[Federal Register Volume 76, Number 47 (Thursday, March 10, 2011)]
[Proposed Rules]
[Pages 13101-13111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4707]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 23, 37, 38, and 39
RIN 3038-AC98
Requirements for Processing, Clearing, and Transfer of Customer
Positions
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission) is
proposing regulations to implement Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act). Proposed
regulations would establish the time frame for a swap dealer (SD),
major swap participant (MSP), futures commission merchant (FCM), swap
execution facility (SEF), and designated contract market (DCM) to
submit contracts, agreements, or transactions to a derivatives clearing
organization (DCO) for clearing. Proposed regulations also would
facilitate compliance with DCO Core Principle C (Participant and
Product Eligibility) in connection with standards for cleared products
and the prompt and efficient processing of all contracts, agreements,
and transactions submitted for clearing. The Commission is further
proposing related regulations implementing SEF Core Principle 7
(Financial Integrity of Transactions) and DCM Core Principle 11
(Financial Integrity of Transactions), requiring coordination with DCOs
in the
[[Page 13102]]
development of rules and procedures to facilitate clearing.
Additionally, the Commission is proposing a regulation to implement DCO
Core Principle F (Treatment of Funds), requiring a DCO, upon customer
request, to promptly transfer customer positions and related funds from
one clearing member to another, without requiring the close-out and re-
booking of the positions.
DATES: Submit comments on or before April 11, 2011.
ADDRESSES: You may submit comments, identified by RIN number 3038-AC98,
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.
Please submit comments by only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
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 (FOIA), a petition for confidential treatment of the
exempt information may be submitted according to the procedures
established in Sec. 145.9 of the Commission's regulations.\1\ The
Commission reserves the right, but shall have no obligation, to review,
pre-screen, filter, redact, refuse, or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
FOIA.
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\1\ Commission regulations referred to herein are found at 17
CFR Ch. 1 (2010). They are accessible on the Commission's Web site
at http://www.cftc.gov.
FOR FURTHER INFORMATION CONTACT: John C. Lawton, Deputy Director, 202-
418-5480, [email protected]; Phyllis P. Dietz, Associate Director, 202-
418-5449, [email protected]; Sarah E. Josephson, Associate Director, 202-
418-5684, [email protected], Division of Clearing and Intermediary
Oversight; Riva Spear Adriance, Associate Director, 202-418-5494,
[email protected]; Nancy Markowitz, Assistant Deputy Director, 202-
418-5453, [email protected]; Nadia Zakir, Attorney-Advisor, 202-418-
5720, [email protected]; Mauricio Melara, Attorney-Advisor, 202-418-5719,
[email protected]; Division of Market Oversight, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
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Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Title VII of the Dodd-Frank Act
On July 21, 2010, President Obama signed the Dodd-Frank Act.\2\
Title VII of the Dodd-Frank Act \3\ amended the Commodity Exchange Act
(CEA) \4\ to establish a comprehensive regulatory framework 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 SDs and MSPs; (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 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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In this notice of proposed rulemaking, the Commission proposes to
adopt regulations to establish the time frame for an SD, MSP, FCM, SEF,
or DCM to process and submit contracts, agreements, or transactions to
a DCO for clearing; to establish certain product standards and a time
frame for a DCO to clear such contracts, agreements, and transactions;
and to facilitate a DCO's transfer of open positions from a carrying
clearing member to another clearing member without unwinding and re-
booking the position. These supplement proposed regulations that were
previously published for public comment.\5\
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\5\ See e.g., 76 FR 6715, Feb. 8, 2011 (proposed rules for SD
and MSP documentation); 76 FR 3698, Jan. 20, 2011, (proposed rules
for DCO Core Principles C and F); 76 FR 1214, Jan. 7, 2011 (proposed
rules for SEF Core Principle 7; 75 FR 81519, Dec. 28, 2010,
(proposed rules for SD and MSP confirmation, portfolio
reconciliation, and portfolio compression); 75 FR 80572, Dec. 22,
2010 (proposed rules for DCM Core Principle 11).
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B. Existing Swap Clearing Practices
1. Time Frame for Clearing
Currently, a significant number of swaps are not cleared and, for
those that are cleared, there may be a delay in the substitution of a
DCO as the counterparty to the transaction through a novation of the
original contract, agreement, or transaction.\6\ In many instances,
this delay can be up to a week. For example, some clearinghouses accept
bilateral trades for clearing on a batched basis once a week. This time
lag potentially presents credit risk to the swap counterparties and the
DCO because the value of a position may change significantly between
the time of execution and the time of novation, thereby allowing
financial exposure to accumulate in the absence of daily mark-to-
market. Among the purposes of clearing are the reduction of risk and
the enhancement of financial certainty, and this delay diminishes these
benefits of clearing swaps that Congress sought to promote in the Dodd-
Frank Act. Delay in clearing is also inconsistent with other proposed
regulations concerning product eligibility and financial integrity of
transactions insofar as the delay constrains liquidity and increases
risk.
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\6\ A clearinghouse becomes the counterparty to trades with
market participants through novation, an open offer system, or an
analogous legally binding arrangement. Through novation, the
original contract between the buyer and seller is extinguished and
replaced by two new contracts, one between the clearinghouse and the
buyer and the other between the clearinghouse and the seller. In an
open offer system, a clearinghouse is automatically and immediately
interposed in a transaction at the moment the buyer and seller agree
on the terms.
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The Commission recognizes that there may be instances when a delay
in acceptance of a transaction by a DCO is unavoidable. For instance,
when new products are first listed for clearing, existing legacy
transactions may have to be moved into clearing incrementally. However,
this process, sometimes referred to as backloading or migration, should
be accomplished as quickly as possible.
The swap market infrastructure established by the Dodd-Frank Act
provides for the trading of swaps on a SEF or DCM. The Dodd-Frank Act
also
[[Page 13103]]
establishes certain parameters for the bilateral execution of swaps
among entities registered as SDs or MSPs and their counterparties.
Swaps traded on a SEF or DCM, as well as swaps executed bilaterally,
that are subject to mandatory clearing (and have not been electively
excepted from mandatory clearing by an end user under section 2(h)(7)
of the CEA), must be cleared by a registered DCO. For swaps executed
bilaterally that are not required to be cleared, if the parties to the
transaction agree to clear, they may submit the swap to a registered
DCO for clearing.
Through this proposed rulemaking, the Commission seeks to expand
access to, and to strengthen the financial integrity of, the swap
markets subject to Commission oversight by requiring, and establishing
uniform standards for, prompt processing, submission, and acceptance of
swaps eligible for clearing by DCOs. This requires setting an
appropriate time frame for the processing and submission of swaps for
clearing, as well as a time frame for the clearing of swaps by the DCO.
2. Transfer of Swaps Positions and Related Funds
Currently, in the futures industry, a request by a customer to
transfer its open positions and related funds from its carrying FCM to
another FCM is accomplished within a reasonable period of time
(typically within two business days). However, under current practice
for some cleared swaps, a customer's request to transfer all or a
portion of its swap positions and related funds may be subject to a
more significant delay. (A party to a cleared swap may wish to transfer
its positions from its current clearing member to another clearing
member because there is concern about the carrying clearing member's
financial strength or for competitive reasons relating to customer
service or pricing). In these instances, a party must either enter into
an offsetting position without terminating its original position,
thereby creating economically unnecessary trades, or ``unwind'' the
position with the clearinghouse.
In proposing a new regulation to implement DCO Core Principle F
(Treatment of Funds), the Commission seeks to ensure that DCOs do not
impose economic or operational obstacles to the prompt transfer of
customer positions and related funds from one clearing member to
another, upon the request of a customer. The Commission's purpose in
this regard is to formalize and apply to swaps clearing, the futures
clearinghouse practice of transferring customer positions and related
funds without close-out and re-booking of the positions.
II. Proposed Regulations
A. Proposed Sec. 23.506--SD and MSP Submission of Swaps for Processing
and Clearing
1. Proposed Regulations
Section 731 of the Dodd-Frank Act amends the CEA by adding a new
section 4s, which sets forth a number of requirements for SDs and MSPs.
Specifically, section 4s(i) of the CEA establishes swap documentation
standards for SDs and MSPs and requires them to ``conform with such
standards as may be prescribed by the Commission by rule or regulation
that relate to timely and accurate confirmation, processing, netting,
documentation, and valuation of all swaps.'' Accordingly, the
Commission is proposing regulations on swap processing and clearing
discussed below, pursuant to the authority granted under sections
4s(h)(1)(D), 4s(h)(3)(D), 4s(i), and 8a(5) of the CEA.\7\ These
proposed regulations for SDs and MSPs are intended to complement the
proposed regulations for DCOs, which require timely acceptance of swaps
for clearing.\8\
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\7\ 7 U.S.C. 6s(h)(1)(D); 7 U.S.C. 6s(h)(3)(D); 7 U.S.C. 6s(i);
and 7 U.S.C. 12a(5). Section 8a(5) of the CEA authorizes the
Commission to promulgate such regulations as, in the judgment of the
Commission, are reasonably necessary to effectuate any of the
provisions or to accomplish any of the purposes of the CEA.
\8\ See discussion in section II.B. of this notice.
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In order to ensure compliance with any mandatory clearing
requirement issued pursuant to section 2(h)(1) of the CEA and to
promote the mitigation of counterparty credit risk through the use of
central clearing, the Commission is proposing Sec. 23.506(a)(1), which
would require that SDs and MSPs have the ability to route swaps that
are not executed on a SEF or DCM to a DCO in a manner that is
acceptable to the DCO for the purposes of risk management. Under Sec.
23.506(a)(2), SDs and MSPs would also be required to coordinate with
DCOs to facilitate prompt and efficient processing in accordance with
proposed regulations related to the timing of clearing by DCOs.
Proposed Sec. 23.506(a) does not prescribe the manner by which SDs
or MSPs route their swaps to DCOs and provide for prompt and efficient
processing. Indeed, in many instances, it is likely that DCOs will
enable SDs and MSPs to submit their swaps to clearing via third-party
platforms and other service providers. In this manner, privately
negotiated swaps may be submitted to DCOs with minimal burden on market
participants.
Proposed Sec. 23.506(b) would set forth timing requirements for
submitting swaps to DCOs in those instances where the swap is subject
to a clearing mandate and in those instances when a swap is not subject
to a mandate. Under Sec. 23.506(b)(1), an SD or MSP would be required
to submit a swap that is not executed on a SEF or DCM, but is subject
to a clearing mandate under section 2(h)(1) of the CEA (and has not
been electively excepted from mandatory clearing by an end user under
section 2(h)(7) of the CEA) as soon as technologically practicable
following execution of the swap, but no later than the close of
business on the day of execution.
For those swaps that are not subject to a clearing mandate, but
both counterparties to the swap have elected to clear the swap, under
proposed Sec. 23.506(b)(2), the SD or MSP would be required to submit
the swap for clearing not later than the next business day after
execution of the swap or the agreement to clear, if later than
execution. This time frame reflects the possibility that, unlike a
trade that takes place on a DCM, in the case of a bilateral swap, the
parties may need time to agree to terms that would conform with a DCO's
template for swaps it will accept for clearing. As noted previously,
any delay between execution and novation to a clearinghouse potentially
presents credit risk to the swap counterparties and the DCO because the
value of the position could change significantly between the time of
execution and the time of novation, thereby allowing financial exposure
to accumulate in the absence of daily mark-to-market. The proposed
regulation would serve to limit this delay as much as reasonably
possible.
Proposed Sec. 23.506 is consistent with regulations previously
proposed for SDs and MSPs, including proposed Sec. 23.501, which
requires confirmation of all swaps.\9\ In fact, by providing for
confirmation upon acceptance for clearing pursuant to proposed Sec.
39.12(b)(7)(v), SDs and MSPs would be able to satisfy proposed Sec.
23.501.
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\9\ See 76 FR at 81531.
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Proposed Sec. 23.506 is consistent with the Commission's proposed
regulations requiring reporting of swap transaction data to a
registered swap data repository.\10\ Under these proposed regulations,
SDs and MSPs are required to report certain information about a
[[Page 13104]]
swap that is not executed on a SEF or DCM to a registered swap data
repository ``promptly following verification of the primary economic
terms by the counterparties with each other at or immediately following
execution of the swap, but in no event later than: 30 minutes after
execution of the swap if verification of primary economic terms occurs
electronically; or 24 hours after execution of a swap if verification
of primary economic terms does not occur electronically.'' \11\ One of
the ``primary economic terms'' required to be reported under such
proposed regulations is an indication of whether or not the swap will
be cleared by a DCO.\12\
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\10\ See 75 FR 76574, Dec. 8, 2010 (proposed rules for swap data
recordkeeping and reporting requirements).
\11\ Proposed Sec. 45.3(a)(1)(iii)(A), 75 FR at 76600.
\12\ Proposed Sec. 45.1(q)(20), 75 FR at 76598.
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The proposed regulation also is consistent with the Commission's
proposed regulations requiring real-time public reporting of swap
transaction and pricing data.\13\ Under these proposed regulations, SDs
and MSPs are required to report certain information about a swap that
is not executed on a SEF or DCM to a registered swap data repository
that accepts and publicly disseminates swap transaction and pricing
data, as soon as technologically practicable following execution of
such swap.\14\ The information required to be reported under the
proposed regulations includes an indication of whether or not a swap is
cleared by a DCO.\15\
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\13\ See 75 FR 76140, Dec. 7, 2010 (proposed rules for real-time
public reporting of swap transaction data).
\14\ Proposed Sec. 43.3(a)(3), 75 FR at 76172.
\15\ Proposed Sec. 43.4 and Appendix A to part 43, 75 FR at
76174 and 76177.
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2. Solicitation of Comments
The Commission solicits comment on all aspects of the proposed
Sec. 23.506. It further requests responses to the following specific
questions: Should the regulations specify how an SD or MSP must ensure
that it has the capacity to route swaps to a DCO? Are there any
systemic obstacles to the DCO, SD, and MSP coordination required under
the proposed regulation?
Are the proposed time frames in Sec. 23.506(b) appropriate? Are
they operationally feasible? What is the operational feasibility of
same-day clearing for swaps executed bilaterally that are required to
be cleared and those that will not be required to be cleared? The
Commission further requests comment on the use of the phrase ``as soon
as technologically practicable.''
B. Proposed Sec. 39.12--Acceptance and Clearing of Swaps by a DCO
1. Recently Proposed Product Eligibility Standards Under Core Principle
C
Core Principle C requires each DCO to establish ``appropriate
standards for determining the eligibility of agreements, contracts, or
transactions submitted to the [DCO] for clearing.'' \16\ The Commission
has previously proposed Sec. 39.12(b) to implement this provision,\17\
pursuant to its rulemaking authority under sections 5b(c)(2)(A) and
8a(5) of the CEA.\18\
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\16\ Section 5b(c)(2)(C)(i)(II) of the CEA; 7 U.S.C. 7a-
1(c)(2)(C)(i)(II).
\17\ See 76 FR 3698.
\18\ 7 U.S.C. 7a-1(c)(2)(A); and 7 U.S.C. 12a(5).
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As previously published for public notice and comment, proposed
Sec. 39.12(b)(1) would require a DCO to establish appropriate
requirements for determining the eligibility of agreements, contracts,
or transactions submitted to the DCO for clearing, taking into account
the DCO's ability to manage the risks associated with such agreements,
contracts, or transactions.\19\ Proposed Sec. 39.12(b)(2) would codify
the requirements of section 2(h)(1)(B) of the CEA regarding a DCO's
offset of economically equivalent swaps.\20\ Proposed Sec. 39.12(b)(3)
would require a DCO to select contract unit sizes that maximize
liquidity, open access, and risk management.\21\ Finally, proposed
Sec. 39.12(b)(4) would require each DCO that clears swaps to have
rules stating that upon acceptance of a swap by the DCO for clearing,
(i) the original swap is extinguished, (ii) it is replaced by equal and
opposite swaps between clearing members and the DCO, (iii) all terms of
the cleared swaps must conform to templates established under DCO
rules, and (iv) if a swap is cleared by a clearing member on behalf of
a customer, all terms of the swap, as carried in the customer account
on the books of the clearing member, must conform to the terms of the
cleared swap established under the DCO's rules.\22\
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\19\ See 76 FR at 3720.
\20\ Id. Section 2(h)(1)(B) of the CEA, 7 U.S.C. 2(h)(1)(B),
requires a DCO to adopt rules providing that all swaps with the same
terms and conditions submitted to the DCO for clearing are
economically equivalent within the DCO and may be offset with each
other within the DCO. Section 2(h)(1)(B) further requires a DCO to
provide for non-discriminatory clearing of a swap executed
bilaterally or on or subject to the rules of an unaffiliated SEF or
DCM.
\21\ See 76 FR at 3720.
\22\ Id.
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2. Re-Proposed and Newly Proposed Regulations
To refine and supplement the previously proposed regulations
implementing Core Principle C, the Commission is (1) re-proposing Sec.
39.12(b)(2) to clarify the role of a DCO in establishing the terms and
conditions for swaps that it accepts for clearing; \23\ (2) proposing a
new Sec. 39.12(b)(4) that would prohibit a DCO from refusing to clear
a product where neither party to the original contract, agreement, or
transaction is a clearing member; (3) re-proposing Sec. 39.12(b)(3)
(renumbered as Sec. 39.12(b)(5)) to clarify a DCO's role and
objectives in selecting contract units for clearing purposes that are
smaller than the contract units in which trades submitted for clearing
were executed; and (4) proposing a new Sec. 39.12(b)(7) that would
clarify the timing of the actions described in previously proposed
Sec. Sec. 39.12(b)(4)(i) and (ii) (renumbered as paragraph (b)(6)),
i.e., requirements that upon acceptance of a swap by the DCO for
clearing, (i) the original swap is extinguished and (ii) it is replaced
by equal and opposite swaps between clearing members and the DCO.
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\23\ To provide additional clarity regarding open access to
clearing, the Commission is proposing to renumber the second
sentence of proposed Sec. 39.12(b)(2) as Sec. 39.12(b)(3) and to
insert a new paragraph (b)(4). Accordingly, proposed paragraphs
(b)(3) and (b)(4) would be renumbered as paragraphs (b)(5) and
(b)(6), respectively.
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(a) Section 39.12(b)(2)
As previously proposed, Sec. 39.12(b)(2) required a DCO to ``adopt
rules providing that all swaps with the same terms and conditions
submitted to the derivatives clearing organization for clearing are
economically equivalent within the derivatives clearing organization
and may be offset with each other within the derivatives clearing
organization.'' \24\ It also required that a DCO provide for non-
discriminatory clearing of a swap executed bilaterally or on or subject
to the rules of an unaffiliated SEF or DCM.\25\
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\24\ See 76 FR at 3720.
\25\ Id.
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The Commission is proposing to revise the first provision of Sec.
39.12(b)(2) to clarify that a DCO must adopt rules to establish
templates for the terms and conditions of swaps that it will clear.
Accordingly, the proposed provision now reads: ``A derivatives clearing
organization shall adopt rules providing that all swaps with the same
terms and conditions, as defined by templates established under
derivatives clearing organization rules, submitted to the derivatives
clearing organization for
[[Page 13105]]
clearing are economically equivalent within the derivatives clearing
organization and may be offset with each other within the derivatives
clearing organization.''
As noted above, the second provision of previously proposed Sec.
39.12(b)(2) would be unchanged, and would be renumbered as Sec.
39.12(b)(3).
(b) Section 39.12(b)(4)
Some clearinghouses have indicated that they intend to require
that, for a transaction to be eligible for clearing, one of the
executing parties must be a clearing member. This has the effect of
preventing trades between two parties who are not clearing members from
being cleared. Such a restriction of open access serves no apparent
risk management purpose and operates to keep certain trades out of the
clearing process and to constrain liquidity for cleared trades.
Moreover, such restrictions also may raise competitive issues under
Core Principle N (Antitrust Considerations).\26\
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\26\ See Section 5b(c)(2)(N) of the CEA, which provides that
``Unless necessary or appropriate to achieve the purposes of this
Act, a derivatives clearing organization shall not--
(i) Adopt any rule or take any action that results in any
unreasonable restraint of trade; or
(ii) Impose any material anticompetitive burden.''
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Accordingly, the Commission is proposing new Sec. 39.12(b)(4) to
prohibit a DCO from refusing to clear a product where neither party to
the original contract, agreement, or transaction is a clearing member.
The Commission notes that parties that are not clearing members would
still have to submit their bilateral trades for clearing through a
clearing member of the DCO.
(c) Section 39.12(b)(5)
The Commission previously proposed Sec. 39.12(b)(3), now proposed
to be renumbered at Sec. 39.12(b)(5), which would require a DCO to
``select contract unit sizes that maximize liquidity, open access, and
risk management.'' \27\ To the extent appropriate to further these
objectives, a DCO would be further required to select contract units
for clearing purposes that are smaller than the contract units in which
trades submitted for clearing were executed.\28\ The purpose of this
provision is to require the DCO to split a cleared swap into smaller
units in order to promote liquidity by permitting more parties to trade
the product, to facilitate open access by permitting more clearing
members to clear the product, and to aid risk management by enabling a
DCO, in the event of a default, to have more potential counterparties
to take on positions during a liquidation.
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\27\ See 76 FR at 3720.
\28\ Id.
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The Commission is now proposing to expand its description of the
actions to be undertaken by the DCO and the objectives to be served.
Accordingly, the Commission proposes that the introductory sentence of
Sec. 39.12(b)(5) read as follows: ``A derivatives clearing
organization shall select contract unit sizes and other terms and
conditions that maximize liquidity, facilitate transparency in pricing,
promote open access, and allow for effective risk management.'' This
would clarify that, in establishing product templates under its rules,
the DCO is required to select other terms and conditions in addition to
unit size, such as termination or maturity period, settlement features,
and cash flow conventions, to facilitate price transparency in addition
to liquidity, open access, and risk management.
(d) Section 39.12(b)(7)
Proposed Sec. 39.12(b)(7)(i) would establish general standards for
the adoption of rules that establish a time frame for clearing. The DCO
would have to coordinate with each SEF and DCM that lists for trading a
product that is cleared by the DCO, in developing rules and procedures
to facilitate prompt and efficient processing of all contracts,
agreements, and transactions submitted to the DCO for clearing.
For prompt and efficient clearing to occur, the rules, procedures,
and operational systems of the trading platform and the clearinghouse
must mesh. Vertically integrated trading and clearing systems currently
process high volumes of transactions quickly and efficiently. The
Commission believes that trading platforms and DCOs under separate
control should be able to coordinate with one another to achieve
similar results. The Commission also recognizes that there may be
issues of connectivity between and among trading platforms and
clearinghouses. The Commission requests comment on how best to
facilitate the development of infrastructure, systems, and procedures
to address these issues.
Proposed paragraph (ii) would require a DCO to have rules that
provide that the DCO will accept for clearing, immediately upon
execution, all contracts, agreements, and transactions that are listed
for clearing by the DCO and (A) that are entered into on or subject to
the rules of a SEF or DCM; (B) for which the executing parties have
clearing arrangements in place with clearing members of the DCO; and
(C) for which the executing parties identify the DCO as the intended
clearinghouse.
Rules, procedures, and operational systems along these lines
currently work well for many exchange-traded futures. Similar
requirements could be applied across multiple exchanges and
clearinghouses for swaps. The parties would need to have clearing
arrangements in place with clearing members in advance of execution. In
cases where more than one DCO offered clearing services, the parties
also would need to specify in advance where the trade should be sent
for clearing.
Proposed paragraph (iii), which governs swaps subject to mandatory
clearing, would require a DCO to have rules that provide that the DCO
will accept for clearing, upon submission, all contracts, agreements,
and transactions that are listed for clearing by the DCO and (A) That
are not executed on or subject to the rules of a SEF or DCM; (B) that
are subject to mandatory clearing pursuant to section 2(h) of the CEA;
(C) that are submitted by the parties to the DCO, in accordance with
Sec. 23.506 of the Commission's regulations; (D) for which the
executing parties have clearing arrangements in place with clearing
members of the DCO; and (E) for which the executing parties identify
the DCO as the intended clearinghouse.
Proposed paragraph (iv) would provide for a longer time frame for
clearing swaps not executed on or subject to the rules of a SEF or DCM
and not subject to mandatory clearing. It would require a DCO to have
rules that provide that the DCO will process for clearing, no later
than the close of business on the day of submission to the DCO, all
swaps that are listed for clearing by the DCO and (A) that are not
executed on a SEF or a DCM; (B) that are not subject to mandatory
clearing pursuant to section 2(h) of the CEA; (C) that are submitted by
the parties to the DCO in accordance with proposed Sec. 23.506; (D)
for which the executing parties have clearing arrangements in place
with clearing members of the DCO; and (E) for which the executing
parties identify the DCO as the intended clearinghouse.
Because the execution of bilateral trades might not be automated
and because the parties to a trade might not decide that they want to
clear the trade until some time after execution, immediate clearing
might not be feasible. However, a DCO should provide sufficient clarity
about its participant and product eligibility requirements to enable
swap counterparties to determine whether a bilateral trade would be
acceptable to be cleared within one day of submission.
Proposed Sec. 39.12(b)(7)(v) would require that DCOs accepting a
swap for
[[Page 13106]]
clearing provide the counterparties with a definitive written record of
the terms of their agreement, which will serve as a confirmation of the
swap. This requirement would facilitate the timely processing and
confirmation of swaps not executed on a SEF or DCM by allowing parties
to confirm their transaction by submitting it to a DCO for clearing.
Swaps executed on a SEF or DCM are confirmed upon execution.\29\ In
other regulations proposed by the Commission, a swap confirmation is
defined as the consummation (electronically or otherwise) of legally
binding documentation (electronic or otherwise) that memorializes the
agreement of the counterparties to all of the terms of a swap.\30\ By
providing for confirmation upon acceptance for clearing, SDs and MSPs
would be able to satisfy proposed Sec. 23.501, which requires timely
confirmation of all swaps.
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\29\ See 76 FR at 1240.
\30\ See 75 FR 76140; and 75 FR 76574.
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(e) Proposed Sec. Sec. 37.702 and 38.601--Reciprocal Requirements for
SEFs and DCMs
In connection with proposing that a DCO coordinate the development
of rules and procedures with each SEF and DCM that lists for trading a
product that is cleared by the DCO, the Commission is re-proposing
certain amendments to parts 37 and 38 of the Commission's regulations
to include reciprocal coordination obligations for SEFs and DCMs.
The Commission previously proposed Sec. Sec. 37.700 to 703 to
implement SEF Core Principle 7 (Financial Integrity of Transactions),
pursuant to its rulemaking authority under sections 5h(h) and 8a(5) of
the CEA.\31\ Core Principle 7 requires a SEF to ``establish and enforce
rules and procedures for ensuring the financial integrity of swaps
entered on or through the facilities of the swap execution facility,
including the clearing and settlement of the swaps pursuant to section
2(h)(1) [of the CEA].'' \32\ As previously proposed, Sec. 37.702(b)
would require a SEF to provide for the financial integrity of its
transactions cleared by a DCO by ensuring that the SEF has the capacity
to route transactions to the DCO in a manner acceptable to the DCO for
purposes of risk management.\33\ In this notice, the Commission
proposes to renumber previously proposed Sec. 37.702(b) as paragraph
(b)(1) and add a new paragraph (b)(2) to require the SEF to
additionally provide for the financial integrity of cleared
transactions by coordinating with each DCO to which it submits
transactions for clearing, in the development of rules and procedures
to facilitate prompt and efficient transaction processing in accordance
with the requirements of Sec. 39.12(b)(7) of the Commission's
regulations.
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\31\ See 76 FR 1214; 7 U.S.C. 7b-3(h); and 7 U.S.C. 12a(5).
\32\ Section 5h(f)(7) of the CEA, 7 U.S.C. 7b-3(f)(7).
\33\ See 76 FR at 1248. Section 37.702(b), as originally
proposed, referred to ``ongoing'' risk management. In renumbering
and re-proposing this provision herein, the Commission is deleting
the term ``ongoing'' because it is superfluous and could create
confusion when read in conjunction with other Commission regulations
that refer to ``risk management.'' See, e.g., proposed Sec. 39.13
relating to risk management for DCOs, 76 FR at 3720.
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Similarly, the Commission previously proposed Sec. Sec. 38.600 to
607 to implement DCM Core Principle 11 (Financial Integrity of
Transactions) pursuant to its rulemaking authority under sections
5(d)(1) and 8a(5) of the CEA.\34\ Core Principle 11 requires a DCM to
``establish and enforce--(A) rules and procedures for ensuring the
financial integrity of transactions entered into on or through the
facilities of the contract market (including the clearance and
settlement of the transactions with a derivatives clearing
organization); and (B) rules to ensure--(i) the financial integrity of
any--(I) futures commission merchant; and (II) introducing broker; and
(ii) the protection of customer funds.'' \35\ As previously proposed,
Sec. 38.601 would require that transactions executed on or through a
DCM, other than transactions in security futures products, must be
cleared through a registered DCO in accordance with the provisions of
part 39 of the Commission's regulations.\36\ In this notice, the
Commission proposes to renumber this provision as paragraph (a) of
proposed Sec. 38.601 and add a new paragraph (b) to specifically
require the DCM to coordinate with each DCO to which it submits
transactions for clearing, in the development of DCO rules and
procedures to facilitate prompt and efficient transaction processing in
accordance with the requirements of Sec. 39.12(b)(7) of the
Commission's regulations.
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\34\ See 75 FR 80572; 7 U.S.C. 7(d)(1); and 7.U.S.C. 12a(5).
\35\ Section 5(d)(11) of the CEA, 7 U.S.C. 7(d)(11).
\36\ See 75 FR at 80618.
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3. Solicitation of Comments
The Commission solicits comment on all aspects of the proposed
regulations. It further requests responses to the following specific
questions: Are there any systemic or legal obstacles to the DCO, SEF,
and DCM coordination required under the proposed regulation? Are the
proposed time frames appropriate? Are they operationally feasible? More
specifically, for futures traded on a DCM, rules and procedures are in
place under which bunched orders are accepted for clearing immediately
upon execution, with allocation to individual customer accounts
occurring before the end of the day. Are similar procedures
operationally feasible for swaps executed as block trades? What amount
of time is necessary for asset managers to allocate block trades to the
individual entities on whose behalf they manage money, prior to the
allocated trades being sent to clearing (i.e. end of day, two hours,
etc.)? Should the submission of block trades to a DCO be treated
differently than other trades executed on or subject to the rules of a
SEF or DCM? What is the operational feasibility of same-day clearing
for bilateral swaps that are not required to be cleared?
C. Proposed Sec. 39.15--Transfer of Customer Positions and Related
Funds
1. Recently Proposed Treatment of Funds Standards Under Core Principle
F
Core Principle F, as amended by the Dodd-Frank Act,\37\ requires a
DCO to: (a) Establish standards and procedures that are designed to
protect and ensure the safety of its clearing members' funds and
assets; (b) hold such funds and assets in a manner by which to minimize
the risk of loss or of delay in the DCO's access to the assets and
funds; and (c) only invest such funds and assets in instruments with
minimal credit, market, and liquidity risks.\38\ The Commission has
proposed Sec. 39.15 to establish standards for compliance with Core
Principle F.\39\
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\37\ Section 5b(c)(2)(F) of the CEA; 7 U.S.C. 7a-1(c)(2)(F)
(Core Principle F).
\38\ Prior to amendment by the Dodd-Frank Act, Core Principle F
provided that ``[t]he applicant shall have standards and procedures
designed to protect and ensure the safety of member and participant
funds.''
\39\ See 76 FR at 3723.
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2. Newly-Proposed Regulations
To supplement the previously proposed regulations implementing Core
Principle F, the Commission is proposing a new Sec. 39.15(d) to
require a DCO to facilitate the prompt transfer of customer positions
from one clearing member of the DCO to another clearing member of the
DCO.\40\
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\40\ In connection with the proposed addition of new paragraph
(d), the Commission also proposes to renumber previously proposed
paragraph (d) as paragraph (e).
---------------------------------------------------------------------------
Efficient and complete portability of customer positions and the
funds
[[Page 13107]]
related to those positions is important in both pre-default and post-
default scenarios. A DCO should therefore structure its portability
arrangements in a way that facilitates the prompt and efficient
transfer of all or a portion of a customer's positions and funds from
one clearing member to one or more other clearing members. A DCO's
rules and procedures should require clearing members to facilitate the
transfer of customer positions and funds upon the customer's request,
subject to any notice or other contractual requirements.
Proposed Sec. 39.15(d) would require a DCO to have rules providing
that, upon the request of a customer and subject to the consent of the
receiving clearing member, the DCO will promptly transfer all or a
portion of such customer's portfolio of positions and related funds
from the carrying clearing member of the DCO to another clearing member
of the DCO, without requiring the close-out and re-booking of the
positions prior to the requested transfer. The term ``promptly,'' as
used in this provision is intended to mean as soon as possible and
within a reasonable period of time. Based on current futures industry
standards, this time frame is typically no more than two business days.
The requirement that a DCO not require close-out and re-booking of
positions eliminates a source of unnecessary delay and market
disruption, and conforms with current futures industry practice.\41\
The Commission is unaware of any reason that the transfer of cleared
swaps positions cannot be accomplished by means of the same process
that has been used for futures positions.
---------------------------------------------------------------------------
\41\ See, e.g., National Futures Association Rule 2-27
``Transfer of Customer Accounts'' (requiring that in response to a
customer's request to transfer its account, the carrying member must
confirm the account balances and positions to the receiving member
and then effect the requested transfer); and Chicago Mercantile
Exchange Rule 853 ``Transfer of Trades'' (permitting existing trades
to be transferred either on the books of a clearing member or from
one clearing member to another clearing member provided 1. the
transfer merely constitutes a change from one account to another
account where the underlying beneficial ownership in the accounts
remains the same; or 2. an error has been made in the clearing of a
trade and the error is discovered and the transfer is completed
within two business days after the trade date).
---------------------------------------------------------------------------
3. Solicitation of Comments
The Commission requests comment on whether the use of the term
``promptly'' provides adequate guidance or whether another descriptive
term or phrase, such as ``within a reasonable period of time'' or ``as
soon as practicable'' would better convey the intended meaning. The
Commission is not proposing that a specific time frame be included in
Sec. 39.15(d) because as technology evolves, it is likely that the
transfer of customer positions and related funds can be accomplished
more quickly and with greater operational efficiency. The Commission
requests comment on the proposed time frame and possible alternative
standards that could be applied.
As noted above, the Commission believes that the transfer of
cleared customer swap positions can be processed in the same manner as
futures positions. The Commission requests comment on whether there are
distinctions between futures and cleared swaps positions that would
require a different type of processing such that the cleared swaps
positions would have to be closed out and re-booked prior to transfer
from the carrying clearing member to another clearing member.
The proposed regulation places an obligation on the DCO to promptly
transfer customer positions and related funds, and the Commission
requests comment on whether the regulation also should require that a
DCO adopt rules that would require its clearing members to facilitate
prompt transfer of customer accounts.
III. Related Matters
A. Regulatory Flexibility Act
1. Swap Dealers and Major Swap Participants
The Regulatory Flexibility Act (RFA) requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities.\42\ The
Commission previously has established certain definitions of ``small
entities'' to be used in evaluating the impact of its regulations on
small entities in accordance with the RFA.\43\ The proposed regulations
would affect SDs and MSPs.
---------------------------------------------------------------------------
\42\ 5 U.S.C. 601 et seq.
\43\ 47 FR 18618, Apr. 30, 1982.
---------------------------------------------------------------------------
SDs and MSPs are new categories of registrants. Accordingly, the
Commission has not previously addressed the question of whether such
persons are, in fact, small entities for purposes of the RFA. The
Commission previously has determined, however, that futures commission
merchants (FCMs) should not be considered to be small entities for
purposes of the RFA.\44\ The Commission's determination was based, in
part, upon the obligation of FCMs to meet the minimum financial
requirements established by the Commission to enhance the protection of
customers' segregated funds and protect the financial condition of FCMs
generally.\45\ Like FCMs, SDs will be subject to minimum capital and
margin requirements and are expected to comprise the largest global
financial firms. The Commission is required to exempt from SD
registration any entities that engage in a de minimis level of swaps
dealing in connection with transactions with or on behalf of customers.
The Commission anticipates that this exemption would tend to exclude
small entities from registration. Accordingly, for purposes of the RFA
for this rulemaking, the Commission is hereby proposing that SDs not be
considered ``small entities'' for essentially the same reasons that
FCMs have previously been determined not to be small entities and in
light of the exemption from the definition of SD for those engaging in
a de minimis level of swap dealing.
---------------------------------------------------------------------------
\44\ Id. at 18619.
\45\ Id.
---------------------------------------------------------------------------
The Commission also has previously determined that large traders
are not ``small entities'' for RFA purposes.\46\ In that determination,
the Commission considered that a large trading position was indicative
of the size of the business. MSPs, by statutory definition, maintain
substantial positions in swaps or maintain outstanding swap positions
that create substantial counterparty exposure that could have serious
adverse effects on the financial stability of the United States banking
system or financial markets. Accordingly, for purposes of the RFA for
this rulemaking, the Commission is hereby proposing that MSPs not be
considered ``small entities'' for essentially the same reasons that
large traders have previously been determined not to be small entities.
---------------------------------------------------------------------------
\46\ Id. at 18620.
---------------------------------------------------------------------------
Moreover, the Commission is carrying out Congressional mandates by
proposing this regulation. Specifically, the Commission is proposing
these regulations to comply with the Dodd-Frank Act, the aim of which
is to reduce systemic risk presented by SDs and MSPs through
comprehensive regulation. The Commission does not believe that there
are regulatory alternatives to those being proposed that would be
consistent with the statutory mandate. Accordingly, the Chairman, on
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b)
that the proposed regulations will not have a significant economic
impact on a substantial number of small entities.
The Commission invites the public to comment on whether SDs and
MSPs should be considered small entities for purposes of the RFA.
[[Page 13108]]
2. Swap Execution Facilities
As noted above, the RFA requires that agencies consider whether the
regulations they propose will have a significant economic impact on a
substantial number of small entities. The Commission previously has
established certain definitions of ``small entities'' to be used in
evaluating the impact of its regulations on small entities in
accordance with the RFA.
The regulations adopted herein will affect SEFs. While SEFs are new
entities to be regulated by the Commission pursuant to the Dodd-Frank
Act, in a recent rulemaking proposal,\47\ the Commission proposed that
SEFs should not be considered as small entities for the purpose of the
RFA. The Dodd-Frank Act defines a SEF to mean ``a trading system or
platform in which multiple participants have the ability to execute or
trade swaps by accepting bids and offers made by multiple participants
in the facility or system, through any means of interstate commerce,
including any trading facility, that--(A) facilitates the execution of
swaps between persons; and (B) is not a designated contract market.''
\48\
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\47\ 75 FR 63745-46 (Oct. 18, 2010).
\48\ See section 1a(50) of the CEA. In addition, the Commission
proposed regulations regarding the types of entities that must
register as SEFs. See 76 FR 1214. The Commission does not believe
that such proposals would alter its determination that a SEF is not
a ``small entity'' for purposes of the RFA.
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In such rulemaking, the Commission proposed that SEFs not be
considered to be ``small entities'' for essentially the same reasons
that DCMs and DCOs have previously been determined not to be small
entities. These reasons include the fact that the Commission designates
a DCM or registers a DCO only when it meets specific criteria including
the expenditure of sufficient resources to establish and maintain
adequate self-regulatory programs. Likewise, the Commission will
register an entity as a SEF only after it has met specific criteria
including the expenditure of sufficient resources to establish and
maintain an adequate self-regulatory program.\49\ Once registered, a
SEF will be required to comply with the additional requirements set
forth in the final form of the proposed Part 37 rulemaking.\50\ Under
such rulemaking, the Commission proposed that SEFs should also not be
considered small entities based on, among other things, the central
role SEFs will play in the national regulatory scheme overseeing the
trading of swaps.\51\ Not only will SEFs play a vital role in the
national economy, but they will be subject to Commission oversight with
statutory duties to enforce the regulations adopted by their own
governing bodies.
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\49\ See 76 FR 1214.
\50\ Id.
\51\ Id. at 1235.
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Accordingly, the Commission does not expect the regulations, as
proposed herein, to have a significant economic impact on a substantial
number of small entities. Therefore, the Chairman, on behalf of the
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the
proposed regulations will not have a significant economic impact on a
substantial number of small entities.
The Commission invites the public to comment on whether SEFs should
be considered small entities for purposes of the RFA.
3. Designated Contract Markets and Derivatives Clearing Organizations
The regulations proposed by the Commission will affect DCMs and
DCOs (some of which will be designated as systemically important DCOs).
As noted above, 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. The Commission has previously determined that
DCMs and DCOs are not small entities for the purpose of the RFA.\52\
Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations
will not have a significant economic impact on a substantial number of
small entities.
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\52\ See 47 FR 18618, 18621, Apr. 30, 1982 (DCM determination);
66 FR 45605, 45609, Aug. 29, 2001 (DCO determination).
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B. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) \53\ imposes certain requirements
on Federal agencies in connection with their conducting or sponsoring
any collection of information as defined by the PRA. Under the PRA, an
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid control number from the Office of Management and Budget (OMB).
The Commission believes that these proposed regulations will not impose
any new information collection requirements that require approval of
OMB under the PRA.
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\53\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
C. Cost-Benefit Analysis
Section 15(a) of the CEA 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 regulation 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 action.
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
regulation is necessary or appropriate to protect the public interest
or to effectuate any of the provisions or to accomplish any of the
purposes of the CEA.
Summary of proposed requirements. The proposed regulations would
establish the time frame for SDs, MSPs, FCMs, DCMs, and SEFs to submit
contracts, agreements, or transactions to a DCO for clearing. The
proposed regulations would implement new section 4s(i) of the CEA by
establishing standards for SDs and MSPs related to the timely
processing and clearing of swaps. The proposed regulations also would
implement SEF Core Principle 7 (Financial Integrity of Transactions)
and DCM Core Principle 11 (Financial Integrity of Transactions),
requiring coordination with DCOs in the development of rules and
procedures to facilitate clearing. Additionally, the proposed
regulations would facilitate compliance with DCO Core Principle C
(Participant and Product Eligibility) in connection with the prompt and
efficient processing of all contracts, agreements, and transactions
submitted for clearing. Finally, the proposed regulations would
implement DCO Core Principle F (Treatment of Funds), requiring a DCO,
upon customer request, to promptly transfer customer positions and
related funds from one clearing member to another, without requiring
the close-out and re-booking of the positions.
Costs. The Commission has determined that the costs borne by SDs,
MSPs, FCMs, SEFs, DCMs, and DCOs to implement the new timing
requirements for processing and clearing positions and for transferring
customer positions and related funds, may be limited and far outweighed
by the accrual of benefits to the financial system as a result of the
[[Page 13109]]
regulations' implementation. Indeed, as discussed in Section I.B.2.,
the timely transfer of futures positions and funds is currently
practiced; thus, the additional costs of similar processes for swaps
may not be too significant. Rather, timely transfers of positions and
funds between clearing members would reduce economic and operational
obstacles. Moreover, the Commission has determined that the costs of
implementing new timing requirements for clearing would not be
significantly burdensome to a DCO given that immediate processing and
clearing of futures contracts is the current industry standard.
Furthermore, the clearing delays in the swaps market (as discussed in
Sections I.B.1, above) creates a credit risk because the value of
position may change between execution and novation, thereby allowing
financial exposure to accumulate in the absence of daily mark-to-
market, and additionally can have negative effects on liquidity and the
market's price discovery function.
Benefits. The Commission has determined that the benefits of the
proposed regulations are considerable. Through this proposed
rulemaking, market access will be expanded by requiring and
establishing uniform standards for, prompt processing and clearing of
swaps eligible for clearing by DCOs. Other benefits of timely clearing
include the promotion of centralized trading and clearing; increased
financial and legal certainty; and the timely notice of information so
that parties and market participants can gauge risk exposure,
liquidity, and market integrity. Timely clearing increases liquidity,
enhances price discovery for traders, and reduces risk to markets by
informing market participants of margin concerns and whether safeguards
should be triggered. Significantly, the Commission notes that these
regulations would aid market participants in fully complying with Dodd-
Frank's overarching mandate to promote clearing of swaps. The proposed
new regulation regarding a DCO's timely transfer of swaps positions and
related funds would benefit market participants by eliminating economic
or operational obstacles to customer transfers between clearing
members. In addition, the standardization of swaps clearing and
procedures for customer account transfer will be more akin to valuable
practices used in the futures market. The Commission believes it is
prudent to employ similar practices in the swaps markets.
List of Subjects
17 CFR Part 23
Antitrust, Commodity futures, Conduct standards, Conflicts of
interests, Major swap participants, Reporting and recordkeeping, Swap
dealers, Swaps.
17 CFR Part 37
Swaps, Swap execution facilities, Registration application,
Registered entities, Reporting and recordkeeping requirements.
17 CFR Part 38
Block transaction, Commodity futures, Designated contract markets,
Reporting and recordkeeping requirements, Transactions off the
centralized market.
17 CFR Part 39
Commodity futures, Participant and product eligibility, Risk
management, Swaps.
In light of the foregoing, the Commission hereby proposes to amend
part 23, as proposed to be added at 75 FR 71390, November 23, 2010, and
further amended at 75 FR 81530, December 28, 2010; part 37, as proposed
to be revised at 76 FR 1237, January 7, 2011; part 38, as proposed to
be amended at 75 FR 80606, December 22, 2010; and part 39, as proposed
to be amended at 76 FR 3717, January 20, 2011, of Title 17 of the Code
of Federal Regulations as follows:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
1. The authority citation for part 23 is revised to read as
follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
2. Revise the table of contents for part 23, subpart I to read as
follows:
Subpart I--Swap Documentation
Sec.
23.500 Definitions.
23.501 Swap confirmation.
23.502 Portfolio reconciliation.
23.503 Portfolio compression.
23.504 Swap trading relationship documentation.
23.505 End user exception documentation.
23.506 Swap processing and clearing.
3. Add Sec. 23.506 to part 23, subpart I, to read as follows:
Sec. 23.506 Swap processing and clearing.
(a) Swap processing. (1) Each swap dealer and major swap
participant shall ensure that it has the capacity to route swap
transactions not executed on a swap execution facility or designated
contract market to a derivatives clearing organization in a manner
acceptable to the derivatives clearing organization for the purposes of
risk management; and
(2) Each swap dealer and major swap participant shall coordinate
with each derivatives clearing organization to which the swap dealer,
major swap participant, or its clearing member, submits transactions
for clearing, to facilitate prompt and efficient swap transaction
processing in accordance with the requirements of Sec. 39.12(b)(7) of
this chapter.
(b) Swap clearing. With respect to each swap that is not executed
on a swap execution facility or a designated contract market, each swap
dealer and major swap participant shall:
(1) If such swap is subject to a mandatory clearing requirement
pursuant to section 2(h)(1) of the Act and an exception pursuant to
2(h)(7) is not applicable, submit such swap for clearing to a
derivatives clearing organization as soon as technologically
practicable after execution of the swap, but no later than the close of
business on the day of execution; or
(2) If such swap is not subject to a mandatory clearing requirement
pursuant to section 2(h)(1) of the Act but is accepted for clearing by
any derivatives clearing organization and the swap dealer or major swap
participant and its counterparty agree that such swap will be submitted
for clearing, submit such swap for clearing not later than the next
business day after execution of the swap, or the agreement to clear, if
later than execution.
PART 37--SWAP EXECUTION FACILITIES
4. Revise the authority citation for part 37 to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3 and 12a, as
amended by the Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. 111-203, 124 Stat. 1376.
Subpart H--Financial Integrity of Transactions
5. Amend Sec. 37.702 by revising paragraph (b) to read as follows:
Sec. 37.702 General financial integrity.
* * * * *
(b) For transactions cleared by a derivatives clearing
organization:
(1) By ensuring that the swap execution facility has the capacity
to route transactions to the derivative clearing organization in a
manner acceptable to the derivatives clearing organization for purposes
of risk management; and
[[Page 13110]]
(2) By coordinating with each derivatives clearing organization to
which it submits transactions for clearing, in the development of rules
and procedures to facilitate prompt and efficient transaction
processing in accordance with the requirements of Sec. 39.12(b)(7) of
this chapter.
* * * * *
PART 38--DESIGNATED CONTRACT MARKETS
6. Revise the authority citation for part 38 to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j,
6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as
amended by the Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. 111-203, 124 Stat. 1376.
Subpart L--Financial Integrity of Transactions
7. Revise Sec. 38.601 to read as follows:
Sec. 38.601 Mandatory clearing.
(a) Transactions executed on or through the designated contract
market, other than transactions in security futures products, must be
cleared through a Commission-registered derivatives clearing
organization, in accordance with the provisions of part 39 of this
chapter.
(b) A designated contract market must coordinate with each
derivatives clearing organization to which it submits transactions for
clearing, in the development of rules and procedures to facilitate
prompt and efficient transaction processing in accordance with the
requirements of Sec. 39.12(b)(7) of this chapter.
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
8. Revise the authority citation for part 39 to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6d, 7a-1, 7a-2, and 7b as
amended by the Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. 111-203, 124 Stat. 1376.
Subpart B--Compliance With Core Principles
9. Amend Sec. 39.12 by revising paragraphs (b)(2) through (b)(4),
and adding paragraphs (b)(5) through (b)(7), to read as follows:
Sec. 39.12 Participant and product eligibility.
(a) * * *
(b) * * *
(2) A derivatives clearing organization shall adopt rules providing
that all swaps with the same terms and conditions, as defined by
templates established under derivatives clearing organization rules,
submitted to the derivatives clearing organization for clearing are
economically equivalent within the derivatives clearing organization
and may be offset with each other within the derivatives clearing
organization.
(3) A derivatives clearing organization shall provide for non-
discriminatory clearing of a swap executed bilaterally or on or subject
to the rules of an unaffiliated swap execution facility or designated
contract market.
(4) A derivatives clearing organization shall not require that one
of the original executing parties must be a clearing member in order
for a contract, agreement, or transaction to be eligible for clearing.
(5) A derivatives clearing organization shall select contract unit
sizes and other terms and conditions that maximize liquidity,
facilitate transparency in pricing, promote open access, and allow for
effective risk management. To the extent appropriate to further these
objectives, a derivatives clearing organization shall select contract
units for clearing purposes that are smaller than the contract units in
which trades submitted for clearing were executed.
(6) A derivatives clearing organization that clears swaps shall
have rules providing that, upon acceptance of a swap by the derivatives
clearing organization for clearing:
(i) The original swap is extinguished;
(ii) The original swap is replaced by equal and opposite swaps
between clearing members and the derivatives clearing organization;
(iii) All terms of the cleared swaps must conform to templates
established under derivatives clearing organization rules; and
(iv) If a swap is cleared by a clearing member on behalf of a
customer, all terms of the swap, as carried in the customer account on
the books of the clearing member, must conform to the terms of the
cleared swap established under the derivatives clearing organization's
rules.
(7) Time frame for clearing. (i) General. Each derivatives clearing
organization shall coordinate with each swap execution facility and
designated contract market that lists for trading a product that is
cleared by the derivatives clearing organization, in developing rules
and procedures to facilitate prompt and efficient processing of all
contracts, agreements, and transactions submitted to the derivatives
clearing organization for clearing.
(ii) Transactions executed on or subject to the rules of a swap
execution facility or designated contract market. A derivatives
clearing organization shall have rules that provide that the
derivatives clearing organization will accept for clearing, immediately
upon execution, all contracts, agreements, and transactions that are
listed for clearing by the derivatives clearing organization and
(A) That are entered into on a swap execution facility or
designated contract market;
(B) For which the executing parties have clearing arrangements in
place with clearing members of the derivatives clearing organization;
and
(C) For which the executing parties identify the derivatives
clearing organization as the intended clearinghouse.
(iii) Swaps not executed on or subject to the rules of a swap
execution facility or a designated contract market and subject to
mandatory clearing. A derivatives clearing organization shall have
rules that provide that the derivatives clearing organization will
accept for clearing, upon submission to the derivatives clearing
organization, all swaps that are listed for clearing by the derivatives
clearing organization and
(A) That are not executed on a swap execution facility or a
designated contract market;
(B) That are subject to mandatory clearing pursuant to section 2(h)
of the Act;
(C) That are submitted by the parties to the derivatives clearing
organization, in accordance with Sec. 23.506 of this chapter;
(D) For which the executing parties have clearing arrangements in
place with clearing members of the derivatives clearing organization;
and
(E) For which the executing parties identify the derivatives
clearing organization as the intended clearinghouse.
(iv) Swaps not executed on or subject to the rules of a swap
execution facility or a designated contract market and not subject to
mandatory clearing. A derivatives clearing organization shall have
rules that provide that the derivatives clearing organization will
accept for clearing, no later than the close of business on the day of
submission to the derivatives clearing organization, all swaps that are
listed for clearing by the derivatives clearing organization and
(A) That are not executed on a swap execution facility or a
designated contract market;
(B) That are not subject to mandatory clearing pursuant to section
2(h) of the Act;
[[Page 13111]]
(C) That are submitted by the parties to the derivatives clearing
organization, in accordance with Sec. 23.506 of this chapter;
(D) For which the executing parties have clearing arrangements in
place with clearing members of the derivatives clearing organization;
and
(E) For which the executing parties identify the derivatives
clearing organization as the intended clearinghouse.
(v) All swaps not executed on a swap execution facility or a
designated contract market and submitted for clearing. A derivatives
clearing organization shall have rules that provide that all swaps
submitted to the derivatives clearing organization for clearing shall
include written documentation that memorializes all of the terms of the
transaction and legally supersedes any previous agreement. The
confirmation of all terms of the transaction shall take place at the
same time as the swap is accepted for clearing.
10. Amend Sec. 39.15 by revising paragraph (d) and adding
paragraph (e) to read as follows:
Sec. 39.15 Treatment of funds.
* * * * *
(d) Transfer of customer positions. A derivatives clearing
organization shall have rules providing that, upon the request of a
customer and subject to the consent of the receiving clearing member,
the derivatives clearing organization will promptly transfer all or a
portion of such customer's portfolio of positions and related funds
from the carrying clearing member of the derivatives clearing
organization to another clearing member of the derivatives clearing
organization, without requiring the close-out and re-booking of the
positions prior to the requested transfer.
(e) Permitted investments. Funds and assets belonging to clearing
members and their customers that are invested by a derivatives clearing
organization shall be held in instruments with minimal credit, market,
and liquidity risks. Any investment of customer funds or assets by a
derivatives clearing organization shall comply with Sec. 1.25 of this
part, as if all such funds and assets comprise customer funds subject
to segregation pursuant to section 4d(a) of the Act and Commission
regulations thereunder.
Issued in Washington, DC, on February 24, 2011, by the
Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations
Appendices to Requirements for Processing, Clearing and Transfer of
Customer Positions--Commission Voting Summary and Statements of
Commissioners
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Dunn,
Sommers, Chilton and O'Malia voted in the affirmative; no
Commissioner voted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the proposed rulemaking regarding straight-through
processing because it furthers the goal of expanding access to and
strengthening the financial integrity of the swap markets. These
proposed regulations would require and establish uniform standards
for prompt processing, submission and acceptance for clearing of
swaps eligible for clearing. Such uniform standards, similar to the
practices in the futures markets, lower risk because they allow
market participants to get the prompt benefit of clearing rather
than having to first enter into a bilateral transaction that would
subsequently be moved into a clearinghouse.
In addition, I support the requirement for prompt and efficient
transfer of customer positions from a carrying clearing member of a
clearinghouse to another clearing member of the clearinghouse, upon
a customer's request. This would promote efficiency and avoid
unnecessary delay and market disruption. Furthermore, users of
derivatives could get the benefit of greater competition amongst
clearing members.
[FR Doc. 2011-4707 Filed 3-9-11; 8:45 am]
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