. These proposed rules apply to the review of swaps by the

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

DATES: Submit comments on or before January 3, 2011.

ADDRESSES: You may submit comments, identified by RIN number, by any of

the following methods:

Agency Web Site, via its Comments Online process: http://

comments.cftc.gov. Follow the instructions for submitting comments

through the Web site.

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

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

Street, NW., Washington, DC 20581.

Hand Delivery/Courier: Same as mail above.

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

Follow the instructions for submitting comments.

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

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

http://www.cftc.gov. You should submit only information that you wish

to make available publicly. If you wish the Commission to consider

information that may be exempt from disclosure under the Freedom of

Information Act, a petition for confidential treatment of the exempt

information may be submitted according to the established procedures in

CFTC Regulation 145.9.\1\

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

CFR Ch. 1.

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

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

Oversight, Commodity Futures Trading Commission, Three Lafayette

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

SUPPLEMENTARY INFORMATION:

I. Background

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

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

the

[[Page 67278]]

Dodd-Frank Act \3\ amended the Commodity Exchange Act (CEA) \4\ 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 and major

swap participants; (2) imposing clearing and trade execution

requirements on standardized derivative products; (3) creating rigorous

recordkeeping and real-time reporting regimes; and (4) enhancing the

Commission's rulemaking and enforcement authorities with respect to,

among others, all registered entities and intermediaries subject to the

Commission's oversight.

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

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

Dodd-Frank Act may be accessed at http://www.cftc.gov./

LawRegulation/OTCDERIVATIVES/index.htm.

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

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

2010.''

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

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Section 723(a)(3) of the Dodd-Frank Act amends the CEA to provide

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

that person submits such swap for clearing to a derivatives clearing

organization [(DCO)] that is registered under [the CEA] or a [DCO] that

is exempt from registration under [the CEA] if the swap is required to

be cleared.'' \5\ Section 723(a)(3) requires the Commission to adopt

rules for the review of a swap, or group, category, type, or class of

swaps (collectively, ``swaps'') to make a determination as to whether

the swaps should be required to be cleared.

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\5\ See Section 2(h) of the CEA, 7 U.S.C. 2(h).

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In addition, Section 745(b) of the Dodd-Frank Act amends the CEA to

direct the Commission to prescribe criteria, conditions, or rules under

which the Commission will determine the initial eligibility or the

continuing qualification of a DCO to clear swaps.\6\

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\6\ See Section 5c(c)(5)(C)(iii) of the CEA, 7 U.S.C. 7a-

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

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Accordingly, the Commission is proposing to adopt Regulation 39.5

to implement procedures for determining the eligibility of a DCO to

clear swaps that it plans to accept for clearing; for DCOs submitting

swaps to the Commission for review; for Commission-initiated reviews of

swaps; and for staying a clearing requirement while the clearing of a

swap is reviewed.

The Commission requests comment on all aspects of the proposed

rules, as well as comment on the specific provisions and issues

highlighted in the discussion below.

II. Proposed Regulations

A. Eligibility of a DCO To Clear Swaps

The Dodd-Frank Act requires the Commission to determine, upon

request or its own motion, the initial eligibility or continuing

qualification of a DCO to clear a swap that it plans to accept for

clearing, under criteria, conditions, or rules determined by the

Commission. Such criteria, conditions, or rules must consider the

financial integrity of the DCO and any other factors that the

Commission determines to be appropriate.\7\

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

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

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

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

or class of swaps that the DCO already clears. However, such a

presumption would be subject to Commission review, and if the

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

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

required to request a determination by the Commission of its

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

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

that the DCO already clears also would be required to make such a

request.

To receive a determination of eligibility to clear a swap, a DCO

would have to file a written request with the Commission that addresses

its ability to maintain compliance with the core principles for DCOs

set out in Section 5b(c)(2) of the CEA if it accepts the swap for

clearing, specifically: (1) The sufficiency of its financial resources;

and (2) its ability to manage the risks associated with clearing the

swap, especially if the Commission determines that the swap is required

to be cleared.

B. Submission of Swaps to the Commission for Review

The Dodd-Frank Act requires a DCO that plans to accept a swap (or

group, category, type, or class of swaps) for clearing to submit the

swap to the Commission for review.\8\ Proposed Regulation 39.5(b) sets

out the process for DCOs to follow, including what information a DCO

must include in its submission to assist the Commission in its review.

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\8\ See Section 2(h)(2)(B)(i) of the CEA, 7 U.S.C.

2(h)(2)(B)(i).

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First, the submission would have to include a statement that the

DCO is eligible to clear the swap and, if the Commission determines

that the swap is required to be cleared, the DCO would be able to

maintain compliance with Section 5b(c)(2) of the CEA. This provision is

intended to satisfy the Dodd-Frank Act requirement that a swap

submission be consistent with Section 5b(c)(2).\9\ Regulation

39.5(b)(1) would require a DCO submitting a swap to be eligible to

clear the swap under Regulation 39.5(a) and, as noted above, a DCO that

seeks to be considered eligible to clear a swap must demonstrate its

ability to maintain compliance with the core principles in Section

5b(c)(2). Therefore, a DCO submitting a swap under Regulation 39.5(b)

would have already demonstrated pursuant to Regulation 39.5(a) its

ability to comply with Section 5b(c)(2). Accordingly, the Commission

believes it is appropriate to require only a statement to that effect

in the swap submission itself.

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\9\ See Section 2(h)(2)(D)(i) of the CEA, 7 U.S.C.

2(h)(2)(D)(i).

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A DCO would also have to provide a statement that includes, but is

not limited to, information that would assist the Commission in the

quantitative and qualitative assessment of five specific factors that

the Dodd-Frank Act requires the Commission to take into account when

reviewing a swap submission,\10\ and additional information that the

Commission believes is needed for an effective review of the swap

submission. The proposed regulation would require the DCO to provide

specific information relating to product specifications; participant

eligibility standards; pricing sources, models, and procedures; \11\

risk management procedures; measures of market liquidity and trading

activity; the effect of a clearing requirement on the market for the

swap; applicable rules, manuals, policies, or procedures; and terms and

trading conventions on which the swap is currently traded.

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\10\ See Section 2(h)(2)(D)(ii) of the CEA, 7 U.S.C.

2(h)(2)(D)(ii).

\11\ This would include information about any price reference

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

calculates it, the methodology used to calculate the price reference

index and how often it is calculated, and when and where it is

published publicly. For example, the BBA LIBOR 3-Month USD interest

rate published by the British Bankers Association is calculated

daily by Thomson Reuters on behalf of BBA. The rate is published

daily at 11 a.m. London Time via data vendors like Reuters and

Bloomberg, and is calculated using a survey of 16 major banks. The

bank quotes are then ranked in order, high four and bottom four

removed, and the remaining eight quotes are averaged to determine

the official 3-Month USD LIBOR fixing rate for that day. A DCO would

be required to provide documentation of the index methodology and

publication frequency or the relevant hyperlink if it is openly

available on the Internet.

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Finally, the swap submission would have to include a description of

the manner in which the DCO has provided

[[Page 67279]]

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

to the submission expressed by members. The Dodd-Frank Act requires a

DCO to provide notice of the submission to its members in a manner to

be determined by the Commission.\12\ The Commission recognizes that a

DCO typically has established procedures for providing notice to its

members and believes it is appropriate to allow the DCO to provide

notice of a swap submission in the same manner. The submission to the

Commission also would have to include a summary of any opposition

expressed by members, which means that a DCO would be expected to

notify members before it makes its submission to the Commission. The

Commission invites comment on whether the regulation should prescribe a

specific manner in which a DCO must provide notice to its members, and

whether the regulation should prescribe a specific period of time

between the notice to members and the submission to the Commission to

allow time for members to make their views on the submission known.

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\12\ See Section 2(h)(2)(B)(i) of the CEA, 7 U.S.C.

2(h)(2)(B)(i).

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Upon receiving a DCO's submission, the Commission would begin its

90-day review by posting the submission on the Commission Web site for

a 30-day public comment period, as required by the Dodd-Frank Act. The

Commission invites comment regarding the appropriateness and

sufficiency of providing notice of the submission on the Commission Web

site as compared to publishing notice of the submission in the Federal

Register. The review would not begin until the submission was complete,

as determined solely in the discretion of the Commission. Due to the

relatively brief 90-day review period prescribed by the Dodd-Frank Act,

the Commission must be certain before it begins a review that it has

the information it needs to reach an appropriate determination.

The proposed regulation encourages a DCO to submit swaps to the

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

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

will make the review process more efficient. The Commission would be

able to consolidate multiple submissions from one DCO or subdivide a

DCO's submission for review as appropriate.

The Commission would review the submission and make a determination

as to whether the swap will be required to be cleared not later than 90

days after receiving the submission, unless the submitting DCO agreed

to an extension. In making a determination that the swap must be

cleared, the Commission would impose terms and conditions on the

requirement as appropriate.

C. Commission-Initiated Reviews of Swaps

The Dodd-Frank Act requires the Commission on an ongoing basis to

review swaps that have not been accepted for clearing by a DCO to make

a determination as to whether the swaps should be required to be

cleared.\13\ Under proposed Regulation 39.5(c), the Commission would

use information obtained pursuant to Commission regulations \14\ from

swap data repositories, swap dealers, and major swap participants, and

any other available information, in undertaking such reviews.

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\13\ See Section 2(h)(2)(A) of the CEA, 7 U.S.C. 2(h)(2)(A).

\14\ The Commission intends to adopt such regulations before any

Commission reviews would be initiated.

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If no DCO has accepted for clearing a particular swap, group,

category, type, or class of swaps that the Commission finds would

otherwise be subject to a clearing requirement, the Commission would,

as required by the Dodd-Frank Act,\15\ investigate the relevant facts

and circumstances and, within 30 days of the completion of its

investigation, issue a public report containing the results of the

investigation. The Commission would take such actions as it determines

to be necessary and in the public interest, which may include

establishing margin or capital requirements for parties to the swap,

group, category, type, or class of swaps.

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\15\ See Section 2(h)(4)(B) of the CEA, 7 U.S.C. 2(h)(4)(B).

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D. Stay of Clearing Requirement

After making a determination that a swap (or group, category, type,

or class of swaps) is required to be cleared, the Commission, on

application of a counterparty to a swap or on its own initiative, may

stay the clearing requirement until it completes a review of the terms

of the swap and the clearing arrangement.\16\ Proposed Regulation

39.5(d)(2) sets out the process for a counterparty to a swap to apply

for a stay of the clearing requirement.

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\16\ See Section 2(h)(3)(A) of the CEA, 7 U.S.C. 2(h)(3)(A).

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A counterparty to a swap that wants to apply for a stay of the

clearing requirement for that swap would be required to submit a

written request to the Secretary of the Commission that includes

information that would assist the Commission in its review, including:

The identity and contact information of the counterparty to the swap;

the terms of the swap subject to the clearing requirement; the name of

the DCO that clears the swap; a description of the clearing

arrangement; and a statement explaining why the swap should not be

subject to a clearing requirement.

The Commission also would be able to obtain additional information

to assist it in its review from the DCO that clears the swap. The

Commission would complete its review not later than 90 days after

issuance of the stay, unless the DCO that clears the swap agrees to an

extension.

Upon completion of its review, the Commission could determine,

subject to any terms and conditions as the Commission determines to be

appropriate, that the swap must be cleared, or that the clearing

requirement will not apply but clearing may continue on a non-mandatory

basis.

III. Technical Amendments

The Commission is proposing to amend Regulation 140.94 \17\ to

delegate authority to the Director of the Division of Clearing and

Intermediary Oversight to consolidate or subdivide swap submissions as

appropriate for review under proposed Regulation 39.5(b)(2) and to

request information from a derivatives clearing organization in

connection with the stay of a clearing requirement under proposed

Regulation 39.5(d)(3).

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\17\ See 75 FR 55410 (Sep. 10, 2010). The Commission previously

proposed to amend Regulation 140.94 in connection with the proposal

of Regulation 39.11 (75 FR 63113 (Oct. 14, 2010)). The Commission

intends to place all delegations to the Director of the Division of

Clearing and Intermediary Oversight for Part 39 under this

regulation.

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IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) requires that agencies

consider whether the rules they propose will have a significant

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

provide a regulatory flexibility analysis respecting the impact.\18\

The rules proposed by the Commission shall affect only DCOs. The

Commission has previously established certain definitions of ``small

entities'' to be used by the Commission in evaluating the impact of its

regulations on small entities in accordance with the RFA.\19\ The

Commission has previously determined that DCOs are not small entities

for the purpose of the RFA.\20\

[[Page 67280]]

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

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

have a significant economic impact on a substantial number of small

entities.

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\18\ 5 U.S.C. 601 et seq.

\19\ 47 FR 18618 (Apr. 30, 1982).

\20\ See 66 FR 45605, 45609 (August 29, 2001).

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B. 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. OMB has not yet assigned a control

number to the new collection. The Paperwork Reduction Act of 1995 (PRA)

\21\ imposes certain requirements on Federal agencies (including the

Commission) in connection with their conducting or sponsoring any

collection of information as defined by the PRA. This proposed

rulemaking would result in new collection of information requirements

within the meaning of the PRA. The Commission therefore is submitting

this proposal to the Office of Management and Budget (OMB) for review.

If adopted, responses to this collection of information would be

mandatory. The Commission will protect proprietary information

according to the Freedom of Information Act and 17 CFR Part 145,

``Commission Records and Information.'' In addition, section 8(a)(1) of

the CEA strictly prohibits the Commission, unless specifically

authorized by the CEA, from making public ``data and information that

would separately disclose the business transactions or market positions

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

is also required to protect certain information contained in a

government system of records according to the Privacy Act of 1974, 5

U.S.C. 552a.

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\21\ 44 U.S.C. 3501 et seq.

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1. Information Provided by Reporting Entities/Persons

The proposed regulations require each respondent to file

information with the Commission on an occasional basis, which would

result in one annual response per respondent. Commission staff

estimates that each respondent would expend 40 hours to prepare each

filing required under the proposed regulations, which was estimated

based on the Commission's prior experience with DCOs and their

preparation of filings for the Commission's review. Commission staff

estimates that it would receive filings from up to 12 respondents

annually, which assumes that each DCO would make an average of one

filing per year. Accordingly the burden in terms of hours would in the

aggregate be 40 hours annually per respondent and 480 hours annually

for all respondents.

Commission staff estimates that each respondent could expend up to

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

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

$48,000 per annum (12 respondents x $4000). The Commission invites

public comment on the accuracy of its estimate regarding the collection

requirements that would result from the proposed regulations.

2. Information Collection Comments

The Commission invites the public and other federal agencies to

comment on any aspect of the reporting and recordkeeping burdens

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

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

collection of information is necessary for the proper performance of

the functions of the Commission, including whether the information will

have practical utility; (ii) evaluate the accuracy of the Commission's

estimate of the burden of the proposed collection of information; (iii)

determine whether there are ways to enhance the quality, utility, and

clarity of the information to be collected; and (iv) minimize the

burden of the collection of information on those who are to respond,

including through the use of automated collection techniques or other

forms of information technology.

Comments may be submitted directly to the Office of Information and

Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at

[email protected] Please provide the Commission with a copy

of submitted comments so that all comments can be summarized and

addressed in the final rule preamble. Refer to the Addresses section of

this notice of proposed rulemaking for comment submission instructions

to the Commission. A copy of the supporting statements for the

collections of information discussed above may be obtained by visiting

RegInfo.gov. OMB is required to make a decision concerning the

collection of information between 30 and 60 days after publication of

this document in the Federal Register. Therefore, a comment is best

assured of having its full effect if OMB receives it within 30 days of

publication.

C. Cost-Benefit Analysis

Section 15(a) of the CEA \22\ requires the Commission to consider

the costs and benefits of its actions before issuing a rulemaking under

the CEA. By its terms, Section 15(a) does not require the Commission to

quantify the costs and benefits of a rule or to determine whether the

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

the Commission ``consider'' the costs and benefits of its actions.

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

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

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

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

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

interest considerations. The Commission may in its discretion give

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

discretion determine that, notwithstanding its costs, a particular rule

is necessary or appropriate to protect the public interest or to

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

the CEA.

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\22\ 7 U.S.C. 19(a).

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Summary of proposed requirements. The proposed rule would implement

processes for determining the eligibility of a DCO to clear swaps that

it wishes to accept for clearing; for DCOs submitting swaps to the

Commission for review; for Commission-initiated reviews of swaps; and

for staying a clearing requirement while the clearing of a swap is

reviewed.

Costs. With respect to costs, the Commission has determined that

the rule results in minimal costs. The rule only requires DCOs and swap

counterparties to provide sufficient information for the Commission to

carry out its responsibilities under the Dodd-Frank Act in an efficient

manner. The rule itself does not require the clearing of any swap, so

the Commission did not consider the potential costs of mandatory

clearing in its analysis.

Benefits. With respect to benefits, the Commission has determined

that the rule will benefit the public by making information publicly

available and by providing opportunity for comment. The rule also takes

into account the risk management practices of a DCO in making a

determination on the DCO's eligibility to clear swaps. The rule itself

does not require the clearing of any swap, so the Commission did not

[[Page 67281]]

consider the potential benefits of mandatory clearing in its analysis.

Public Comment. The Commission invites public comment on its cost-

benefit considerations. Commenters are also invited to submit any data

or other information that they may have quantifying or qualifying the

costs and benefits of the proposal with their comment letters.

List of Subjects

17 CFR Part 39

Business and industry, Commodity futures, Reporting and

recordkeeping requirements.

17 CFR Part 140

Authority delegations (Government agencies), Conflict of interests,

Organization and functions (Government agencies).

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

amend 17 CFR parts 39 and 140 as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

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

follows:

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

Stat. 1376.

2. Redesignate Sec. Sec. 39.5 through 39.7 as Sec. Sec. 39.6

through 39.8 and add new Sec. 39.5 to read as follows:

Sec. 39.5 Review of swaps for Commission determination on clearing

requirement.

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

organization shall be presumed eligible to accept for clearing any swap

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

derivatives clearing organization already clears. Such presumption of

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

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

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

of swaps that the derivatives clearing organization already clears

shall request a determination by the Commission of the derivatives

clearing organization's eligibility to clear such a swap before

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

electronically with the Secretary of the Commission, shall address the

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

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

specifically:

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

financial resources; and

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

risks associated with clearing the swap, especially if the Commission

determines that the swap is required to be cleared.

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

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

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

clearing organization making the submission must be eligible under

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

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

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

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

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

reasonable discretion consolidate multiple submissions from one

derivatives clearing organization or subdivide a derivatives clearing

organization's submission as appropriate for review.

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

of the Commission and shall include:

(i) A statement that the derivatives clearing organization is

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

swaps for clearing and, if the Commission determines that the swap, or

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

derivatives clearing organization will be able to maintain compliance

with section 5b(c)(2) of the Act;

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

regarding the swap, or group, category, type, or class of swaps that is

sufficient to provide the Commission a reasonable basis to make a

quantitative and qualitative assessment of the following factors:

(A) The existence of significant outstanding notional exposures,

trading liquidity, and adequate pricing data;

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

expertise and resources, and credit support infrastructure to clear the

contract on terms that are consistent with the material terms and

trading conventions on which the contract is then traded;

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

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

the DCO available to clear the contract;

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

charges applied to clearing; and

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

insolvency of the relevant DCO or one or more of its clearing members

with regard to the treatment of customer and swap counterparty

positions, funds, and property;

(iii) Product specifications, including copies of any standardized

legal documentation, generally accepted contract terms, standard

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

and the extent to which the swap is electronically confirmable;

(iv) Participant eligibility standards, if different from the

derivatives clearing organization's general participant eligibility

standards;

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

ability to obtain sufficient price data to measure credit exposures in

a timely and accurate manner, including any agreements with clearing

members to provide price data and copies of executed agreements with

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

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

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

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

(vi) Risk management procedures, including measurement and

monitoring of credit exposures, initial and variation margin

methodology, methodologies for stress testing and back testing,

settlement procedures, default management procedures, and an

independent validation of the scalability of the derivatives clearing

organization's risk management policies, systems, and procedures,

including the margin methodology, settlement procedures, and default

management procedures;

(vii) Measures of market liquidity and trading activity, including

information on the sources of such measures;

(viii) An analysis of the effect of a clearing requirement on the

market for the group, category, type, or class of swaps, both

domestically and globally, including the potential effect on market

liquidity, trading activity, use of swaps by direct and indirect market

participants, and any potential market disruption;

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

(x) Terms and trading conventions on which the swap is currently

traded;

(xi) A description of the manner in which the derivatives clearing

organization has provided notice of the submission to its members and a

summary of any opposition to the submission expressed by the members. A

copy of the notice to members shall be included with the submission.

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

on

[[Page 67282]]

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

derivatives clearing organization that wishes to request confidential

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

the procedures set out in Sec. 145.9(d).

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

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

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

determination not later than 90 days after a complete submission has

been received, unless the submitting derivatives clearing organization

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

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

determination that a clearing requirement shall apply, the Commission

may require such terms and conditions to the requirement as the

Commission determines to be appropriate.

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

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

derivatives clearing organization to make a determination as to whether

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

reviews, the Commission will use information obtained pursuant to

Commission regulations from swap data repositories, swap dealers, and

major swap participants, and any other available information.

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

of this section will be posted on the Commission Web site for a 30-day

public comment period.

(3) If no derivatives clearing organization has accepted for

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

that the Commission finds would otherwise be subject to a clearing

requirement, the Commission will:

(i) Investigate the relevant facts and circumstances;

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

public report containing the results of the investigation; and

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

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

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

category, type, or class of swaps.

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

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

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

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

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

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

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

clearing requirement for that swap shall submit a written request to

the Secretary of the Commission that includes:

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

swap;

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

(iii) The name of the derivatives clearing organization clearing

the swap;

(iv) A description of the clearing arrangement; and

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

clearing requirement.

(3) A derivatives clearing organization that has accepted for

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

subject to a stay of the clearing requirement shall provide any

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

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

after issuance of the stay, unless the derivatives clearing

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

of swaps agrees to an extension.

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

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

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

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

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

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

continue on a non-mandatory basis.

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

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

follows:

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

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

(a)(6) and (a)(7) to read as follows:

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

of Clearing and Intermediary Oversight.

(a) * * *

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

chapter;

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

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

(7) All functions reserved to the Commission in Sec. Sec. 39.11

(b)(1)(vi), (b)(2)(ii), (c)(1), (c)(2), (f)(1), and (f)(4) of this

chapter.

* * * * *

Issued in Washington, DC, on October 26, 2010, by the

Commission.

David A. Stawick,

Secretary of the Commission.

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

Federal Regulations:

Statement of Chairman Gary Gensler Process for Review of Swaps for

Mandatory Clearing October 26, 2010

I support the proposed rulemaking to establish a process for the

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

primary goals of the Dodd-Frank Act was to lower risk by requiring

standardized swaps to be centrally cleared. The process set out in the

proposed rule is consistent with the Congressional requirement that

derivatives clearing organizations (DCOs) be eligible to clear the

swaps and that before a swap becomes subject to mandatory clearing the

public get to provide input on the contract or class of contracts.

Though we have until July to finalize this rulemaking, it is my hope

that we can finish by April. This would allow us to begin reviewing the

contracts that are already being cleared by DCOs and under Dodd-Frank

have already been deemed submitted to the Commission for consideration.

[FR Doc. 2010-27532 Filed 11-1-10; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: November 2, 2010