Committee for Purchase From People Who Are Blind or Severely Disabled
Industry and Security Bureau
International Trade Administration
National Oceanic and Atmospheric Administration
Presidential Documents
Federal Emergency Management Agency
Ocean Energy Management Bureau
Employee Benefits Security Administration
Federal Highway Administration
Surface Transportation Board
Consult the Reader Aids section at the end of this page for phone numbers, online resources, finding aids, reminders, and notice of recently enacted public laws.
To subscribe to the Federal Register Table of Contents LISTSERV electronic mailing list, go to http://listserv.access.gpo.gov and select Online mailing list archives, FEDREGTOC-L, Join or leave the list (or change settings); then follow the instructions.
Postal Service
Final rule.
The Postal Service will revise the
Charles Hunt at 901-681-4651, or Bill Chatfield at 202-268-7278.
On September 4, 2012, the Postal Service published a proposed rule in the
The termination date for
The Postal Service adopts the following changes to
Administrative practice and procedure, Postal Service.
Accordingly, 39 CFR part 111 is amended as follows:
5 U.S.C. 552(a); 13 U.S.C. 301-307; 18 U.S.C. 1692-1737; 39 U.S.C. 101, 401, 403, 404, 414, 416, 3001-3011, 3201-3219, 3403-3406, 3621, 3622, 3626, 3632, 3633, and 5001.
The following methods are authorized for meeting the Move Update standard:
b. National Change of Address Linkage System (NCOALink). This includes both pre-mail NCOALink processing systems and the physical mailpiece processing equipment system: National Change of Address Linkage System Mail Processing Equipment (NCOALink MPE). See the NCOALink page (NCOALink MPE Solutions) on
We will publish an appropriate amendment to 39 CFR part 111 to reflect these changes.
Environmental Protection Agency (EPA).
Direct final rule.
EPA is promulgating significant new use rules (SNURs) under the Toxic Substances Control Act (TSCA) for 20 chemical substances which were the subject of premanufacture notices (PMNs). Eight of these chemical substances are subject to TSCA section 5(e) consent orders issued by EPA. This action requires persons who intend to manufacture, import, or process any of these 20 chemical substances for an activity that is designated as a significant new use by this rule to notify EPA at least 90 days before commencing that activity. The required notification will provide EPA with the opportunity to evaluate the intended use and, if necessary, to prohibit or limit that activity before it occurs.
This rule is effective on January 2, 2013. For purposes of judicial review, this rule shall be promulgated at 1 p.m. (e.s.t.) on November 16, 2012.
Written adverse or critical comments, or notice of intent to submit adverse or
For additional information on related reporting requirement dates, see Units I.A., VI., and VII. of the
Submit your comments, identified by docket identification (ID) number EPA-HQ-OPPT-2012-0740, by one of the following methods:
•
•
•
You may be potentially affected by this action if you manufacture, import, process, or use the chemical substances contained in this rule. The following list of North American Industrial Classification System (NAICS) codes is not intended to be exhaustive, but rather provides a guide to help readers determine whether this document applies to them. Potentially affected entities may include:
• Manufacturers, importers, or processors of one or more subject chemical substances (NAICS codes 325 and 324110), e.g., chemical manufacturing and petroleum refineries.
This action may also affect certain entities through pre-existing import certification and export notification rules under TSCA. Chemical importers are subject to the TSCA section 13 (15 U.S.C. 2612) import certification requirements promulgated at 19 CFR 12.118 through 12.127 and 19 CFR 127.28. Chemical importers must certify that the shipment of the chemical substance complies with all applicable rules and orders under TSCA. Importers of chemicals subject to these SNURs must certify their compliance with the SNUR requirements. The EPA policy in support of import certification appears at 40 CFR part 707, subpart B. In addition, any persons who export or intend to export a chemical substance that is the subject of this rule are subject to the export notification provisions of TSCA section 12(b) (15 U.S.C. 2611(b)) (see § 721.20), and must comply with the export notification requirements in 40 CFR part 707, subpart D.
1.
2.
i. Identify the document by docket ID number and other identifying information (subject heading,
ii. Follow directions. The Agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulations (CFR) part or section number.
iii. Explain why you agree or disagree; suggest alternatives and substitute language for your requested changes.
iv. Describe any assumptions and provide any technical information and/or data that you used.
v. If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced.
vi. Provide specific examples to illustrate your concerns and suggest alternatives.
vii. Explain your views as clearly as possible, avoiding the use of profanity or personal threats.
viii. Make sure to submit your comments by the comment period deadline identified.
EPA is promulgating these SNURs using direct final procedures. These SNURs will require persons to notify EPA at least 90 days before commencing the manufacture, import, or processing of a chemical substance for any activity designated by these SNURs as a significant new use. Receipt of such notices allows EPA to assess risks that may be presented by the intended uses and, if appropriate, to regulate the proposed use before it occurs. Additional rationale and background to these rules are more fully set out in the preamble to EPA's first direct final SNUR published in the
Section 5(a)(2) of TSCA (15 U.S.C. 2604(a)(2)) authorizes EPA to determine that a use of a chemical substance is a “significant new use.” EPA must make this determination by rule after considering all relevant factors, including the four bulleted TSCA section 5(a)(2) factors listed in Unit III. Once EPA determines that a use of a chemical substance is a significant new use, TSCA section 5(a)(1)(B) requires persons to submit a significant new use notice (SNUN) to EPA at least 90 days before they manufacture, import, or process the chemical substance for that use. Persons who must report are described in § 721.5.
General provisions for SNURs appear in 40 CFR part 721, subpart A. These provisions describe persons subject to the rule, recordkeeping requirements, exemptions to reporting requirements, and applicability of the rule to uses occurring before the effective date of the rule. Provisions relating to user fees appear at 40 CFR part 700. According to § 721.1(c), persons subject to these SNURs must comply with the same SNUN requirements and EPA regulatory procedures as submitters of PMNs under TSCA section 5(a)(1)(A). In particular, these requirements include the information submission requirements of TSCA section 5(b) and 5(d)(1), the exemptions authorized by TSCA section 5(h)(1), (h)(2), (h)(3), and (h)(5), and the regulations at 40 CFR part 720. Once EPA receives a SNUN, EPA may take regulatory action under TSCA section 5(e), 5(f), 6, or 7 to control the activities for which it has received the SNUN. If EPA does not take action, EPA is required under TSCA section 5(g) to explain in the
Section 5(a)(2) of TSCA states that EPA's determination that a use of a chemical substance is a significant new use must be made after consideration of all relevant factors, including:
• The projected volume of manufacturing and processing of a chemical substance.
• The extent to which a use changes the type or form of exposure of human beings or the environment to a chemical substance.
• The extent to which a use increases the magnitude and duration of exposure of human beings or the environment to a chemical substance.
• The reasonably anticipated manner and methods of manufacturing, processing, distribution in commerce, and disposal of a chemical substance.
In addition to these factors enumerated in TSCA section 5(a)(2), the statute authorized EPA to consider any other relevant factors.
To determine what would constitute a significant new use for the 20 chemical substances that are the subject of these SNURs, EPA considered relevant information about the toxicity of the chemical substances, likely human exposures and environmental releases associated with possible uses, and the four bulleted TSCA section 5(a)(2) factors listed in this unit.
EPA is establishing significant new use and recordkeeping requirements for 20 chemical substances in 40 CFR part 721, subpart E. In this unit, EPA provides the following information for each chemical substance:
• PMN number.
• Chemical name (generic name, if the specific name is claimed as CBI).
• Chemical Abstracts Service (CAS) Registry number (if assigned for non-confidential chemical identities).
• Basis for the TSCA section 5(e) consent order or, for non-section 5(e) SNURs, the basis for the SNUR (i.e., SNURs without TSCA section 5(e) consent orders).
• Toxicity concerns.
• Tests recommended by EPA to provide sufficient information to evaluate the chemical substance (see Unit VIII. for more information).
• CFR citation assigned in the regulatory text section of this rule.
The regulatory text section of this rule specifies the activities designated as significant new uses. Certain new uses, including production volume limits (i.e., limits on manufacture and importation volume) and other uses designated in this rule, may be claimed as CBI. Unit IX. discusses a procedure companies may use to ascertain whether a proposed use constitutes a significant new use.
This rule includes 8 PMN substances that are subject to “risk-based” consent orders under TSCA section 5(e)(1)(A)(ii)(I) where EPA determined that activities associated with the PMN substances may present unreasonable risk to human health or the environment. Those consent orders require protective measures to limit exposures or otherwise mitigate the potential unreasonable risk. The so-called “5(e) SNURs” on these PMN substances are promulgated pursuant to § 721.160, and are based on and consistent with the provisions in the underlying consent orders. The 5(e) SNURs designate as a “significant new use” the absence of the protective measures required in the corresponding consent orders.
Where EPA determined that the PMN substance may present an unreasonable risk of injury to human health via inhalation exposure, the underlying TSCA section 5(e) consent order usually requires, among other things, that potentially exposed employees wear specified respirators unless actual measurements of the workplace air show that air-borne concentrations of the PMN substance are below a New Chemical Exposure Limit (NCEL) that is established by EPA to provide adequate protection to human health. In addition to the actual NCEL concentration, the comprehensive NCELs provisions in TSCA section 5(e) consent orders, which are modeled after Occupational Safety and Health Administration (OSHA) Permissible Exposure Limits (PELs) provisions, include requirements
This rule also includes SNURs on 12 PMN substances that are not subject to consent orders under TSCA section 5(e). In these cases, for a variety of reasons, EPA did not find that the use scenario described in the PMN triggered the determinations set forth under TSCA section 5(e). However, EPA does believe that certain changes from the use scenario described in the PMN could result in increased exposures, thereby constituting a “significant new use.” These so-called “non-section 5(e) SNURs” are promulgated pursuant to § 721.170. EPA has determined that every activity designated as a “significant new use” in all non-section 5(e) SNURs issued under § 721.170 satisfies the two requirements stipulated in § 721.170(c)(2), i.e., these significant new use activities, “(i) are different from those described in the premanufacture notice for the substance, including any amendments, deletions, and additions of activities to the premanufacture notice, and (ii) may be accompanied by changes in exposure or release levels that are significant in relation to the health or environmental concerns identified” for the PMN substance.
1. Use of personal protective equipment including dermal protection when there is potential dermal exposure and a National Institute for Occupational Safety and Health (NIOSH)-certified respirator with an assigned protection factor (APF) of at least 10,000, or compliance with a NCEL of 0.32 mg/m
2. No use of the substances resulting in surface water concentrations exceeding 5 ppb of the combination of these PMN substances.
3. Establishment and use of a hazard communication program.
1. Use of the substance only as described in the PMN.
2. Establishment and use of a hazard communication program.
3. No use of the substance that results in releases to surface water.
EPA has also determined that a prenatal developmental toxicity study (OPPTS Test Guideline 870.3700 or OECD 414) using oral (gavage) in the rat would help characterize the human health effects of the PMN substance. The order does not require the submission of the prenatal developmental toxicity study at any specified time or production volume. However, the order's restrictions on manufacture, import, processing, distribution in commerce, use, and disposal of the PMN substance will remain in effect until the order is modified or revoked by EPA based on submission of that or other relevant information.
As described in the PMN, releases of the substance are not expected to result in surface water concentrations that exceed 1 ppb. Therefore, EPA has not determined that the proposed manufacturing, processing, or use of the substance may present an unreasonable risk. EPA has determined, however, that any use of the substance resulting in surface water concentrations exceeding 1 ppb may cause significant adverse environmental effects. Based on this information, the PMN substance meets the concern criteria at § 721.170(b)(4)(ii).
During review of the PMNs submitted for the chemical substances that are subject to these SNURs, EPA concluded that for 8 of the 20 chemical substances, regulation was warranted under TSCA section 5(e), pending the development of information sufficient to make reasoned evaluations of the health or environmental effects of the chemical substances. The basis for such findings is outlined in Unit IV. Based on these findings, TSCA section 5(e) consent orders requiring the use of appropriate exposure controls were negotiated with the PMN submitters. The SNUR provisions for these chemical substances are consistent with the provisions of the TSCA section 5(e) consent orders. These SNURs are promulgated pursuant to § 721.160 (see Unit II.).
In the other 12 cases, where the uses are not regulated under a TSCA section 5(e) consent order, EPA determined that one or more of the criteria of concern established at § 721.170 were met, as discussed in Unit IV.
EPA is issuing these SNURs for specific chemical substances which have undergone premanufacture review because the Agency wants to achieve the following objectives with regard to the significant new uses designated in this rule:
• EPA will receive notice of any person's intent to manufacture, import, or process a listed chemical substance for the described significant new use before that activity begins.
• EPA will have an opportunity to review and evaluate data submitted in a SNUN before the notice submitter begins manufacturing, importing, or processing a listed chemical substance for the described significant new use.
• EPA will be able to regulate prospective manufacturers, importers, or processors of a listed chemical substance before the described significant new use of that chemical substance occurs, provided that regulation is warranted pursuant to TSCA sections 5(e), 5(f), 6, or 7.
• EPA will ensure that all manufacturers, importers, and processors of the same chemical substance that is subject to a TSCA section 5(e) consent order are subject to similar requirements.
Issuance of a SNUR for a chemical substance does not signify that the chemical substance is listed on the TSCA Chemical Substance Inventory (TSCA Inventory). Guidance on how to determine if a chemical substance is on the TSCA Inventory is available on the Internet at
EPA is issuing these SNURs as a direct final rule, as described in § 721.160(c)(3) and § 721.170(d)(4). In accordance with § 721.160(c)(3)(ii) and § 721.170(d)(4)(i)(B), the effective date of this rule is January 2, 2013 without further notice, unless EPA receives written adverse or critical comments, or notice of intent to submit adverse or critical comments before December 3, 2012.
If EPA receives written adverse or critical comments, or notice of intent to submit adverse or critical comments, on one or more of these SNURs before December 3, 2012, EPA will withdraw the relevant sections of this direct final rule before its effective date. EPA will then issue a proposed SNUR for the chemical substance(s) on which adverse or critical comments were received, providing a 30-day period for public comment.
This rule establishes SNURs for a number of chemical substances. Any person who submits adverse or critical comments, or notice of intent to submit adverse or critical comments, must identify the chemical substance and the new use to which it applies. EPA will not withdraw a SNUR for a chemical substance not identified in the comment.
Significant new use designations for a chemical substance are legally established as of the date of publication of this direct final rule, November 2, 2012.
To establish a significant “new” use, EPA must determine that the use is not ongoing. The chemical substances
As discussed in the April 24, 1990 SNUR, EPA has decided that the intent of TSCA section 5(a)(1)(B) is best served by designating a use as a significant new use as of the date of publication of this direct final rule rather than as of the effective date of the rule. If uses begun after publication were considered ongoing rather than new, it would be difficult for EPA to establish SNUR notification requirements because a person could defeat the SNUR by initiating the significant new use before the rule became effective, and then argue that the use was ongoing before the effective date of the rule. Thus, persons who begin commercial manufacture, import, or processing of the chemical substances regulated through this SNUR will have to cease any such activity before the effective date of this rule. To resume their activities, these persons would have to comply with all applicable SNUR notification requirements and wait until the notice review period, including any extensions, expires.
EPA has promulgated provisions to allow persons to comply with this SNUR before the effective date. If a person meets the conditions of advance compliance under § 721.45(h), the person is considered exempt from the requirements of the SNUR.
EPA recognizes that TSCA section 5 does not require developing any particular test data before submission of a SNUN. The two exceptions are:
1. Development of test data is required where the chemical substance subject to the SNUR is also subject to a test rule under TSCA section 4 (see TSCA section 5(b)(1)).
2. Development of test data may be necessary where the chemical substance has been listed under TSCA section 5(b)(4) (see TSCA section 5(b)(2)).
In the absence of a TSCA section 4 test rule or a TSCA section 5(b)(4) listing covering the chemical substance, persons are required only to submit test data in their possession or control and to describe any other data known to or reasonably ascertainable by them (see § 720.50). However, upon review of PMNs and SNUNs, the Agency has the authority to require appropriate testing. In cases where EPA issued a TSCA section 5(e) consent order that requires or recommends certain testing, Unit IV. lists those tests. Unit IV. also lists recommended testing for non-5(e) SNURs. Descriptions of tests are provided for informational purposes. EPA strongly encourages persons, before performing any testing, to consult with the Agency pertaining to protocol selection. To access the OCSPP and OPPTS test guidelines referenced in this document electronically, please go to
In the TSCA section 5(e) consent orders for several of the chemical substances regulated under this rule, EPA has established production volume limits in view of the lack of data on the potential health and environmental risks that may be posed by the significant new uses or increased exposure to the chemical substances. These limits cannot be exceeded unless the PMN submitter first submits the results of toxicity tests that would permit a reasoned evaluation of the potential risks posed by these chemical substances. Under recent TSCA section 5(e) consent orders, each PMN submitter is required to submit each study at least 14 weeks (earlier TSCA section 5(e) consent orders required submissions at least 12 weeks) before reaching the specified production limit. Listings of the tests specified in the TSCA section 5(e) consent orders are included in Unit IV. The SNURs contain the same production volume limits as the TSCA section 5(e) consent orders. Exceeding these production limits is defined as a significant new use. Persons who intend to exceed the production limit must notify the Agency by submitting a SNUN at least 90 days in advance of commencement of non-exempt commercial manufacture, import, or processing.
The recommended tests specified in Unit IV. may not be the only means of addressing the potential risks of the chemical substance. However, submitting a SNUN without any test data may increase the likelihood that EPA will take action under TSCA section 5(e), particularly if satisfactory test results have not been obtained from a prior PMN or SNUN submitter. EPA recommends that potential SNUN submitters contact EPA early enough so that they will be able to conduct the appropriate tests.
SNUN submitters should be aware that EPA will be better able to evaluate SNUNs which provide detailed information on the following:
• Human exposure and environmental release that may result from the significant new use of the chemical substances.
• Potential benefits of the chemical substances.
• Information on risks posed by the chemical substances compared to risks posed by potential substitutes.
By this rule, EPA is establishing certain significant new uses which have been claimed as CBI subject to Agency confidentiality regulations at 40 CFR part 2 and 40 CFR part 720, subpart E. Absent a final determination or other disposition of the confidentiality claim under 40 CFR part 2 procedures, EPA is required to keep this information confidential. EPA promulgated a procedure to deal with the situation where a specific significant new use is CBI, at 40 CFR 721.1725(b)(1).
Under these procedures a manufacturer, importer, or processor may request EPA to determine whether
If EPA determines that the use identified in the
According to § 721.1(c), persons submitting a SNUN must comply with the same notification requirements and EPA regulatory procedures as persons submitting a PMN, including submission of test data on health and environmental effects as described in § 720.50. SNUNs must be submitted on EPA Form No. 7710-25, generated using e-PMN software, and submitted to the Agency in accordance with the procedures set forth in §§ 721.25 and 720.40. E-PMN software is available electronically at
EPA has evaluated the potential costs of establishing SNUN requirements for potential manufacturers, importers, and processors of the chemical substances subject to this rule. EPA's complete economic analysis is available in the docket under docket ID number EPA-HQ-OPPT-2012-0740.
This rule establishes SNURs for several new chemical substances that were the subject of PMNs and, in some cases, TSCA section 5(e) consent orders. The Office of Management and Budget (OMB) has exempted these types of actions from review under Executive Order 12866, entitled “Regulatory Planning and Review” (58 FR 51735, October 4, 1993).
According to PRA (44 U.S.C. 3501
The information collection requirements related to this action have already been approved by OMB pursuant to PRA under OMB control number 2070-0012 (EPA ICR No. 574). This action does not impose any burden requiring additional OMB approval. If an entity were to submit a SNUN to the Agency, the annual burden is estimated to average between 30 and 170 hours per response. This burden estimate includes the time needed to review instructions, search existing data sources, gather and maintain the data needed, and complete, review, and submit the required SNUN.
Send any comments about the accuracy of the burden estimate, and any suggested methods for minimizing respondent burden, including through the use of automated collection techniques, to the Director, Collection Strategies Division, Office of Environmental Information (2822T), Environmental Protection Agency, 1200 Pennsylvania Ave. NW., Washington, DC 20460-0001. Please remember to include the OMB control number in any correspondence, but do not submit any completed forms to this address.
On February 18, 2012, EPA certified pursuant to RFA section 605(b) (5 U.S.C. 601
1. A significant number of SNUNs would not be submitted by small entities in response to the SNUR.
2. The SNUR submitted by any small entity would not cost significantly more than $8,300.
A copy of that certification is available in the docket for this rule.
This rule is within the scope of the February 18, 2012, certification. Based on the Economic Analysis discussed in Unit XI. and EPA's experience promulgating SNURs (discussed in the certification), EPA believes that the following are true:
• A significant number of SNUNs would not be submitted by small entities in response to the SNUR.
• Submission of the SNUN would not cost any small entity significantly more than $8,300.
Based on EPA's experience with proposing and finalizing SNURs, State, local, and Tribal governments have not been impacted by these rulemakings, and EPA does not have any reasons to believe that any State, local, or Tribal government will be impacted by this rule. As such, EPA has determined that this rule does not impose any enforceable duty, contain any unfunded mandate, or otherwise have any effect on small governments subject to the requirements of UMRA sections 202, 203, 204, or 205 (2 U.S.C. 1501
This action will not have a substantial direct effect on States, on the
This rule does not have Tribal implications because it is not expected to have substantial direct effects on Indian Tribes. This rule does not significantly nor uniquely affect the communities of Indian Tribal governments, nor does it involve or impose any requirements that affect Indian Tribes. Accordingly, the requirements of Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000), do not apply to this rule.
This action is not subject to Executive Order 13045, entitled “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997), because this is not an economically significant regulatory action as defined by Executive Order 12866, and this action does not address environmental health or safety risks disproportionately affecting children.
This action is not subject to Executive Order 13211, entitled “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001), because this action is not expected to affect energy supply, distribution, or use and because this action is not a significant regulatory action under Executive Order 12866.
This action does not involve any technical standards, so NTTAA section 12(d) (15 U.S.C. 272 note) does not apply to this action.
This action does not entail special considerations of environmental justice related issues as delineated by Executive Order 12898, entitled “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations” (59 FR 7629, February 16, 1994).
Pursuant to the Congressional Review Act (5 U.S.C. 801
Environmental protection, Reporting and recordkeeping requirements.
Environmental protection, Chemicals, Hazardous substances, Reporting and recordkeeping requirements.
Therefore, 40 CFR parts 9 and 721 are amended as follows:
7 U.S.C. 135
15 U.S.C. 2604, 2607, and 2625(c).
(a)
(2) The significant new uses are:
(i) Industrial, commercial and consumer activities. Requirements as specified in § 721.80(f) and (j)
(ii) [Reserved]
(b)
(1)
(2)
(3)
(a)
(2) The significant new uses are:
(i)
(A) As an alternative to the respiratory requirements listed in paragraph (a)(2)(i), a manufacturer, importer, or processor may choose to follow the new chemical exposure limit (NCEL) provisions listed in the TSCA section 5(e) consent order for this substance. The NCEL is 0.32 milligram/cubic meter (mg/m
(B) [Reserved]
(ii)
(iii)
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(A) As an alternative to the respiratory requirements listed in paragraph (a)(2)(i), a manufacturer, importer, or processor may choose to follow the new chemical exposure limit (NCEL) provisions listed in the TSCA section 5(e) consent order for this substance. The NCEL is 0.32 milligram/cubic meter (mg/m
(B) [Reserved]
(ii)
(iii)
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(A) As an alternative to the respiratory requirements listed in paragraph (a)(2)(i), a manufacturer, importer, or processor may choose to follow the new chemical exposure limit (NCEL) provisions listed in the TSCA section 5(e) consent order for this substance. The NCEL is 0.32 milligram/cubic meter (mg/m
(B) [Reserved]
(ii)
(iii)
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(A) As an alternative to the respiratory requirements listed in paragraph (a)(2)(i), a manufacturer, importer, or processor may choose to follow the new chemical exposure limit (NCEL) provisions listed in the TSCA section 5(e) consent order for this substance. The NCEL is 0.32 milligram/cubic meter (mg/m
(B) [Reserved]
(ii)
(iii)
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(A) As an alternative to the respiratory requirements listed in paragraph (a)(2)(i), a manufacturer, importer, or processor may choose to follow the new chemical exposure limit (NCEL) provisions listed in the TSCA section 5(e) consent order for this substance. The NCEL is 0.32 milligram/cubic meter (mg/m
(B) [Reserved]
(ii)
(iii)
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(A) As an alternative to the respiratory requirements listed in paragraph (a)(2)(i), a manufacturer, importer, or processor may choose to follow the new chemical exposure limit (NCEL) provisions listed in the TSCA section 5(e) consent order for this substance. The NCEL is 0.32 milligram/cubic meter (mg/m
(B) [Reserved]
(ii)
(iii)
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(ii)
(iii)
(b)
(1)
(2)
(3)
(a)
(2) The significant new uses are:
(i)
(A) If as a result of the test data required under the TSCA section 5(e) consent order for this substance, the employer becomes aware that this substance may present a risk of injury to human health or the environment, the employer must incorporate this new information, and any information on methods for protecting against such risk, into a Material Safety Data Sheet (MSDS) as described in § 721.72(c) within 90 days from the time the employer becomes aware of the new information. If this substance is not being manufactured, imported, processed, or used in the employer's workplace, the employer must add the new information to a MSDS before the substance is reintroduced into the workplace.
(B) The employer must ensure that persons who will receive the PMN substance from the employer, or who have received the PMN substance from the employer within 5 years from the date the employer becomes aware of the new information described in paragraph (a)(2)(i)(A) of this section, are provided an MSDS containing the information required under paragraph (a)(2)(i)(A) within 90 days from the time the
(ii)
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(ii)
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(ii) [Reserved]
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(ii) [Reserved]
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(ii) [Reserved]
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(ii) [Reserved]
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(ii) [Reserved]
(b)
(1)
(2)
(3)
(a)
(2) The significant new uses are:
(i)
(ii) [Reserved]
(b)
(1)
(2)
(a)
(2) The significant new uses are:
(i)
(ii) [Reserved]
(b)
(1)
(2)
(3)
(a)
(2) The significant new uses are:
(i) Industrial, commercial, and consumer activities. Requirements as specified in § 721.80(j) and (s).
(ii) [Reserved]
(b)
(1)
(2)
(3)
Federal Emergency Management Agency, DHS.
Proposed rule; withdrawal.
The Federal Emergency Management Agency (FEMA) is withdrawing its proposed rule concerning proposed flood elevation determinations for Scotland County, North Carolina, and Incorporated Areas.
This withdrawal is effective on November 2, 2012.
You may submit comments, identified by Docket No. FEMA-B-1158, to Luis Rodriguez, Chief, Engineering Management Branch, Federal Insurance and Mitigation Administration, Federal Emergency Management Agency, 500 C Street SW., Washington, DC 20472, (202) 646-4064, or (email)
Luis Rodriguez, Chief, Engineering Management Branch, Federal Insurance and Mitigation Administration, Federal Emergency Management Agency, 500 C Street SW., Washington, DC 20472, (202) 646-4064, or (email)
On December 16, 2010, FEMA published a proposed rulemaking at 75 FR 78654, proposing flood elevation determinations along one or more flooding sources in Scotland County, North Carolina. FEMA is withdrawing the proposed rulemaking and intends to publish a Notice of Proposed Flood Hazard Determinations in the
42 U.S.C. 4104; 44 CFR 67.4.
Surface Transportation Board (the Board or STB), DOT.
Notice of proposed rulemaking.
Through this Notice of Proposed Rulemaking (NPR), the Board is proposing a rule establishing additional disclosure requirements for notices and petitions for exemption where the underlying lease or line sale includes an interchange commitment.
Comments are due by December 3, 2012. Reply comments are due by January 2, 2013.
Comments and replies may be submitted either via the Board's e-filing format or in the traditional paper format. Any person using e-filing should attach a document and otherwise comply with the instructions at the E-FILING link on the Board's Web site, at
Amy C. Ziehm at (202) 245-0391. Assistance for the hearing impaired is available through the Federal Information Relay Service (FIRS) at (800) 877-8339.
Interchange commitments are “contractual provisions included with a sale or lease of a rail line that limit the incentive or the ability of the purchaser or tenant carrier to interchange traffic with rail carriers other than the seller or lessor railroad.”
As a result of both the Railroad Revitalization and Regulatory Reform Act of 1976 and the Staggers Rail Act of 1980, it has become easier for rail carriers to abandon, sell, or lease a line or part of a line by utilizing exemptions from regulatory procedures. This flexibility has helped to revitalize the railroad industry. In 1998, the Board held two days of hearings to examine rail access and competition.
In September 1998, the American Short Line and Regional Railroad Association and the Association of American Railroads entered into a Railroad Industry Agreement (RIA), which stipulated, among other things, that “[l]egitimate paper barriers are those that are designed as fair payment for the sale or rental value of the line that created the Short Line.”
In 2005, in response to a renewed petition filed by WCTL, the Board initiated a rulemaking proceeding to consider regulations restricting interchange commitment provisions included with a sale or lease of a rail line.
To facilitate its review of transactions that include interchange commitments, the Board proposed new disclosure requirements in 2007 to ensure appropriate advance regulatory scrutiny of sale and lease agreements containing interchange commitments,
Since its May 2008 decision adopting disclosure rules, the Board has reviewed 10 notices or petitions for exemption involving interchange commitments.
The Board and interested parties have availed themselves of the information required in transactions containing interchange commitments. For instance, in four of those cases, third parties filed petitions to revoke the exemptions based on the interchange commitment.
In this rulemaking, the Board proposes to require that additional information be provided in notices and petitions for exemption to include, among other things, specific details regarding the impact the interchange commitment will have on shippers and the purchaser or lessee railroad. The Board's goal is to ensure that both the agency and other interested parties have sufficient information to judge whether the exemption process is appropriate for a transaction. In particular, because the notice of exemption process involves very short deadlines, the Board proposes to require disclosure of information about the transaction at the time of the notice itself, rather than during any subsequent requests to reject or revoke the exemption.
(1) A list of shippers that currently use or have used the line in question within the last two years;
(2) The number of carloads those shippers specified in paragraph (1) originated or terminated (submitted under seal);
(3) A certification that the railroad has provided notice of the proposed transaction and interchange commitment to the shippers identified in paragraph (1);
(4) A list of third party railroads that could physically interchange with the line sought to be acquired or leased;
(5) The percentage of the purchasing/leasing railroad's revenue projected to be derived from operations on the line with the interchange commitment (submitted under seal);
(6) An estimate of the difference between the sale or lease price with and without the interchange commitment (submitted under seal);
(7) An estimate of the discounted annual value of the interchange commitment to the Class I (or other incumbent carrier) leasing or selling the line (submitted under seal); and
(8) A change in the case caption so that the existence of an interchange commitment is apparent from the case title.
The Board's goal is to encourage transactions that are in the public interest, while ensuring that it has sufficient information about transactions to determine whether they are appropriate for the exemption process or, on the other hand, raise competitive issues that require a more detailed examination. The Board has already indicated that interchange commitments that last in perpetuity or completely eliminate the ability of the lessee/purchaser railroad to interchange with a third-party carrier raise significant concerns. Long-term interchange commitments, often embodied in lengthy, renewable leases, also have the potential to control the competitive environment—thus affecting rates and service—for years to come. To this end, the Board believes that it will benefit the parties to the transaction, shippers, and the public for the Board to be provided with the above-outlined information simultaneously with the filing of a notice or petition for exemption. This additional information will aid the Board in its review of petitions for and notices of exemption and allow the Board to evaluate contracts involving interchange commitments without the delay involved with seeking additional information. Furthermore, parties objecting to a petition for exemption or those filing a petition to revoke an exemption will have access to this relevant information up front, thus minimizing the length of time spent on the process of filing and deciding a petition to revoke.
The regulations proposed here would affect railroads negotiating contracts that contain interchange commitments. As noted below, the Board estimates that a total of four respondents will be affected by these additional reporting requirements annually, and that the additional time required by each respondent is no more than eight hours. The Board believes that an additional eight hours in the context of putting together the relevant documents and filings does not create a significant impact. Moreover, as only four respondents per year will be affected, the proposed rule would not impact a substantial number of small entities.
This action will not significantly affect either the quality of the human environment or the conservation of energy resources.
This rulemaking will affect the following subject: Parts 1121, 1150, and 1180 of title 49, chapter X, of the Code of Federal Regulations. It is issued subject to the Board's authority under 49 U.S.C. 721(a).
1. The Board proposes to amend its rules as set forth in this decision. Notice of the proposed rules will be published in the
2. Comments are due by December 3, 2012. Reply comments are due by January 2, 2013.
3. This decision is effective on the day of service.
Administrative practice and procedure, Railroads.
Administrative practice and procedure, Railroads.
Administrative practice and procedure, Railroads, Reporting and record keeping requirements.
Decided: October 29, 2012.
By the Board, Chairman Elliott, Vice Chairman Mulvey, and Commissioner Begeman. Vice Chairman Mulvey commented with a separate expression.
I commend the Board for proposing additional rules and soliciting comments regarding interchange commitment disclosures requirements. As explained in the decision, the goal of the proposed rules is to provide the Board and interested parties early access to a wide range of information regarding newly proposed interchange commitments. The impact of interchange commitments on competition remains a serious concern for many stakeholders. As we continue to grapple with questions raised by interchange commitments established decades ago, the Board must also be vigilant about the impact of any new restrictions on competition. In responding to the proposed rules, I hope that stakeholders will assist the Board in crafting a regime that provides appropriate scrutiny to transactions that have the potential to adversely impact competition.
For the reasons set forth in the preamble, the Surface Transportation Board proposes to amend parts 1121, 1150, and 1180 of title 49, chapter X, of the Code of Federal Regulations as follows:
1. The authority citation for part 1121 continues to read as follows:
49 U.S.C. 10502 and 10704.
2. Amend § 1121.3 by revising paragraph (d)(1) introductory text and by adding paragraphs (d)(1)(iii) through (x) to read as follows:
(d)
(iii) A list of shippers that currently use or have used the line in question within the last two years;
(iv) The number of carloads those shippers specified in paragraph (d)(1)(iii) of this section originated or terminated (submitted under seal);
(v) A certification that the railroad has provided notice of the proposed transaction and interchange commitment to the shippers identified in paragraph (d)(1)(iii) of this section;
(vi) A list of third party railroads that could physically interchange with the line sought to be acquired or leased;
(vii) The percentage of the purchasing/leasing railroad's revenue projected to be derived from operations on the line with the interchange commitment (submitted under seal);
(viii) An estimate of the difference between the sale or lease price with and without the interchange commitment (submitted under seal);
(ix) An estimate of the discounted annual value of the interchange commitment to the Class I (or other incumbent carrier) leasing or selling the line (submitted under seal); and
(x) A change in the case caption so that the existence of an interchange commitment is apparent from the case title.
3. The authority citation for part 1150 continues to read as follows:
49 U.S.C. 721(a), 10502, 10901, and 10902.
4. Amend § 1150.33 by revising paragraph (h)(1) introductory text and by adding paragraphs (h)(1)(iii) through (x) to read as follows:
(h)
(iii) A list of shippers that currently use or have used the line in question within the last two years;
(iv) The number of carloads those shippers specified in paragraph (iii) originated or terminated (submitted under seal);
(v) A certification that the railroad has provided notice of the proposed transaction and interchange commitment to the shippers identified in paragraph (iii);
(vi) A list of third party railroads that could physically interchange with the line sought to be acquired or leased;
(vii) The percentage of the purchasing/leasing railroad's revenue projected to be derived from operations on the line with the interchange commitment (submitted under seal);
(viii) An estimate of the difference between the sale or lease price with and without the interchange commitment (submitted under seal);
(ix) An estimate of the discounted annual value of the interchange commitment to the Class I (or other incumbent carrier) leasing or selling the line (submitted under seal); and
(x) A change in the case caption so that the existence of an interchange commitment is apparent from the case title.
5. Amend § 1150.43 by revising paragraphs (h)(1) introductory text and by adding paragraphs (h)(1)(iii) through (x) to read as follows:
(h)
(iii) A list of shippers that currently use or have used the line in question within the last two years;
(iv) The number of carloads those shippers specified in paragraph (h)(1)(iii) of this section originated or terminated (submitted under seal);
(v) A certification that the railroad has provided notice of the proposed transaction and interchange commitment to the shippers identified in paragraph (h)(1)(iii) of this section;
(vi) A list of third party railroads that could physically interchange with the line sought to be acquired or leased;
(vii) The percentage of the purchasing/leasing railroad's revenue projected to be derived from operations on the line with the interchange commitment (submitted under seal);
(viii) An estimate of the difference between the sale or lease price with and without the interchange commitment (submitted under seal);
(ix) An estimate of the discounted annual value of the interchange commitment to the Class I (or other incumbent carrier) leasing or selling the line (submitted under seal); and
(x) A change in the case caption so that the existence of an interchange commitment is apparent from the case title.
6. The authority citation for part 1180 continues to read as follows:
5 U.S.C. 553 and 559; 11 U.S.C. 1172; 49 U.S.C. 721, 10502, 11323-11325.
7. Amend § 1180.4 by revising paragraph (g)(4)(i) introductory text and by adding paragraphs (g)(4)(i)(C) through (J) to read as follows:
(g) * * *
(4)
(C) A list of shippers that currently use or have used the line in question within the last two years;
(D) The number of carloads those shippers specified in paragraph (g)(4)(i)(C) of this section originated or terminated (submitted under seal);
(E) A certification that the railroad has provided notice of the proposed transaction and interchange commitment to the shippers identified in paragraph (g)(4)(i)(C) of this section;
(F) A list of third party railroads that could physically interchange with the line sought to be acquired or leased;
(G) The percentage of the purchasing/leasing railroad's revenue projected to be derived from operations on the line with the interchange commitment (submitted under seal);
(H) An estimate of the difference between the sale or lease price with and without the interchange commitment (submitted under seal);
(I) An estimate of the discounted annual value of the interchange commitment to the Class I (or other incumbent carrier) leasing or selling the line (submitted under seal); and
(J) A change in the case caption so that the existence of an interchange commitment is apparent from the case title.
The following appendix will not appear in the Code of Federal Regulations.
The additional information below is included to assist those who may wish to submit comments pertinent to review under the Paperwork Reduction Act:
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Proposed rule; request for comments.
NMFS proposes regulations to implement Amendment 19 to the Northeast Multispecies Fishery Management Plan, if approved. The New England Fishery Management Council developed Amendment 19 to modify management measures that currently govern the small-mesh multispecies fishery, including the accountability measures, the year-round possession limits and total allowable landings process.
Written comments must be received no later than 5 p.m. eastern standard time, on December 3, 2012.
An environmental assessment (EA) was prepared for Amendment 19 that describes the proposed action and other considered alternatives, and provides an analysis of the impacts of the proposed measures and alternatives. Copies of the Amendment, including the EA and the Initial Regulatory Flexibility Analysis (IRFA), are available on request from Paul J. Howard, Executive Director, New England Fishery Management Council, 50 Water Street, Newburyport, MA 01950. These documents are also available online at
You may submit comments, identified by NOAA-NMFS-2012-0170, by any one of the following methods:
•
•
•
Moira Kelly, Fishery Policy Analyst, (978) 281-9218.
Amendment 19 to the Northeast (NE) Multispecies Fishery Management Plan (FMP) affects the part of the New England groundfish fishery known as the small-mesh fishery. The small-mesh fishery is composed of a complex of five stocks of three species of hakes (northern silver hake, southern silver hake, northern red hake, southern red hake, and offshore hake), and is managed through a series of exemptions from the other provisions of the NE Multispecies FMP. It is managed separately from the other stocks of groundfish such as cod, haddock, and flounder, primarily because it is prosecuted with much smaller mesh and does not generally result in the catch of these other stocks.
The New England Fishery Management Council (Council) initiated Amendment 19 to bring the small-mesh multispecies portion of the NE Multispecies FMP into compliance with the annual catch limit (ACL) and accountability measure (AM) requirements of the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act). However, development of Amendment 19 was delayed, and it became apparent that the amendment would not be submitted until well after the 2011 statutory deadline for implementing mechanisms for establishing ACLs and AMs. To ensure that ACLs and AMs for the small-mesh fishery were implemented closer to the statutory deadline, NOAA initiated, developed, and implemented, with the concurrence of the Council, a Secretarial Amendment on March 30, 2012 (77 FR 19138). The Secretarial Amendment was based on the preliminary work the Council completed up to that point, including the overfishing limits (OFL), acceptable biological catches (ABC), and ACLs.
The Council, through Amendment 19, is adopting those limits (Table 1) and the process that describes how those values are calculated as implemented in the Secretarial Amendment. As described in the Secretarial Amendment, the ABCs are based on the OFLs and, to account for scientific uncertainty, are set equal to the 40th percentile of the OFL distribution for both red hake stocks, and the 25th percentile for both silver hake stocks. In order to account for offshore hake, which are caught incidentally in the southern silver hake fishery and are marketed together as “whiting,” the southern silver hake ABC is increased by 4 percent. The ACLs are then set equal to 95 percent of the respective ABC, to account for management uncertainty.
However, in Amendment 19, the Council recommended changes to some measures implemented in the Secretarial Amendment, as well as changes to management measures that the Secretarial Amendment did not address. This rule proposes these changes, which are discussed in detail below.
The overfishing definitions were derived from the most recent stock assessment for the small-mesh multispecies that was conducted in November 2010 (SAW 51). The Council prefers using the new overfishing definitions because they are based on the best available science. There is no overfishing definition for offshore hake because there is insufficient information for a stock assessment. The proposed new overfishing definitions for red hake and silver hake would be as follows:
Red hake is overfished when the 3-yr moving arithmetic average of the spring survey weight per tow (i.e., the biomass threshold) is less than one-half of the B
Overfishing occurs when the ratio between catch and spring survey biomass exceeds 0.163 kt/kg and 3.038 kt/kg, respectively, derived from An Index Method (AIM) analyses from 1980-2009.
Silver hake is overfished when the 3-yr moving average of the fall survey weight per tow (i.e., the biomass threshold) is less than one-half the B
Overfishing occurs when the ratio between the catch and the arithmetic mean fall survey biomass index from the most recent three years exceeds the overfishing threshold. The most recent
This rule proposes to modify the specifications process and the list of measures that may be changed in a Framework Adjustment implemented by the Secretarial Amendment, and also proposes to modify the process by which the fishery is monitored. The proposed specifications process would specify the date by which the Council would need to make a recommendation on the catch limits, possession limits, and other measures deemed to be part of the specifications package. In addition, the list of items that could be considered for adjustment in a framework would be modified slightly.
This rule also proposes a measure that would require NMFS to prepare, and the appropriate Council technical group (such as a plan development team (PDT)) to review, a report on the small-mesh multispecies fishery, including trends in the fishery and changes in stock size. The PDT would be responsible for making recommendations to the Council, should any management changes be deemed necessary.
Finally, this rule proposes to require vessels fishing for small-mesh multispecies to send their vessel trip reports (VTRs) to NMFS on a weekly basis. Amendment 16 to the NE Multispecies FMP implemented the requirement that vessels fishing with a NE multispecies permit have a weekly VTR requirement; however, that amendment had no other small-mesh multispecies measures associated with it. As a result, the Council and the Whiting Oversight Committee wanted to ensure that the weekly submission of VTRs is a requirement for small-mesh multispecies vessels through this action, in order to facilitate more effective monitoring of the stock-area based TALs.
The Secretarial Amendment implemented annual, stock-wide TALs for northern and southern red hake, as well as for northern silver hake and southern “whiting” (i.e., silver and offshore hake, combined). The TALs are calculated by deducting the most recent 3-year moving average of discards from the ACL. From that resulting value, 3 percent is deducted to account for state-waters landings.
This rule proposes to maintain the annual, stock-wide TAL for the northern area, instead of the other considered alternative of sub-dividing the TALs by exemption area. The annual, stock-wide TAL was the Council's preferred alternative because it would be less costly to monitor and the small-mesh exemption area targets may not provide the intended benefits of ensuring full trip limits for the different fleets that fish seasonally in the exemption areas.
In the southern stock area, the TALs would be monitoring annually initially, until two-thirds of a TAL is harvested in a given year. The Council prefers this alternative to implementing quarterly TALs at this time because the quarterly allocations are unnecessary unless and until landings begin to approach the TALs. In addition, the quarterly TALs, as opposed to the annual quota, would, if implemented, prevent long directed fishery closures, possibly affecting the ability to target whiting in the winter and spring.
If landings in a given year exceed two-thirds of the TAL, NMFS would consult with the Council during the following year, and if the Council agrees, NMFS would implement a rule to switch the TAL to a quarterly system for the next year. For example, if two-thirds of the red hake TAL were landed in 2013, and the Council agreed, the quarterly TALs would be implemented for the start of the 2015 fishing year and would be maintained until the Council chooses, through specifications or a Framework Adjustment, to revert back to an annual TAL. The incidental possession limit trigger (as described in the in-season AM section, below) would be applied for each quarter. The quarterly allocations would be based on the average proportion of dealer-reported landings from 2008-2010, as follows:
Included in this proposed measure is a “roll-up” procedure that would be used for in-season monitoring of the quarterly TALs. In each quarter, the cumulative landings to date that fishing year would be monitored against a quarterly TAL represented by the sum of that quarter's allocation, plus the allocations from prior quarters (e.g., during quarter 2, the cumulative landings of southern red hake to date would be monitored against a quota equal to 58.6 percent of the annual TAL, which is the sum of the quarter 1 allocation of 33.3 percent plus the quarter 2 allocation of 25.3 percent). The possession limit trigger for each stock would apply in each quarter when cumulative landings reach 90 percent of the rolled-up quarterly allocation, and the incidental possession limit would remain in effect until the end of that quarter. At the start of the next quarter, the possession limit would reset to the
The Secretarial Amendment implemented two types of AMs for the small-mesh multispecies fishery. The in-season AM would reduce the possession limit to an incidental amount for a stock if 90 percent of that stock's TAL were projected to be harvested. For both red hake stocks, the possession limit would be reduced to 400 lb (181.4 kg), and for northern silver hake and southern whiting, the possession limit would be reduced to 1,000 lb (453.6 kg). In the event that an ACL is exceeded in a given year, the post-season AM implemented in the Secretarial Amendment would reduce a subsequent year's ACL by the exact amount, by weight, by which the ACL were exceeded. For example, if an ACL in fishing year 2013 were exceeded by 15,000 lb (6,803. 9 kg), the ACL for that stock in fishing year 2015 would be reduced by 15,000 lb (6,803.9 kg).
This rule proposes to maintain the overall structure of the in-season AM (i.e., the 90-percent trigger, with a reduced possession limit), but proposes to change the incidental possession limit for northern silver hake and southern whiting. This rule proposes to maintain the 400-lb (181.4-kg) incidental possession limit for red hake and to raise the incidental possession limit for silver and offshore hake, combined, from 1,000 lb (453.6 kg) to 2,000 lb (907.2 kg). This limit is proposed because analysis by the Whiting PDT indicates that it is likely to be effective in keeping landings below the TAL, without increasing discards. There is no meaningful contrast in the effectiveness of lower incidental possession limits, but the lower incidental possession limits are estimated to cause an unacceptable increase in discards.
This rule proposes to replace the post-season AM implemented by the Secretarial Amendment, described above, with a post-season AM that would decrease the TAL trigger by the same percentage by which the ACL were exceeded. That is, if an ACL were exceeded by 5 percent in fishing year 2013, the incidental possession limit trigger of 90 percent would be reduced by 5 percent to 85 percent, starting in fishing year 2015. This reduction in the TAL trigger would remain in effect until the Council chooses to modify it through the specifications process or in a framework adjustment. This AM is intended to permanently account for the management uncertainty that caused the overage. The Council chose this AM because it more directly reduces the trips targeting small-mesh multispecies, and, as a result, the overall landings by the directed fishery.
Currently, there is no year-round possession limit for red hake in both the northern or southern stock area, and the possession limit for silver and offshore hake, combined, is based on mesh size throughout the region. This rule proposes changes to both of these management measures.
This rule is proposing to implement a 5,000-lb (2,268-kg) trip limit for red hake in both the northern and southern stock areas for all gear types. The Council had considered mesh-size based trip limits, similar to silver hake, but prefers the same trip limit for all gear types because it is more enforceable and compliance would likely be higher. The intention of this trip limit is to prevent significant increases in catch beyond what is currently landed. Analysis shows that no trips from 2008-2010 landed more than 5,000 lb (2,268 kg), so the measure is unlikely to restrict existing fishing effort, but is intended to act as a deterrent to increasing fishing effort to target red hake.
This rule proposes to increase the southern whiting (southern silver hake and offshore hake, combined) trip limit from 30,000 lb (13,607.8 kg) to 40,000 lb (18,143.7 kg) for vessels fishing in the Southern New England and Mid-Atlantic Exemption Areas using mesh that is 3 inches (7.6 cm) or greater. The Council had considered implementing this trip limit increase in only a portion of the southern exemption areas; however, as a result of public comment and enforceability concerns, the Council prefers that the increase be applicable throughout the southern area. The Council selected a 40,000-lb (18,143.7-kg) possession limit to retain the delicate balance between allowing a moderate increase in landings while trying not to attract excessive fishing effort to an open access fishery, which could cause landings to rapidly increase and potentially cause the incidental possession limit to be triggered earlier in the fishing year. The Council also constrained this possession limit increase to vessels using trawls having 3-inch (7.6 cm) or larger mesh to maintain optimum size selectivity by the fishery and discourage increases in fishing for smaller whiting.
As required under section 303(c) of the Magnuson-Stevens Act, the Council reviewed the draft regulations and deemed them necessary and appropriate for implementation of Amendment 19. Technical changes to the regulations deemed necessary by the Secretary for clarity may be made, as provided under section 304(b) of the Magnuson-Stevens Act.
NMFS is proposing to clarify some of the regulations governing the small-mesh multispecies fishery through this rulemaking. The proposed language of the regulations pertaining to the small-mesh multispecies exemption programs would clarify that only a raised footrope trawl is allowed in the Small Mesh Area I and II Exemption Programs, and the Gulf of Maine Grate Raised Footrope Trawl Area Exemption Program, and that no other fishing gears are permitted to be used while a vessel is fishing in these exemption programs. NMFS is also proposing language to clarify the incidental catch limits for other species in the small-mesh multispecies exemption programs by adding the citation for each species, as appropriate. NMFS is also proposing to correct an incorrect citation in the regulations pertaining to small-mesh multispecies transfers-at-sea.
Pursuant to section 304(b)(1)(A) of the Magnuson-Stevens Act, the NMFS Assistant Administrator has preliminarily determined that this proposed rule is consistent with the Northeast Multispecies FMP, other provisions of the Magnuson-Stevens Act, and other applicable law, subject to further consideration after public comment.
The Office of Management and Budget has determined that this proposed rule is not significant for the purposes of Executive Order 12866.
The Council prepared an IRFA, as required by section 603 of the Regulatory Flexibility Act (RFA), which is included in Amendment 19 and supplemented by information contained in the preamble to this proposed rule. The IRFA describes the economic impact this proposed rule, if adopted, would have on small entities. A description of the action, why it is being considered, and the legal basis for this
All of the entities (fishing vessels) affected by this action are considered small entities under the Small Business Administration size standards for small fishing businesses ($4.0 million in annual gross sales). Therefore, there are no disproportionate effects on small versus large entities. Information on costs in the fishery is not readily available and individual vessel profitability cannot be determined directly; therefore, expected changes in gross revenues were used as a proxy for profitability.
This action does not introduce any new reporting, recordkeeping, or other compliance requirements. This proposed rule does not duplicate, overlap, or conflict with other Federal rules.
In order to fish for small-mesh multispecies, a vessel owner must be issued either a limited access NE multispecies permit or an open access category K NE multispecies permit; however, there are many vessels issued both of these types of permits that may not actually fish for small-mesh multispecies. Although some firms own more than one vessel, available data make it difficult to reliably identify ownership control over more than one vessel. For this analysis, the number of permitted vessels landing small-mesh multispecies is considered to be a maximum estimate of the number of small business entities that may be impacted. The average number of permitted vessels landing at least 1 lb (0.5 kg) of silver hake or red hake from 2005-2010 was 562 vessels per year.
In general, the economic impacts of the proposed actions vary from positive to slightly negative, compared to the status quo/no action alternatives and the other alternatives considered. The proposed measures that have positive economic impacts include the specifications process; including the modification of the southern area TAL structure that would implement quarterly TALs if two-thirds of the TAL is landed; both year-round trip limit alternatives are expected to result in positive economic impacts. The proposed AMs are more likely to result in slightly negative impacts, if triggered. Although analysis indicates that the preferred post-season AM of a percent reduction in the incidental possession limit trigger would have a less negative impact than the status quo.
The proposed alternatives that would most likely have an impact in the foreseeable future is the status quo alternative that proposed to maintain 90-percent trigger AM for northern red hake with a 400-lb (181.4-kg) incidental possession limit, as was described in the Secretarial Amendment. Using vessel trip report data from 2006-2010, a 400-lb (181.4-kg) incidental possession limit in the northern stock area, implemented when 90 percent of the northern red hake TAL is projected to be harvested, would have impacted approximately 23 trips per year, and an average of 7 vessels per year. At a loss of approximately $282 per trip, this AM would have cost the fleet $6,486 per year in lost northern red hake revenue. This may not be a true revenue loss, however. Red hake is rarely the primary target species and vessel owners are likely to shift effort onto another routinely landed incidental species, such as skates or dogfish, to finish their trip. The other in-season AM alternatives considered for this amendment included incidental possession limits of 200 lb (90.7 kg) or 300 lb (136.1 kg). Both of these alternatives would have an increased negative impact, affecting more trips than the 400-lb (181.4-kg) possession limit. Furthermore, the long-term impacts would likely be negative for these alternatives as well, due to increased discarding. The impacts from alternatives for the in-season AM for northern silver hake, southern whiting, and southern red hake are difficult to quantify because the TALs are significantly higher than recent catch and they are unlikely to be implemented. For southern red hake, the proposed alternative is the status quo alternative and for southern whiting and northern silver hake, the proposed alternative is an increase in the incidental trip limit from 1,000 lb (453.6 kg) to 2,000 lb (907.2 kg). In general, the lower incidental trip limits (200 and 300 lb (90.7 and 136.1 kg) for red hake; and 500 and 1,000 lb (226.8 and 453.6 kg) for southern whiting and northern silver hake) can be assumed to have a more negative economic impact than the higher incidental trip limits (400 lb (181.4 kg) for southern red hake, and 2,000 lb (907.2 kg) for southern whiting and northern red hake).
Another alternative that may have impact in the near-future is the post-season AM for northern red hake. The status quo alternative would implement a pound-for-pound payback system for any overage. The proposed alternative would reduce the incidental possession limit trigger by the same percentage by which the ACL was exceeded. As an example, the 2010 fishing year northern red hake catch exceeds the ACL and can be used to illustrate the potential impacts of the two alternatives. Northern red hake catch was 311 mt in 2010, 17% or 45 mt above the fishing year 2012 ACL of 266 mt. For this example, we assume that the discard rate and state water landings proportion remain constant. Assuming that the discard rate and state waters portion remain constant, the status quo alternative results in a TAL of 144,094 lb (65.4 mt), with a 90 percent incidental trigger limit of 129,685 lb (58.8 mt). The proposed alternative, on the other hand results in a TAL of 199,077 lb (90.3 mt), with a 73 percent incidental trigger limit of 145,326 lb (65.9 mt). This example demonstrates that the reduction in the possession limit trigger would have a less negative impact on the fleet than the status quo alternative of a pound-for-pound payback because it provides for a higher directed fishery target.
Because the current TAL is significantly higher than recent catch for southern red hake, northern silver hake, and southern whiting, it is difficult to quantify the impact that either the status quo or the possession limit trigger reduction would have. However, it can be assumed that the impacts would be similar to those described above.
It is expected that the year-round possession limit changes would also have an immediate economic impact. The year-round red hake limit of 5,000 lb (2268 kg), versus the status quo alternative of an unlimited possession limit, is intended to act as a restriction on potential increases in red hake landings, and very few recent trips would have been impacted by this trip limit. It is possible that there could be a negative effect on the price of red hake if vessels start landing larger quantities, which is possible under the status quo of no trip limit in this open access fishery. It is expected that this alternative would help maintain a satisfactory price for red hake and have a positive economic impact, as opposed to the other, lower possession limits considered in the Amendment.
In addition, the increase in the southern whiting possession limit for vessels using mesh that is 3 inches (7.6 cm) or greater is also expected to have a positive economic impact for vessels fishing in the southern area, but may have a slightly negative economic impact for vessels fishing in the northern area. If the possession limit is increased in the southern area, there may be a reduced demand, and therefore a reduced price, for whiting. This reduced price would be offset by the increased volume for vessels fishing in the southern area, but would not be offset for vessels fishing in the northern area. Analysis indicates that increasing daily landings could cause a decline of 0.6 cents for each 1-percent increase in landings. Therefore, the revenue for a 30,000-lb (13607.8-kg) trip in the northern stock area would decline by approximately $450, while the revenue for a southern area trip landing 40,000 lb (18143.7 kg) of whiting would increase by $5,318. The other alternatives considered for this measure would limit the increase to a portion of the southern area, which would have less economic benefit than the proposed alternative. The status quo alternative would not increase the trip limit and would be less economically beneficial than the proposed alternative.
Fisheries, Fishing, Recordkeeping and reporting requirements.
For the reasons stated in the preamble, 50 CFR part 648 is proposed to be amended as follows:
1. The authority citation for part 648 continues to read as follows:
16 U.S.C. 1801
2. In § 648.7, paragraph (f)(2)(i) is revised to read as follows:
(f) * * *
(2)
3. In § 648.13, paragraph (e) is revised to read as follows:
(e) Vessels issued a letter of authorization from the Regional Administrator to transfer small-mesh multispecies at sea for use as bait will automatically have 500 lb (226.8 kg) deducted from the vessel's combined silver hake and offshore hake possession limit, as specified under § 648.86(d), for every trip during the participation period specified on the letter of authorization, regardless of whether a transfer of small-mesh multispecies at sea occurred or whether the actual amount that was transferred was less than 500 lb (226.8 kg). This deduction shall be noted on the transferring vessel's letter of authorization from the Regional Administrator.
4. In § 648.80, paragraphs (a)(6)(i)(B), (a)(6)(i)(F), (a)(9)(i)(A), (a)(9)(ii), (a)(15)(i)(B), (a)(16)(i)(A), and (a)(16)(ii)(A) are revised to read as follows:
(a) * * *
(6) * * *
(i) * * *
(B) An owner or operator of a vessel fishing in this area may not fish for, possess on board, or land any species of fish other than whiting and offshore hake combined—in excess of 30,000 lb (13,608 kg), except for the following, with the restrictions noted, as allowable incidental species: Atlantic herring, up to the amount specified in § 648.204; longhorn sculpin; squid, butterfish, and Atlantic mackerel, up to the amounts specified in § 648.26; spiny dogfish, up to the amount specified in § 648.235; red hake, up to the amount specified in § 648.86(d), monkfish and monkfish parts—up to 10 percent, by weight, of all other species on board or up to 50 lb (23 kg) tail-weight/166 lb (75 kg) whole-weight of monkfish per trip, as specified in § 648.94(c)(4), whichever is less; and American lobster—up to 10 percent, by weight, of all other species on board or 200 lobsters, whichever is less, unless otherwise restricted by landing limits specified in § 697.17 of this chapter.
(F) A vessel fishing in the Cultivator Shoal Whiting Fishery Exemption Area may fish for small-mesh multispecies in exempted fisheries outside of the Cultivator Shoal Whiting Fishery Exemption Area, provided that the vessel complies with the more restrictive gear, possession limit, and other requirements specified in the regulations of that exempted fishery for the entire participation period specified on the vessel's letter of authorization and consistent with paragraph (a)(15)(i)(G) of this section. For example, a vessel may fish in both the Cultivator Shoal Whiting Fishery Exemption Area and the Southern New England or Mid-Atlantic Exemption Areas, and would be restricted to a minimum mesh size of 3 inches (7.6 cm) and a maximum trip limit of 30,000 lb (13,607.8 kg) for silver hake and offshore hake, combined, as required in the Cultivator Shoal Whiting Fishery Exemption Area.
(9) * * *
(i) * * *
(A) Unless otherwise prohibited in § 648.81, a vessel subject to the minimum mesh size restrictions specified in paragraphs (a)(3) or (4) of this section may fish with or possess nets with a mesh size smaller than the minimum size, provided the vessel complies with the requirements of paragraphs (a)(5)(ii) or (a)(9)(ii) of this section, and § 648.86(d), from July 15 through November 15, when fishing in Small Mesh Area 1; and from January 1 through June 30, when fishing in Small Mesh Area 2. While lawfully fishing in these areas with mesh smaller than the minimum size, an owner or operator of any vessel may not fish for, possess on board, or land any species of fish other than: Silver hake and offshore hake, combined, and red hake—up to the amounts specified in § 648.86(d); butterfish, Atlantic mackerel, squid, up the amounts specified in § 648.26; spiny dogfish, up to the amount specified in § 648.235; Atlantic herring, up to the amount specified in § 648.204; and scup, up to the amount specified in § 648.128.
(ii)
(15) * * *
(i) * * *
(B) All nets must be no smaller than a minimum mesh size of 2.5-inch (6.4-cm) square or diamond mesh, subject to the restrictions as specified in paragraph (a)(15)(i)(D) of this section. An owner or operator of a vessel enrolled in the raised footrope whiting fishery may not fish for, possess on board, or land any species of fish other than silver hake, offshore hake, and red hake, subject to the applicable possession limits as specified in § 648.86(d), except for the following allowable incidental species: Butterfish, Atlantic mackerel, and squid, up to the amounts specified in § 648.26; scup, up to the amount specified in § 648.128; spiny dogfish, up to the amount specified in § 648.235, and Atlantic herring, up to the amount specified in § 648.204.
(16) * * *
(i) * * *
(A) All nets must comply with a minimum mesh size of 2.5-inch (6.4-cm) square or diamond mesh, subject to the restrictions specified in paragraph (a)(16)(i)(B) of this section. An owner or operator of a vessel participating in the GOM Grate Raised Footrope Trawl Exempted Whiting Fishery may not fish for, possess on board, or land any species of fish, other than silver hake and offshore hake, subject to the applicable possession limits as specified in paragraph (a)(16)(i)(C) of this section, and red hake, subject to the possession limit specified in § 648.86, except for the following allowable incidental species: Butterfish, Atlantic mackerel, and squid, up to the amounts specified in § 648.26; Atlantic herring, up to the amount specified in § 648.204; and alewife.
(ii) * * *
(A) An owner or operator of a vessel fishing in the GOM Grate Raised Footrope Trawl Exempted Whiting Fishery must configure the vessel's gear with a raised footrope trawl as specified in paragraphs (a)(9)(ii)(A) through (C) of this section. In addition, the restrictions specified in paragraphs (a)(16)(ii)(B) and (C) of this section apply to vessels fishing in the GOM Grate Raised Footrope Trawl Exempted Whiting Fishery.
4. In § 648.86, (d)(1)(i) introductory text, (d)(1)(ii) introductory text, (d)(1)(iii) introductory text, and paragraph (d)(4)(ii) are revised to read as follows:
(d) * * *
(1) * * *
(i)
(ii)
(iii)
(4) * * *
(ii)
5. In § 648.90, paragraphs (b)(1), (b)(2), (b)(2)(i)(C), (b)(2)(ii)(C), (b)(3), (b)(4), (b)(5)(ii), and (c)(1) are revised to read as follows:
(b) * * *
(1)
(i) At least every 3 years, based on the annual review, described below in paragraph (b)(3) of this section, and/or the specifications package, described in paragraph (b)(4) of this section, recommendations for ABC from the Scientific and Statistical Committee (SSC), and any other relevant information, the Whiting PDT shall recommend to the Whiting Oversight Committee and Council specifications including the OFL, ABC, ACL, and TAL for each small-mesh multispecies stock for a period of at least 3 years. The Whiting PDT and the Council shall follow the process in paragraph (b)(2) of this section for setting these specifications.
(ii) The Whiting PDT, after reviewing the available information on the status of the stock and the fishery, may recommend to the Council any measures necessary to assure that the specifications will not be exceeded, as well as changes to the appropriate specifications.
(iii) Taking into account the annual review and/or specifications package described in paragraphs (b)(2) and (b)(4), respectively, of this section, the advice of the SSC, and any other relevant information, the Whiting PDT may also recommend to the Whiting Oversight Committee and Council changes to stock status determination criteria and associated thresholds based on the best scientific information available, including information from peer-reviewed stock assessments of small-mesh multispecies. These adjustments may be included in the Council's specifications for the small-mesh multispecies fishery.
(iv)
(2)
(i) * * *
(C)
(
(ii) * * *
(C)
(
(3)
(ii) If new and/or additional information becomes available, the Whiting PDT shall consider it during this annual review. Based on this review, the Whiting PDT shall provide guidance to the Whiting Oversight Committee and the Council regarding the need to adjust measures for the small-mesh multispecies fishery to better achieve the FMP's objectives. After considering this guidance, the Council may submit to NMFS its recommendations for changes to management measures, as appropriate, through the specifications process described in this section, the process specified in paragraph (c) of this
(4)
(ii) In any year in which a specifications package, including a SAFE Report, is not completed by the Whiting PDT, the annual review process described in paragraph (a) of this section shall be used to recommend any necessary adjustments to specifications and/or management measures in the FMP.
(5)
(i) * * *
(ii)
(c) * * *
(1)
(ii) The Council's recommendation on adjustments or additions to management measures pertaining to small-mesh NE multispecies, other than to address gear conflicts, must come from one or more of the following categories: Quotas and appropriate seasonal adjustments for vessels fishing in experimental or exempted fisheries that use small mesh in combination with a separator trawl/grate (if applicable); modifications to separator grate (if applicable) and mesh configurations for fishing for small-mesh NE multispecies; adjustments to whiting stock boundaries for management purposes; adjustments for fisheries exempted from minimum mesh requirements to fish for small-mesh NE multispecies (if applicable); season adjustments; declarations; participation requirements for any of the Gulf of Maine/Georges Bank small-mesh multispecies exemption areas; OFL and ABC values; ACL, TAL or TAL allocations, including the proportions used to allocate by season or area; small-mesh multispecies possession limits, including in-season AM possession limits; changes to reporting requirements and methods to monitor the fishery; and biological reference points, including selected reference time series, survey strata used to calculate biomass, and the selected survey for status determination.
(iii)
The Department of Commerce will submit to the Office of Management and Budget (OMB) for clearance the following proposal for collection of information under the provisions of the Paperwork Reduction Act (44 U.S.C. Chapter 35).
The International Billfish Angler Survey began in 1969 and is an integral part of the Billfish Research Program at the National Oceanic and Atmospheric Administration's (NOAA) Southwest Fisheries Science Center (SWFSC). The survey tracks recreational angler fishing catch and effort for billfish in the Pacific and Indian Oceans in support of the Pacific and Western Pacific Fishery Management Councils, authorized under the Magnuson-Stevens Fishery Management and Conservation Act (MSA). The data may be used by scientists and fishery managers to assist with assessing the status of billfish stocks. The survey is intended for anglers cooperating in the Billfish Program and is entirely voluntary. This survey is specific to recreational anglers fishing for Istiophorid and Xiphiid billfish in the Pacific and Indian Oceans; as such it provides the only estimates of catch per unit of effort for recreational billfish fishing in those areas.
Copies of the above information collection proposal can be obtained by calling or writing Jennifer Jessup, Departmental Paperwork Clearance Officer, (202) 482-0336, Department of Commerce, Room 6616, 14th and Constitution Avenue NW., Washington, DC 20230 (or via the Internet at
Written comments and recommendations for the proposed information collection should be sent within 30 days of publication of this notice to
The Department of Commerce will submit to the Office of Management and Budget (OMB) for clearance the following proposal for collection of information under the provisions of the Paperwork Reduction Act (44 U.S.C. Chapter 35).
Reporting injury to and/or mortalities of marine mammals is mandated under Section 118 of the Marine Mammal Protection Act. This information is required to determine the impacts of commercial fishing on marine mammal populations. This information is also used to categorize commercial fisheries into Categories I, II, or III. Participants in the first two categories must be authorized to take marine mammals, while those in Category III are exempt from that requirement. All categories must report injuries or mortalities on a National Marine Fisheries Service form.
Copies of the above information collection proposal can be obtained by calling or writing Jennifer Jessup, Departmental Paperwork Clearance Officer, (202) 482-0336, Department of Commerce, Room 6616, 14th and Constitution Avenue NW., Washington, DC 20230 (or via the Internet at
Written comments and recommendations for the proposed information collection should be sent within 30 days of publication of this notice to
The Sensors and Instrumentation Technical Advisory Committee (SITAC) will meet on November 8, 2012, 9:30 a.m., in the Herbert C. Hoover Building, Room 6087B, 14th Street between Constitution and Pennsylvania Avenues NW., Washington, DC. The Committee advises the Office of the Assistant Secretary for Export Administration on technical questions that affect the level of export controls applicable to sensors
1. Welcome and Introductions.
2. Remarks from the Bureau of Industry and Security Management.
3. Industry Presentations.
4. New Business.
5. Discussion of matters determined to be exempt from the provisions relating to public meetings found in 5 U.S.C. app. 2 10(a)(1) and 10(a)(3).
The open session will be accessible via teleconference to 20 participants on a first come, first serve basis. To join the conference, submit inquiries to Ms. Yvette Springer at
A limited number of seats will be available during the public session of the meeting. Reservations are not accepted. To the extent that time permits, members of the public may present oral statements to the Committee. The public may submit written statements at any time before or after the meeting. However, to facilitate distribution of public presentation materials to the Committee members, the Committee suggests that the materials be forwarded before the meeting to Ms. Springer.
The Assistant Secretary for Administration, with the concurrence of the General Counsel, formally determined on September 27, 2011 pursuant to Section 10(d) of the Federal Advisory Committee Act, as amended (5 U.S.C. app. 2 10(d), that the portion of this meeting dealing with pre-decisional changes to the Commerce Control List and U.S. export control policies shall be exempt from the provisions relating to public meetings found in 5 U.S.C. app. 2 10(a)(1) and 10(a)(3). The remaining portions of the meeting will be open to the public.
For more information contact Yvette Springer on (202) 482-2813.
International Trade Administration, U.S. Department of Commerce.
Notice of extension of the application period for membership on the manufacturing council.
On September 14, 2012, the Department of Commerce's International Trade Administration published a notice in the
All applications must be received by the Office of Advisory Committees by close of business on Friday, November 16, 2012.
Please submit application information to Jennifer Pilat, Office of Advisory Committees, Manufacturing Council Executive Secretariat, U.S. Department of Commerce, Room 4043, 1401 Constitution Avenue NW., Washington, DC 20230.
Jennifer Pilat, Manufacturing Council Executive Secretariat, Room 4043, 1401 Constitution Avenue NW., Washington, DC 20230, telephone: 202-482-4501, email:
Please visit the Manufacturing Council Web site at:
The Office of Advisory Committees is extending the application deadline for the appointment of 25 members of the Council for a two-year term to begin fall 2012. The Council was rechartered most recently on April 5, 2012. The criteria and procedures for selecting the members contained in the September 14, 2012 notice continue to apply and are republished herein for convenience.
Members will be selected in accordance with applicable Department of Commerce guidelines based on his or her ability to advise the Secretary of Commerce on matters relating to the U.S. manufacturing sector, to act as a liaison among the stakeholders represented by the membership, and to provide a forum for those stakeholders on current and emerging issues in the manufacturing sector. In assessing this ability, the Department will consider such factors as, but not limited to, the candidate's proven experience in promoting, developing and marketing programs in support of manufacturing industries, job creation in the manufacturing sector, or the candidate's proven abilities to manage manufacturing organizations. Given the duties and objectives of the Council, the Department particularly seeks applicants who are active manufacturing executives (Chief Executive Officer, President, or a comparable level of responsibility) that are leaders within their local manufacturing communities and industry sectors. The Council's membership shall reflect the diversity of American manufacturing by representing a balanced cross-section of the U.S. manufacturing industry in terms of industry sectors, geographic locations, demographics, and company size, particularly seeking the representation of small- and medium-sized enterprises.
During the 2012-2014 charter term of the Manufacturing Council, the Assistant Secretary of Commerce for Manufacturing and Services intends to establish a new Economic Security Commission Subcommittee. The purpose of this subcommittee will be to examine factors that impact the long-term strategic challenges faced by the manufacturing sector in the United States. As indicated below, applicants are encouraged to highlight in their submissions any interest in and experience relevant to the work of this subcommittee.
The Secretary of Commerce appoints all Council members. All Council members serve at the discretion of the Secretary of Commerce. Council members shall serve in a representative capacity, representing the views and interests of a U.S. entity in the manufacturing industry and its particular sector. For the purposes of eligibility, a U.S. entity is defined as a firm incorporated in the United States (or an unincorporated firm with its
As noted above, Council members serve in a representative capacity, expressing the views and interests of a U.S. entity; they are, therefore, not Special Government Employees. Council members receive no compensation for their participation in Council activities. Members participating in Council meetings and events are responsible for their travel, living and other personal expenses. Meetings are held regularly and not less than annually, usually in Washington, DC Members are required to attend a majority of the Council's meetings.
To be considered for membership, please provide the following:
1. Name and title of the individual requesting consideration.
2. A sponsor letter from the applicant on his or her entity's letterhead or, if the applicant is to represent an entity other than his or her employer, a letter from the entity to be represented, containing a brief statement of why the applicant should be considered for membership on the Council. This sponsor letter should also address the applicant's manufacturing-related experience, including any manufacturing trade policy experience.
3. The applicant's personal resume.
4. An affirmative statement that the applicant meets all eligibility criteria.
5. An affirmative statement that the applicant is not required to register as a foreign agent under the Foreign Agents Registration Act of 1938, as amended.
6. An affirmative statement that the applicant is not a federally registered lobbyist, and that the applicant understands that, if appointed, the applicant will not be allowed to continue to serve as a Council member if the applicant becomes a federally registered lobbyist.
7. Information regarding the control of the entity to be represented, including the governing structure and stock holdings, as appropriate, demonstrating compliance with the criteria set forth above.
8. The entity's size, place of incorporation or principal place of business, ownership, product or service line and major markets in which the entity operates.
9. Please include all relevant contact information such as mailing address, fax, email, phone number, and support staff information where relevant.
10. Please indicate if the applicant has an interest in serving on the Economic Security Commission subcommittee, if appointed, and highlight any experience relevant to the work of the subcommittee.
International Trade Administration, U.S. Department of Commerce.
Notice.
The U.S. Secretary of Commerce and the Iraq Minister of Trade in July 2006 established the U.S.-Iraq Business Dialogue (Business Dialogue or Dialogue) as a bilateral forum to facilitate private sector business growth in Iraq and to strengthen trade and investment ties between the United States and Iraq. This notice announces four open membership opportunities for representatives of American industry to join the U.S. section of the Dialogue following the end of term for existing members.
Applications must be received no later than November 15, 2012; 5:00 p.m. EST.
Please send requests for consideration to Ms. Susan Hamrock Mann, Director, Iraq Investment and Reconstruction Task Force, U.S. Department of Commerce, either by fax on 202-482-0980 or by mail to U.S. Department of Commerce, 14th and Constitution Avenue NW., Mail Stop 3421, Washington, DC 20230.
Kevin M. Reichelt, Office of the Middle East, U.S. Department of Commerce, Room 2029-B, Washington, DC 20230. Phone: 202-482-2896.
The U.S. Secretary of Commerce and the Iraqi Minister of Trade co-chair the Dialogue. The Dialogue consists of a U.S. Section and an Iraqi Section. Each Section consists of members from the private sector, representing the views and interests of the private sector business community. Each Party appoints the members to its respective Section. The Sections provide policy advice and counsel to the U.S. Secretary of Commerce and to Iraq's Minister of Trade that reflect private sector views, needs, and concerns regarding private sector business development in Iraq and enhanced bilateral commercial ties that would form the basis for expanded trade between the United States and Iraq. The Dialogue will exchange information and encourage bilateral discussions that address the following areas:
Applications to represent any sector will be considered. The U.S. section will represent a cross-section of American businesses.
Members serve in a representative capacity representing the views and interests of their particular industries. Members are not special government employees, and receive no compensation for their participation in Dialogue activities. Only appointed members may participate in Dialogue meetings; substitutes and alternates will not be permitted. Section members serve for three-year terms, but may be reappointed. U.S. Section members serve at the discretion of the Secretary of Commerce.
Candidates will be evaluated based on: Their interest in the Iraqi market; export/investment experience; contribution to diversity based on size of company, geographic location, and sector; and ability to initiate and be responsible for activities in which the Business Dialogue will be active.
In order to be eligible for membership in the U.S. section, potential candidates shall be:
Members will be selected on the basis of who best will carry out the objectives of the Business Dialogue as described above and as stated in the Terms of Reference for the Dialogue. (The Terms of Reference are available from the point of contact listed above.) Recommendations for appointment will be made to the Secretary of Commerce. All candidates will be notified of whether they have been selected.
To be considered for membership, please submit the following information as instructed in the addresses and dates captions above: Name(s) and title(s) of the individual(s) requesting consideration; name and address of company or non-profit entity to be represented; size of the company or non-profit entity; description of relevant product, service, or technical expertise; size of company's export trade, investment, and/or international program experience; nature of operations or interest in Iraq; responsibilities of the candidate within the company or non-profit entity; and a brief statement of why the candidate should be appointed, including information about the candidate's ability to initiate and be responsible for activities in which the Business Dialogue will be active.
Committee for Purchase From People Who Are Blind or Severely Disabled.
Proposed Deletions from the Procurement List.
The Committee is proposing to delete products from the Procurement List that were furnished by nonprofit agencies employing persons who are blind or have other severe disabilities.
Committee for Purchase From People Who Are Blind or Severely Disabled, Jefferson Plaza 2, Suite 10800, 1421 Jefferson Davis Highway, Arlington, Virginia, 22202-3259.
This notice is published pursuant to 41 U.S.C. 8503 (a)(2) and 41 CFR 51-2.3. Its purpose is to provide interested persons an opportunity to submit comments on the proposed actions.
The following products are proposed for deletion from the Procurement List:
Committee for Purchase From People Who Are Blind or Severely Disabled.
Additions to the Procurement List.
This action adds products and services to the Procurement List that will be furnished by nonprofit agencies employing persons who are blind or have other severe disabilities.
DATES:
Committee for Purchase From People Who Are Blind or Severely Disabled, Jefferson Plaza 2, Suite 10800, 1421 Jefferson Davis Highway, Arlington, Virginia, 22202-3259.
Barry S. Lineback, Telephone: (703) 603-7740, Fax: (703) 603-0655, or email
On 8/31/2012 (77 FR 53179-53180) and 9/14/2012 (77 FR 56813-56814), the Committee for Purchase From People Who Are Blind or Severely Disabled published notices of proposed additions to the Procurement List.
After consideration of the material presented to it concerning capability of qualified nonprofit agencies to provide the products and services and impact of the additions on the current or most recent contractors, the Committee has determined that the products and services listed below are suitable for procurement by the Federal Government under 41 U.S.C. 8501-8506 and 41 CFR 51-2.4.
I certify that the following action will not have a significant impact on a substantial number of small entities. The major factors considered for this certification were:
1. The action will not result in any additional reporting, recordkeeping or other compliance requirements for small entities other than the small organizations that will furnish the products and services to the Government.
2. The action will result in authorizing small entities to furnish the products and services to the Government.
3. There are no known regulatory alternatives which would accomplish the objectives of the Javits-Wagner-O'Day Act (41 U.S.C. 8501-8506) in
Accordingly, the following products and services are added to the Procurement List:
Office of the Secretary, DoD.
Notice of an extension to the TRICARE Over-the-Counter Drug Demonstration Project.
This notice is to advise interested parties of a 2-year extension of the demonstration project in which the Department of Defense (DoD) evaluates allowing selected over-the-counter (OTC) drugs to be included on the TRICARE uniform formulary. The Department will continue to evaluate the costs/benefits and beneficiary satisfaction of providing OTC drugs under the pharmacy benefits program when the selected OTC drugs are determined to be clinically effective.
This demonstration project will continue through November 4, 2014.
Colonel George Jones, TRICARE Management Activity, Pharmaceutical Operations Directorate, telephone (703) 681-2890.
Section 705 of the John Warner National Defense Authorization Act for 2007 directed the Secretary to conduct a demonstration project under 10 U.S.C. 1092 to allow certain over-the-counter (OTC) medications to be included on the uniform formulary under 10 U.S.C. 1074g. On June 15, 2007, the Department of Defense published a notice in the
Office of the Deputy Secretary, Department of Education.
Notice reopening the Race to the Top—District competition.
The Secretary reopens the Race to the Top—District competition to extend the deadline for submitting applications. Hurricane Sandy prevented many applicants from submitting their applications by the October 30, 2012, deadline. The hurricane also closed Federal Government offices in Washington, DC, on October 29 and 30, 2012. The Department, therefore, could not receive applications on those days.
For local educational agencies located in States affected by Hurricane Sandy and for which the President has issued a major disaster declaration or an emergency declaration, the new deadline is 4:30 p.m. Washington, DC time on Wednesday, November 7, 2012. For local educational agencies everywhere else, the new deadline is 4:30 p.m. Washington, DC time on Friday, November 2, 2012.
For local educational agencies located in States affected by Hurricane Sandy and for which the President has issued either a major disaster declaration or an emergency declaration: November 7, 2012. For local educational agencies located everywhere else: November 2, 2012.
Meredith Farace, U.S. Department of Education, 400 Maryland Avenue SW., room 7e208, Washington, DC 20202-4260. Telephone: (202) 453-6800. Fax: (202) 401-1557.
If you use a telecommunications device for the deaf (TDD) or a text telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-800-877-8339.
On August 16, 2012, we published in the
An eligible applicant that submitted an application by the October 30, 2012, deadline does not need to re-submit its application but may choose to do so. If you re-submit your application, we will consider the most recently submitted complete application.
All information in the August 16, 2012, notice for this competition remains the same, except for the change in the deadline for submitting applications. Information about the Race to the Top—District program is available on the Department's Web site at
Applications for grants under this competition must be submitted in electronic format on a CD or DVD, with CD-ROM or DVD-ROM preferred, by mail or hand delivery. For complete information about how to submit an application, please refer to the
Individuals with disabilities can obtain this document and a copy of the application package in an accessible format (e.g., braille, large print, audiotape, or compact disc) by contacting the program person listed in this section.
You may also access documents of the Department published in the
Pursuant to 40 CFR 1506.9.
As of October 1, 2012, EPA will not accept paper copies or CDs of EISs for filing purposes; all submissions on or after October 1, 2012 must be made through e-NEPA.
While this system eliminates the need to submit paper or CD copies to EPA to meet filing requirements, electronic submission does not change requirements for distribution of EISs for public review and comment. To begin using e-NEPA, you must first register with EPA's electronic reporting site—
Federal Election Commission.
Thursday, November 1, 2012 at 10:00 a.m.
999 E Street NW., Washington, DC (Ninth Floor).
This Meeting Will Be Open To The Public.
Changes In The Meeting—This meeting has been cancelled.
Judith Ingram, Press Officer. Telephone: (202) 694-1220.
Office of the Assistant Secretary for Community Planning and Development, HUD.
Notice.
This Notice identifies unutilized, underutilized, excess, and surplus Federal property reviewed by HUD for suitability for use to assist the homeless.
Juanita Perry, Department of Housing and Urban Development, 451 Seventh Street SW., Room 7266, Washington, DC 20410; telephone (202) 402-3970; TTY number for the hearing- and speech-impaired (202) 708-2565 (these telephone numbers are not toll-free), or call the toll-free Title V information line at 800-927-7588.
In accordance with 24 CFR part 581 and section 501 of the Stewart B. McKinney Homeless Assistance Act (42 U.S.C. 11411), as amended, HUD is publishing this Notice to identify Federal buildings and other real property that HUD has reviewed for suitability for use to assist the homeless. The properties were reviewed using information provided to HUD by Federal landholding agencies regarding unutilized and underutilized buildings and real property controlled by such agencies or by GSA regarding its inventory of excess or surplus Federal property. This Notice is also published in order to comply with the December 12, 1988 Court Order in
Properties reviewed are listed in this Notice according to the following categories: Suitable/available, suitable/unavailable, suitable/to be excess, and unsuitable. The properties listed in the three suitable categories have been reviewed by the landholding agencies, and each agency has transmitted to HUD: (1) Its intention to make the property available for use to assist the homeless, (2) its intention to declare the property excess to the agency's needs, or (3) a statement of the reasons that the property cannot be declared excess or made available for use as facilities to assist the homeless.
Properties listed as suitable/available will be available exclusively for homeless use for a period of 60 days from the date of this Notice. Where property is described as for “off-site use only” recipients of the property will be required to relocate the building to their own site at their own expense. Homeless assistance providers interested in any such property should send a written expression of interest to HHS, addressed to Theresa Ritta, Division of Property Management, Program Support Center, HHS, room 5B-17, 5600 Fishers Lane, Rockville, MD 20857; (301) 443-2265. (This is not a toll-free number.) HHS will mail to the interested provider an application packet, which will include instructions for completing the application. In order to maximize the opportunity to utilize a suitable property, providers should submit their written expressions of interest as soon as possible. For complete details concerning the processing of applications, the reader is encouraged to refer to the interim rule governing this program, 24 CFR part 581.
For properties listed as suitable/to be excess, that property may, if subsequently accepted as excess by GSA, be made available for use by the homeless in accordance with applicable law, subject to screening for other Federal use. At the appropriate time, HUD will publish the property in a Notice showing it as either suitable/available or suitable/unavailable.
For properties listed as suitable/unavailable, the landholding agency has decided that the property cannot be declared excess or made available for use to assist the homeless, and the property will not be available.
Properties listed as unsuitable will not be made available for any other purpose for 20 days from the date of this Notice. Homeless assistance providers interested in a review by HUD of the determination of unsuitability should call the toll free information line at 1-800-927-7588 for detailed instructions or write a letter to Ann Marie Oliva at the address listed at the beginning of this Notice. Included in the request for review should be the property address (including zip code), the date of publication in the
For more information regarding particular properties identified in this Notice (i.e., acreage, floor plan, existing sanitary facilities, exact street address), providers should contact the appropriate landholding agencies at the following addresses:
Bureau of Ocean Energy Management, Interior.
Notice of the availability of an environmental assessment.
Bureau of Ocean Energy Management (BOEM) has prepared an environmental assessment (EA) considering the reasonably foreseeable environmental impacts and socioeconomic effects of issuing
BOEM will conduct public information meetings on Tuesday, November 13, 2012, in Boston and New Bedford, Wednesday, November 14, 2012, in Vineyard Haven on Martha's Vineyard, and Thursday, November 15, 2012, on Nantucket, in Massachusetts to explain the proposed activities and provide additional opportunities for public input on the EA. Details on the meeting locations and times, as well as the EA, can be found online at
Michelle Morin, BOEM Office of Renewable Energy, 381 Elden Street, HM 1328, Herndon, Virginia 20170-4817, (703) 787-1340 or
On February 6, 2012, BOEM published a Notice of Intent (NOI) to prepare an EA, which requested public comments on important environmental issues and alternatives to be considered in the EA; measures (e.g., limitations on activities based on technology, distance from shore, or timing) that would minimize impacts to environmental resources; and socioeconomic conditions that could result from leasing, site characterization, and site assessment in and around the Call Area (77 FR 5830). The Call Area is located offshore Massachusetts. Issues and impacts associated with potential project development will be considered in subsequent environmental analyses after the submittal of project proposals, if any. Comments received in response to the NOI can be viewed at:
On May 30, 2012, BOEM announced the identification of the MA WEA, which excluded high value sea duck habitat and some fishing grounds in the Call Area. The proposed action considered by this EA, under the National Environmental Policy Act (NEPA) (42 U.S.C. 4321-4370f), is leasing and approval of site assessment plans for the entire WEA. BOEM also identified alternatives to the proposed action that would exclude certain portions of the WEA from leasing because of environmental and cultural concerns. Additional information on the MA area identification process can be found at:
BOEM is seeking public input on the EA, including comments on the completeness and adequacy of the environmental analysis and on the measures and operating conditions described in the EA and designed to reduce or eliminate potential environmental impacts. BOEM will consider public comments on the EA in determining whether to issue a Finding of No Significant Impact (FONSI), or conduct additional analysis under NEPA.
Federal, state, and local government agencies, tribal governments, and other interested parties are requested to submit their written comments on the EA in one of the following ways:
1. Electronically:
2. In written form, delivered by hand or by mail, enclosed in an envelope labeled “Comments on Commercial Wind Lease Issuance and Site Assessment Activities on the Atlantic OCS Offshore MA” to: Program Manager, Office of Renewable Energy, Bureau of Ocean Energy Management, 381 Elden Street, HM 1328, Herndon, Virginia 20170-4817.
Comments must be received or postmarked no later than December 3, 2012. All written comments received or postmarked during the comment period will be made available to the public.
This Notice of the Availability (NOA) of an EA is published pursuant to 43 CFR 46.305.
Pursuant to the authority contained in Section 512 of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 1142, the 164th open meeting of the Advisory Council on Employee Welfare and Pension Benefit Plans (also known as the ERISA Advisory Council) will be held on November 26-27, 2012. This meeting originally was scheduled for October 30-31, but has been re-scheduled due to the threat of severe weather.
The meeting will take place in C5521 Room 4, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210 on November 26, from 1 p.m. to approximately 5:00 p.m. On November 27, the meeting will start at 8:30 a.m. and conclude at approximately 4:00 p.m., with a break for lunch. The morning session on November 27 will be in Suite 400 at 122 C Street NW. The afternoon session on November 27 will take place in Room S-2508 at the same address. The purpose of the open meeting on November 26 and the morning of November 27 is for the Advisory Council members to finalize the recommendations they will present to the Secretary. At the November 27 afternoon session, the Council members will receive an update from the Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA) and present their recommendations.
The Council recommendations will be on the following issues: (1) Current Challenges and Best Practices Concerning Beneficiary Designations in Retirement and Life Insurance Plans; (2) Examining Income Replacement During Retirement Years in a Defined Contribution Plan System; and (3) Managing Disability Risks in an Environment of Individual Responsibility. Descriptions of these topics are available on the Advisory Council page of the EBSA Web site at
Organizations or members of the public wishing to submit a written statement may do so by submitting 30 copies on or before November 19, 2012 to Larry Good, Executive Secretary, ERISA Advisory Council, U.S. Department of Labor, Suite N-5623, 200 Constitution Avenue NW., Washington, DC 20210. Statements also may be submitted as email attachments in text or pdf format transmitted to
Individuals or representatives of organizations wishing to address the Advisory Council should forward their requests to the Executive Secretary or telephone (202) 693-8668. Oral presentations will be limited to ten minutes, time permitting, but an extended statement may be submitted for the record. Individuals with disabilities who need special accommodations should contact the Executive Secretary by November 19, 2012 at the address indicated.
National Science Foundation.
Notice of permit issued under the Antarctic Conservation of 1978, Public Law 95-541.
The National Science Foundation (NSF) is required to publish notice of permits issued under the Antarctic Conservation Act of 1978. This is the required notice.
Nadene G. Kennedy, Permit Office, Office of Polar Programs, Rm. 755, National Science Foundation, 4201 Wilson Boulevard, Arlington, VA 22230.
On August 6, 2012, the National Science Foundation published a notice in the
Office of Personnel Management.
30-Day Notice and request for comments.
The Retirement Services, Office of Personnel Management (OPM) offers the general public and other Federal agencies the opportunity to comment on an extension, without change, of a currently approved information collection request (ICR) 3206-0212, Rollover Election (RI 38-117), Rollover Information (RI 38-118), and Special Tax Notice Regarding Rollovers (RI 37-22). As required by the Paperwork Reduction Act of 1995, (Pub. L. 104-13, 44 U.S.C. chapter 35) as amended by the Clinger-Cohen Act (Pub. L. 104-106), OPM is soliciting comments for this collection. This information collection was previously published in the
1. Evaluate whether the proposed collection of information is necessary for the proper performance of functions of the agency, including whether the information will have practical utility;
2. Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
3. Enhance the quality, utility, and clarity of the information to be collected; and
4. Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submissions of responses.
Comments are encouraged and will be accepted until December 3, 2012. This process is conducted in accordance with 5 CFR 1320.1.
Interested persons are invited to submit written comments on the proposed information collection to the Office of Information and Regulatory Affairs, Office of Management and Budget, 725 17th Street NW., Washington, DC 20503, Attention: Desk Officer for the Office of Personnel Management or sent via electronic mail to
A copy of this ICR with applicable supporting documentation, may be obtained by contacting the Office of Information and Regulatory Affairs, Office of Management and Budget, 725 17th Street NW., Washington, DC 20503, Attention: Desk Officer for the Office of Personnel Management or sent via electronic mail to
RI 38-117, Rollover Election, is used to collect information from each payee affected by a change in the tax code so that OPM can make payment in accordance with the wishes of the payee. RI 38-118, Rollover Information, explains the election. RI 37-22, Special Tax Notice Regarding Rollovers, provides more detailed information.
U.S. Office of Personnel Management.
30-Day Notice and request for comments.
The Retirement Services, Office of Personnel Management (OPM) offers the general public and other federal agencies the opportunity to comment on a revised information collection request (ICR) 3206-0138, Reinstatement of Disability Annuity Previously Terminated Because of Restoration to Earning Capacity, RI 30-9. As required by the Paperwork Reduction Act of 1995, (Pub. L. 104-13, 44 U.S.C. chapter 35) as amended by the Clinger-Cohen Act (Pub. L. 104-106), OPM is soliciting comments for this collection. This information collection was previously published in the
1. Evaluate whether the proposed collection of information is necessary for the proper performance of functions of the agency, including whether the information will have practical utility;
2. Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
3. enhance the quality, utility, and clarity of the information to be collected; and
4. Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submissions of responses.
Comments are encouraged and will be accepted until December 3, 2012. This process is conducted in accordance with 5 CFR 1320.1.
Interested persons are invited to submit written comments on the proposed information collection to the Office of Information and Regulatory Affairs, Office of Management and Budget, 725 17th Street NW., Washington, DC 20503, Attention: Desk Officer for the Office of Personnel Management or sent via electronic mail to
A copy of this ICR with applicable supporting documentation, may be obtained by contacting the Office of Information and Regulatory Affairs, Office of Management and Budget, 725 17th Street NW., Washington, DC 20503, Attention: Desk Officer for the Office of Personnel Management or sent via electronic mail to
RI 30-9 informs former disability annuitants of their right to request restoration under title 5, U.S.C. Sections 8337 and 8455. It also specifies the conditions to be met and the documentation required for a person to request reinstatement.
U.S. Office of Personnel Management.
60-Day Notice and request for comments.
The Retirement Services, Office of Personnel Management (OPM) offers the general public and other federal agencies the opportunity to comment on a revised information collection request (ICR) 3206-0143, Request to Disability Annuitant for Information on Physical Condition and Employment, RI 30-1. As required by the Paperwork Reduction Act of 1995, (Pub. L. 104-13, 44 U.S.C. chapter 35) as amended by the Clinger-Cohen Act (Pub. L. 104-106), OPM is soliciting comments for this collection. The Office of Management and Budget is particularly interested in comments that:
1. Evaluate whether the proposed collection of information is necessary for the proper performance of functions of the agency, including whether the information will have practical utility;
2. Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
3. Enhance the quality, utility, and clarity of the information to be collected; and
4. Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submissions of responses.
Comments are encouraged and will be accepted until January 2, 2013. This process is conducted in accordance with 5 CFR 1320.1.
Interested persons are invited to submit written comments on the proposed information collection to U.S. Office of Personnel Management, Retirement Services, Union Square 370, 1900 E Street NW., Washington, DC 20415-3500, Attention: Alberta Butler or sent via electronic mail to
A copy of this ICR, with applicable supporting documentation, may be obtained by contacting the U.S. Office of Personnel Management, Retirement Services Publications Team, 1900 E Street NW., Room 4332, Washington, DC 20415, Attention: Cyrus S. Benson, or sent via electronic mail to
RI 30-1 is used by persons who are not yet age 60 and who are receiving a disability annuity and are subject to inquiry regarding their medical condition as OPM deems reasonably necessary. RI 30-1 collects information as to whether the disabling condition has changed.
U.S. Office of Personnel Management.
60-Day Notice and request for comments.
The Retirement Services, Office of Personnel Management (OPM) offers the general public and other federal agencies the opportunity to comment on an extension without change, of a currently approved information collection request (ICR) 3206-0228, CSRS/FERS Documentation in Support of Disability Retirement Application. As required by the Paperwork Reduction Act of 1995 (Pub. L. 104-13, 44 U.S.C. chapter 35) as amended by the Clinger-Cohen Act (Pub. L. 104-106), OPM is soliciting comments for this collection. The Office of Management and Budget is particularly interested in comments that:
1. Evaluate whether the proposed collection of information is necessary for the proper performance of functions of the agency, including whether the information will have practical utility;
2. Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
3. Enhance the quality, utility, and clarity of the information to be collected; and
4. Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submissions of responses.
Comments are encouraged and will be accepted until January 2, 2013. This process is conducted in accordance with 5 CFR 1320.1.
Interested persons are invited to submit written comments on the proposed information collection to U.S. Office of Personnel Management, Retirement Services, Union Square 370, 1900 E Street NW., Washington, DC 20415-3500, Attention: Alberta Butler or sent via electronic mail to
A copy of this ICR with applicable supporting documentation may be obtained by contacting the Retirement Services Publications Team, Office of Personnel Management, 1900 E Street NW., Room 4332, Washington, DC 20415, Attention: Cyrus S. Benson, or sent via electronic mail to
SF 3112 collects information from applicants for disability retirement so that OPM can determine whether to approve a disability retirement. The applicant will only complete Standard Forms 3112A and 3112C. Standard Forms 3112B, 3112D and 3112E will be completed by the immediate supervisor and the employing agency of the applicant.
U.S. Office of Personnel Management.
60-Day Notice and request for comments.
The Retirement Services, Office of Personnel Management (OPM) offers the general public and other federal agencies the opportunity to comment on an existing information collection request (ICR) 3206-0211, Reemployment of Annuitants. As required by the Paperwork Reduction Act of 1995 (Pub. L. 104-13, 44 U.S.C. chapter 35) as amended by the Clinger-Cohen Act (Pub. L. 104-106), OPM is soliciting comments for this collection. The Office of Management and Budget is particularly interested in comments that:
1. Evaluate whether the proposed collection of information is necessary for the proper performance of functions of the agency, including whether the information will have practical utility;
2. Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
3. Enhance the quality, utility, and clarity of the information to be collected; and
4. Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submissions of responses.
Comments are encouraged and will be accepted until January 2, 2013. This process is conducted in accordance with 5 CFR 1320.1.
Interested persons are invited to submit written comments on the proposed information collection to U.S. Office of Personnel Management, Retirement Services, Union Square 370, 1900 E Street NW., Washington, DC 20415-3500, Attention: Alberta Butler or sent via electronic mail to
A copy of this ICR with applicable supporting documentation, may be obtained by contacting the Retirement Services Publications Team, Office of Personnel Management, 1900 E Street NW., Room 4332, Washington, DC
5 CFR 837.103, Reemployment of Annuitants, requires agencies to collect information from retirees who become employed in Government positions. Agencies need to collect timely information regarding the type and amount of annuity being received so the correct rate of pay can be determined. Agencies provide this information to OPM so a determination can be made whether the reemployed retiree's annuity must be terminated.
U.S. Office of Personnel Management.
30-Day Notice and request for comments.
The Retirement Services, Office of Personnel Management (OPM) offers the general public and other Federal agencies the opportunity to comment on a revised information collection request (ICR) 3206-0034, Annuitant's Report of Earned Income, RI 30-2. As required by the Paperwork Reduction Act of 1995, (Pub. L. 104-13, 44 U.S.C. chapter 35) as amended by the Clinger-Cohen Act (Pub. L. 104-106), OPM is soliciting comments for this collection. The information collection was previously published in the
1. Evaluate whether the proposed collection of information is necessary for the proper performance of functions of the agency, including whether the information will have practical utility;
2. Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
3. Enhance the quality, utility, and clarity of the information to be collected; and
4. Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submissions of response.
Comments are encouraged and will be accepted until December 7, 2012. This process is conducted in accordance with 5 CFR 1320.1.
Interested persons are invited to submit written comments on the proposed information collection to the Office of Information and Regulatory Affairs, Office of Management and Budget, 725 17th Street NW., Washington, DC 20503, Attention: Desk Officer for the Office of Personnel Management or sent via electronic mail to
A copy of this ICR with applicable supporting documentation, may be obtained by contacting the Office of Information and Regulatory Affairs, Office of Management and Budget, 725 17th Street NW., Washington, DC 20503, Attention: Desk Officer for the Office of Personnel Management or sent via electronic mail to
RI 30-2 is used annually to determine if disability retirees under age 60 have earned income which will result in the termination of their annuity benefits.
U.S. Office of Personnel Management.
60-Day Notice and request for comments.
The Retirement Services, Office of Personnel Management (OPM) offers the general public and other Federal agencies the opportunity to comment on a revised information collection request (ICR) 3206-0226, It's Time To Sign up for Direct Deposit or Direct Express. As required by the Paperwork Reduction Act of 1995, (Pub. L. 104-13, 44 U.S.C. chapter 35) as amended by the Clinger-Cohen Act (Pub. L. 104-106), OPM is soliciting comments for this collection. The Office of Management and Budget is particularly interested in comments that:
1. Evaluate whether the proposed collection of information is necessary for the proper performance of functions of the agency, including whether the information will have practical utility;
2. Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
3. Enhance the quality, utility, and clarity of the information to be collected; and
4. Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submissions of responses.
Comments are encouraged and will be accepted until January 2, 2013. This process is conducted in accordance with 5 CFR 1320.1.
Interested persons are invited to submit written comments on the proposed information collection to U.S. Office of Personnel Management,
A copy of this ICR, with applicable supporting documentation, may be obtained by contacting the Retirement Services Publications Team, U.S. Office of Personnel Management, 1900 E Street NW., Room 4332, Washington, DC 20415, Attention: Cyrus S. Benson or sent via electronic mail to
RI 38-128 is primarily used by OPM to give recent retirees the opportunity to waive Direct Deposit of their annuity payments. The form is sent only if the separating agency did not give the retiring employee this election opportunity. This form may also be used to enroll in Direct Deposit, which was its primary use before Public Law 104-134 was passed. This law requires OPM to make all recurring benefits payments electronically to beneficiaries who live where Direct Deposit is available. Beneficiaries who do not enroll in the Direct Deposit Program will be enrolled in Direct Express.
Office of Personnel Management.
Notice.
Notice is hereby given of the appointment of members of the OPM Performance Review Board.
Sara Saphos, OPM Human Resources, Office of Personnel Management, 1900 E Street NW., Washington, DC 20415, (202) 606-1402.
Section 4314(c)(1) through (5) of Title 5, U.S.C., requires each agency to establish, in accordance with regulations prescribed by the Office of Personnel Management, one or more SES performance review boards. The board reviews and evaluates the initial appraisal of a senior executive's performance by the supervisor, and considers recommendations to the appointing authority regarding the performance of the senior executive.
The following have been designated as members of the Performance Review Board of the U.S. Office of Personnel Management:
Postal Regulatory Commission.
Notice.
The Commission is noticing a recent Postal Service filing concerning the addition of First-Class Package Service Contract 25 to the competitive product list. This notice informs the public of the filing, invites public comment, and takes other administrative steps.
Submit comments electronically via the Commission's Filing Online system at
Stephen L. Sharfman, General Counsel, at 202-789-6820.
In accordance with 39 U.S.C. 3642 and 39 CFR 3020.30
The Postal Service contemporaneously filed a redacted contract related to the proposed new product under 39 U.S.C. 3632(b)(3) and 39 CFR 3015.5.
• Attachment A—a redacted copy of Governors' Decision No. 11-6, authorizing the new product;
• Attachment B—a redacted copy of the contract;
• Attachment C—proposed changes to the Mail Classification Schedule competitive product list with the addition underlined;
• Attachment D—a Statement of Supporting Justification as required by 39 CFR 3020.32;
• Attachment E—a certification of compliance with 39 U.S.C. 3633(a); and
• Attachment F—an application for non-public treatment of materials to maintain redacted portions of the contract and related financial information under seal.
In the Statement of Supporting Justification, Dennis R. Nicoski, Manager, Field Sales Strategy and Contracts, asserts that the contract will cover its attributable costs, make a
The Commission establishes Docket Nos. MC2013-12 and CP2013-12 to consider the Request pertaining to the proposed First-Class Package Service Contract 25 product and the related contract, respectively.
Interested persons may submit comments on whether the Postal Service's filings in the captioned dockets are consistent with the policies of 39 U.S.C. 3632, 3633, or 3642, 39 CFR 3015.5, and 39 CFR part 3020, subpart B. Comments are due no later than November 5, 2012. The public portions of these filings can be accessed via the Commission's Web site (
The Commission appoints James F. Callow to serve as Public Representative in these dockets.
1. The Commission establishes Docket Nos. MC2013-12 and CP2013-12 to consider the matters raised in each docket.
2. Pursuant to 39 U.S.C. 505, James F. Callow is appointed to serve as an officer of the Commission (Public Representative) to represent the interests of the general public in these proceedings.
3. Comments by interested persons in these proceedings are due no later than November 5, 2012.
4. The Secretary shall arrange for publication of this order in the
By the Commission.
Postal Regulatory Commission.
Notice.
The Commission is noticing a recent Postal Service filing concerning the addition of Parcel Select Contract 6 to the competitive product list. This notice informs the public of the filing, invites public comment, and takes other administrative steps.
Submit comments electronically via the Commission's Filing Online system at
Stephen L. Sharfman, General Counsel, at 202-789-6820.
In accordance with 39 U.S.C. 3642 and 39 CFR 3020.30
The Postal Service contemporaneously filed a redacted contract related to the proposed new product under 39 U.S.C. 3632(b)(3) and 39 CFR 3015.5.
• Attachment A—a redacted copy of Governors' Decision No. 11-6, authorizing the new product;
• Attachment B—a redacted copy of the contract;
• Attachment C—proposed changes to the Mail Classification Schedule competitive product list with the addition underlined;
• Attachment D—a Statement of Supporting Justification as required by 39 CFR 3020.32;
• Attachment E—a certification of compliance with 39 U.S.C. 3633(a); and
• Attachment F—an application for non-public treatment of materials to maintain redacted portions of the contract and related financial information under seal.
In the Statement of Supporting Justification, Dennis R. Nicoski, Manager, Field Sales Strategy and Contracts, asserts that the contract will cover its attributable costs, make a positive contribution to covering institutional costs, and increase contribution toward the requisite 5.5 percent of the Postal Service's total institutional costs.
The Postal Service filed much of the supporting materials, including the related contract, under seal.
The Commission establishes Docket Nos. MC2013-13 and CP2013-13 to consider the Request pertaining to the proposed Parcel Select Contract 6 product and the related contract, respectively.
Interested persons may submit comments on whether the Postal Service's filings in the captioned dockets are consistent with the policies of 39 U.S.C. 3632, 3633, or 3642, 39 CFR 3015.5, and 39 CFR part 3020, subpart B. Comments are due no later than November 5, 2012. The public portions of these filings can be accessed via the Commission's Web site (
The Commission appoints James F. Callow to serve as Public Representative in these dockets.
1. The Commission establishes Docket Nos. MC2013-13 and CP2013-13 to consider the matters raised in each docket.
2. Pursuant to 39 U.S.C. 505, James F. Callow is appointed to serve as an officer of the Commission (Public Representative) to represent the interests of the general public in these proceedings.
3. Comments by interested persons in these proceedings are due no later than November 5, 2012.
4. The Secretary shall arrange for publication of this order in the
By the Commission.
Wednesday, November 14, 2012, at 10:00 a.m.; Thursday, November 15, at 8:30 a.m. and 10:30 a.m.
Washington, DC, at U.S. Postal Service Headquarters, 475 L'Enfant Plaza SW., in the Benjamin Franklin Room.
Wednesday, November 14, at 10:00 a.m.—Closed; Thursday, November 15, at 8:30 a.m.—Open; and at 10:30 a.m.—Closed
1. Strategic Issues.
2. Financial Matters.
3. Pricing.
4. Personnel Matters and Compensation Issues.
5. Governors' Executive Session—Discussion of prior agenda items and Board Governance.
1. Approval of Minutes of Previous Meetings.
2. Remarks of the Chairman of the Board.
3. Remarks of the Postmaster General and CEO.
4. Committee Reports.
5. FY2012 10K and Financial Statements.
6. FY2013 IFP and Financing Resolution.
7. FY2014 Appropriations Request.
8. Quarterly Service Performance Report.
9. Approval of Annual Report and Comprehensive Statement.
10. Tentative Agenda for the December 11, 2012, meeting in Washington, DC.
11. Election of the Chairman and Vice Chairman of the Board of Governors.
1. Continuation of Wednesday's closed session agenda.
Julie S. Moore, Secretary of the Board, U.S. Postal Service, 475 L'Enfant Plaza SW., Washington, DC 20260-1000. Telephone (202) 268-4800.
Postal Service
Notice.
The Postal Service gives notice of filing a request with the Postal Regulatory Commission to add a domestic shipping services contract to the list of Negotiated Service Agreements in the Mail Classification Schedule's Competitive Products List.
Elizabeth A. Reed, 202-268-3179.
The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on October 25, 2012, it filed with the Postal Regulatory Commission a
Postal Service
Notice.
The Postal Service gives notice of filing a request with the Postal Regulatory Commission to add a domestic shipping services contract to the list of Negotiated Service Agreements in the Mail Classification Schedule's Competitive Products List.
Elizabeth A. Reed, 202-268-3179.
The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on October 25, 2012, it filed with the Postal Regulatory Commission a
The following is a notice of applications for deregistration under section 8(f) of the Investment Company Act of 1940 for the month of October 2012. A copy of each application may be obtained via the Commission's Web site by searching for the file number, or for an applicant using the Company name box, at
Diane L. Titus at (202) 551-6810, SEC, Division of Investment Management, Office of Investment Company Regulation, 100 F Street NE., Washington, DC 20549-8010.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),
CBOE proposes to make a technical amendment to Interpretation and Policy
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.
The Commission recently noticed the Exchange's proposal to amend Interpretation and Policy .07 to Rule 4.11 to eliminate position and exercise limits for physically-settled SPY options purpose to a pilot program (“Program”).
In addition, in the filing to establish the Program, CBOE committed to perform an analysis of the Program after the first twelve (12) months of the pilot program (the “Pilot Report”).
The basis under the Securities Exchange Act of 1934 (the “Act”) for this proposed rule change is the requirement under Section 6(b)(5)
CBOE does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
No written comments were solicited or received with respect to the proposed rule change.
Because the proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative prior to 30 days from the date on which it was filed, or such shorter time as the Commission may designate, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act
A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an email to
• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary,
All submissions should refer to File Number SR-CBOE-2012-099 and should be submitted on or before November 23, 2012.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On August 30, 2012, the Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change and Advance Notice SR-OCC-2012-14 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
Section 806(e)(1)(G) of the Payment, Clearing, and Settlement Supervision Act of 2010 (“Clearing Supervision Act”)
Pursuant to Section 806(e)(1)(H) of the Clearing Supervision Act,
The Commission finds it is appropriate to extend the review period for the Advance Notice. In particular, the Advance Notice is novel because OCC does not currently provide clearing services for OTC products and because no registered clearing agency currently provides clearing services for OTC S&P 500 Index options.
Accordingly, the Commission, pursuant to 806(e)(1)(H) of the Clearing Supervision Act,
By the Commission.
On September 5, 2012, the Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change SR-OCC-2012-15 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
The proposed rule change would make technical “housekeeping” changes to OCC's By-Laws and Rules relating to financial reporting by Canadian clearing members to reflect the Investment Industry Regulatory Organization of Canada's (“IIROC”) adoption of the International Financial Reporting Standards.
OCC Rule 310, through cross-references to interpretive provisions of OCC Rule 306—Financial Reports and
OCC, as part of its financial surveillance program, requires Canadian clearing members to submit their JRFQR, a financial report similar to SEC Form X-17A-5, to OCC at the end of each month. OCC also monitors the financial health of such clearing members using the capital levels reported on their JRFQRs. In 2011, IIROC replaced the JRFQR with Form 1. Among other things, Form 1 aligns the reporting of certain financial liabilities to U.S. Generally Accepted Accounting Principles (“GAAP”). Canadian clearing members that use Form 1 report the same, and in some cases more conservative, amounts of regulatory capital to OCC as they had using the JRFQR. Moreover, OCC believes that the change does not impair OCC's ability to conduct diligent financial surveillance of Canadian clearing members. Accordingly, OCC proposes to replace references to the “JRFQR” within its By-Laws and Rules with references to “Form 1.”
The IIROC also altered how its regulated entities report capital withdrawals. IIROC previously required capital withdrawals to be reported on monthly financial reports; however, IIROC amended its standards and now requires firms to obtain approval for withdrawals of capital following notice thereof. OCC had, when applicable, adjusted Canadian clearing member's reported capital levels in light of withdrawals reflected in financial reports in order to determine if the firm's capital falls within OCC's standards. With the change implemented by IIROC, that information is no longer be available to OCC via monthly financial reports submitted by Canadian clearing members. To ensure it is aware of such capital withdrawals, OCC proposes to add an Interpretation and Policy to Rule 304, which would require Canadian clearing members to submit capital withdrawal notifications to OCC when such requests are submitted to IIROC.
Section 17A(b)(3) (F) of the Act
On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act
For the Commission by the Division of Trading and Markets, pursuant to delegated authority.
On July 23, 2012, The NASDAQ Stock Market LLC (“Nasdaq” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
Pursuant to existing Nasdaq Rule 4626(a), Nasdaq and its affiliates are not liable for any losses, damages, or other claims arising out of the Nasdaq Market Center or its use.
As set forth in more detail in the Notice, Nasdaq proposes to add subsection (3) to Nasdaq Rule 4626(b) to establish a voluntary accommodation program for certain claims arising from the initial public offering (“IPO”) of Facebook, Inc. (“Facebook”) on May 18, 2012 (collectively “Facebook IPO”).
According to proposed Nasdaq Rule 4626(b)(3)(B), the measure of loss for the Cross orders described in (i), (iii), and (iv) above would be the lesser of: (a) The differential between the expected execution price of the orders in the Cross process that established an opening print of $42.00 and the actual execution price received; or (b) the differential between the expected execution price of the orders in the Cross process that established an opening print of $42.00 and a benchmark price of $40.527.
With respect to the process for submitting claims pursuant to proposed Nasdaq Rule 4626(b)(3), all claims must be submitted in writing no later than seven days after this accommodation proposal is approved by the Commission.
Furthermore, as proposed, in order to receive payment under proposed Nasdaq Rule 4626(b)(3), not later than seven days after the effective date of the proposed rule change setting forth the amount of eligible claims, the member must submit to Nasdaq an attestation detailing the amount of customer compensation
With respect to the priority of payment under proposed Nasdaq Rule 4626(b)(3), payments would be made in two tranches.
As previously noted, the Commission received 11 comment letters on the accommodation proposal and one response letter from Nasdaq.
Commenters raised concerns in the following areas, each of which is discussed in greater detail below: (1) The requirement that market participants release all other potentially valid claims as a condition to participation in the accommodation program; (2) Nasdaq's calculation and use of a benchmark price of $40.527; (3) the categories of claim-eligible trading losses; (4) the amount of the accommodation pool; (5) regulatory immunity from private suits and limitations on liability; (6) the applicability of Nasdaq Rule 4626; (7) the impact of approval of the accommodation proposal on pending litigation; and (8) two procedural issues.
Several commenters expressed concerns that payment to eligible claimants are conditioned upon the member firm executing a release of claims by the firm or its affiliates against Nasdaq for losses associated with the Facebook IPO on May 18, 2012.
In response, Nasdaq asserted that the release requirement is fair, reasonable, and furthers the objectives of Section 6(b)(5) of the Act
Several commenters expressed concern with Nasdaq's calculation and use of the uniform benchmark price of $40.527 to determine the amount of compensation owed to a member under the accommodation proposal.
In its response letter, Nasdaq reasserted that the use of the VWAP of Facebook stock during the 45 minute window after 1:50 p.m. is appropriate as the benchmark price because 45 minutes provided members enough time to identify and mitigate any unexpected losses or unanticipated positions.
Several commenters stated that the types of orders eligible to receive compensation under the accommodation proposal are too narrowly defined.
Another commenter observed that the accommodation proposal provides no direct compensation to “ordinary retail investors” and does not guarantee that retail investors would receive any compensation for losses.
Nasdaq responded that the question before the Commission is only whether the proposal is consistent with the requirements of the Act.
Several commenters argued that the proposed $62 million accommodation pool is an insufficient amount to compensate market participants harmed by Nasdaq's systems issues.
Nasdaq responded that commenters' objections to the amount of compensation are “unpersuasive” because the Commission has already determined that rules, such as existing Nasdaq Rule 4626, limiting exchange liability are consistent with the Act.
Several commenters stated that Nasdaq is not entitled to immunity from liability because it was acting in its “for profit” capacity in its handling of the Facebook IPO, rather than acting in its “regulatory capacity” as a self-regulatory organization.
Nasdaq responded that the Commission's task with regard to the accommodation proposal is only to determine whether the proposed rule change is consistent with the Act, and the Commission does not need to address the issue of regulatory immunity to do so.
According to one commenter, market participants' losses “resulted not from the type of ordinary system failures contemplated by Rule 4626 * * *, but rather from a known design flaw that resulted in a similar technology issue dating back to Fall 2011, as well as Nasdaq's high-risk, profit-oriented behavior prior to and during the IPO * * *”
Nasdaq emphasized in response that Rule 4626 is a pre-existing Commission approved rule and that the rule squarely applies to Nasdaq's systems issues related to the Facebook IPO.
Two commenters expressed concern that Commission approval of the accommodation proposal might negatively impact other adjudications of disputes with Nasdaq regarding the Facebook IPO.
Several commenters raised procedural concerns regarding the implementation of the accommodation proposal.
Nasdaq responded that commenters' requests to extend the one-year time limit for members to bring claims against Nasdaq improperly ask the Commission to interfere with existing contractual relationships that have no bearing on whether Nasdaq Rule 4626 should be amended.
The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act
Pursuant to Section 19(b)(2)(B) of the Act,
As discussed above, Nasdaq's accommodation proposal would amend its existing Rule 4626 to provide $62 million to compensate certain types of claims arising in connection with the Facebook IPO Cross on May 18, 2012. Further, as proposed, a Nasdaq member must execute a release of all claims by the member or its affiliates against Nasdaq or its affiliates for losses that arise out of, are associated with, or relate in any way to the Facebook IPO Cross or to any actions or omissions related in any way to that Cross in order to receive any payment under proposed Nasdaq Rule 4626(b)(3). The concerns articulated by commenters, including the limited categories of claims eligible for compensation, the method of determining losses for certain categories of eligible claims, and the requirement that a member waive all claims against
Accordingly, in light of the concerns raised by commenters, the Commission believes that questions are raised as to whether Nasdaq's accommodation proposal is consistent with the requirements of Section 6(b)(5) of the Act, including whether the accommodation proposal would promote just and equitable principles of trade, protect investors and the public interest, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.
The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the concerns identified above, as well as any other concerns they may have with the accommodation proposal. In particular, the Commission invites the written views of interested persons concerning whether the accommodation proposal is consistent with Section 6(b)(5)
Interested persons are invited to submit written data, views, and arguments regarding whether the accommodation proposal should be approved or disapproved by November 23, 2012. Any person who wishes to file a rebuttal to any other person's submission must file that rebuttal by December 7, 2012. Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an email to
• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
October 26, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
The text of the proposed rule change is below.
Rule 100-80203—No Change.
Rule 80301-End—No change
In its filing with the Commission, CME included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. CME has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
CME offers clearing services for certain credit default swap index products. Currently, CME offers clearing of the Markit CDX North American Investment Grade Index Series 9, 10, 11, 12, 13, 14, 15, 16, 17, 18 and 19 and also offers clearing of the Markit CDX North
The proposed rule changes would expand CME's Markit CDX North American Investment Grade (“CDX IG”) Index product offerings by adding Series 8 to the current product set.
The proposed rule changes are immediately effective upon filing but will become operational on October 15, 2012. CME notes that it will also certify the proposed rule changes that are the subject of this filing to its primary regulator, the Commodity Futures Trading Commission (“CFTC”). The text of the CME proposed rule amendments is included above, with additions italicized and deletions in brackets.
The proposed CME rule amendments merely incorporate one additional series to CME's existing offering of broad-based Markit CDX North American Investment Grade credit default swaps. As such, the proposed amendments simply effect changes to an existing service of a registered clearing agency that (1) do not adversely affect the safeguarding of securities or funds in the custody or control of the clearing agency or for which it is responsible and (2) do not significantly affect the respective rights or obligations of the clearing agency or persons using its clearing agency services. Therefore, the proposed rule change is properly filed under Section 19(b)(3)(A) and Rule 19b-4(f)(4)(i) thereunder.
CME does not believe that the proposed rule change will have any impact, or impose any burden, on competition.
CME has not solicited, and does not intend to solicit, comments regarding this proposed rule change. CME has not received any unsolicited written comments from interested parties.
The foregoing proposed rule change has become effective upon filing pursuant to Section 19(b)(3)(A)
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an email to
• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CME-2012-40 and should be submitted on or before November 23, 2012.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
BX is filing with the Commission a proposal to modify Chapter VII, Section 6 (Market Maker Quotations), to eliminate market maker pre-opening obligations on BX Options. The Exchange also proposes to modify Chapter VII, Section 5 (Obligations of Market Makers) to conform it to Section 6.
The Exchange requests that the Commission waive the 30-day operative
The text of the proposed rule change is available at
In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
The purpose of the proposed rule change is to modify Chapter VII, Section 6 of the BX Options rulebook to remove obligations imposed on BX Options market makers (“Market Makers”)
The Exchange notes that its proposal is similar to a recent rule change to Chapter VII, Section 6 of the NASDAQ Options Market (“NOM”) rulebook.
Currently, Section 6 of Chapter VII requires that a Market Maker must enter continuous bids and offers in options in which the Market Maker is registered on BX Options, an all-electronic market. Specifically, Section 6(d)i. requires that on a daily basis a Market Maker must: (1) Participate in the pre-opening phase; and (2) thereafter make markets consistent with the applicable quoting requirements specified in BX Options rules, on a continuous basis in at least sixty percent (60%) of the series in options in which the Market Maker is registered. Additionally, subsection 6(d)(i.1) indicates that to satisfy the Section 6(d)i. requirement with respect to quoting a series, a Market Maker must: (3) quote such series 90% of the trading day (as a percentage of the total number of minutes in such trading day) or such higher percentage as BX Options may announce in advance.
For continuous quotation requirements on BX Options generally,
Subsequent to this proposal, a Market Maker will continue to have all of the other quoting obligations that the Market Maker now has pursuant to Section 6, and pursuant to Section 6(d)i., during regular market hours will be responsible to quote on a continuous basis in at least sixty percent (60%) of the series in options in which the Market Maker is registered for 90% of the trading day (as a percentage of the total number of minutes in such trading day). The change that the Exchange is proposing to Section 6(d)i. is removal of the Market Maker pre-opening quoting obligation and the insertion of text clarifying that the quoting obligation is during regular market hours.
i. On a daily basis, a Market Maker must participate in the pre-opening phase and thereafter make markets consistent with the applicable quoting requirements specified in these rules, on a continuous basis in at least sixty percent (60%) of the series in options in which the Market Maker is registered.
Phlx, ISE, and NOM have a continuous quoting obligation during their regular market hours, which are similar to BX Options' market hours.
Recognizing the requirement to maintain a two-sided market during trading hours per Section 5(a)i., the Exchange is removing reference in Section 5(a)ii. to a Market Maker having to enter two-sided quotes before market open by participating in opening the market. This is done for purposes of conforming Section 5(a)ii. with proposed Section 6(d)i., which eliminates quoting obligations in the pre-opening phase before the market opens.
Exchange Market Makers have noted that unlike BX Options, other options exchanges do not have a pre-opening quoting obligation for their market makers, and have requested the Exchange to eliminate the pre-opening obligation so that BX Options rules are similar to those of other options exchanges such as, for example, NOM and Phlx. This proposed rule change levels the playing field in respect of pre-opening obligations while leaving all other BX Options quoting requirements intact.
Moreover, the Exchange believes that its proposal to put BX Options market makers in the same position as market makers on other exchanges will not have a negative effect on BX Options investors and traders (“BX Options participants”). In particular, the Exchange believes the removal of pre-opening market maker obligations on BX Options will have no impact on the functioning of the BX Options opening process and in turn will not negatively impact BX Options participants. The Exchange generally requires two other option markets to be open prior to BX Options initiating an opening process.
The Exchange believes further that the proposed rule change eliminating pre-opening obligations should be pro-competitive in that it will attract more Market Makers, and additional liquidity, onto BX Options. This should be advantageous to traders and investors executing trading and hedging strategies on the Exchange.
The Exchange believes that its proposal is consistent with Section 6(b) of the Act
Additionally, the Exchange believes the proposal removes a market maker quoting requirement that is unnecessary, as evidenced by the fact that it does not exist on other competitive markets. The Exchange operates in a highly competitive market comprised of ten U.S. options exchanges in which sophisticated and knowledgeable market participants can, and do, send order flow to competing exchanges if they deem trading practices at a particular exchange to be onerous or cumbersome. With this proposal, the Market Maker will be relieved of a market maker requirement that does not materially improve the quality of the markets. On the contrary, the pre-open phase obligation creates an additional obligation and burden on BX Options Market Makers that does not exist on numerous other competitive markets. The Exchange believes that in this competitive marketplace, the impact of the pre-open trading practice that exists on the Exchange today compels this proposal. It will allow Market Makers on the Exchange to follow rules that are similar to the rules of other options exchanges that do not impose pre-opening obligations on their market makers, and will allow Market Makers to focus on aspects of their operations that contribute to the market in a more efficient and meaningful way.
The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. To the contrary, BX Options' proposal to eliminate the pre-opening obligation on Market Makers is consistent with the market maker obligations on other options exchanges, which do not impose pre-opening obligations on market makers. The Exchange believes that its proposal is pro-competitive and should serve to attract market making activity and increase liquidity provision on BX Options.
No written comments were either solicited or received.
Because the proposed rule change does not (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act
A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an email to
• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”)
The Exchange proposes to amend certain of the fees included in the NYSE MKT Company Guide and to make technical and conforming changes. The text of the proposed rule change is available on the Exchange's Web site at
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.
The Exchange proposes to amend Sections 140 and 141 of its Company Guide to amend certain of the fees included therein and to make technical and conforming changes. The Exchange proposes to immediately reflect the proposed changes in the Company Guide, but not to implement the proposed changes until January 1, 2013.
The Exchange proposes to amend Section 140 of its Company Guide, which provides for Original Listing Fees. The Exchange proposes to increase the Original Listing Fee charged in connection with the listing of new shares of common stock or common stock equivalents, including securities issued by non-U.S. companies, for issuers with outstanding shares in excess of 15,000,000. The Original Listing Fee for such issuers would increase from $70,000 to $75,000.
The Exchange also proposes to amend Section 141 of its Company Guide to increase its Annual Fees for stock issues as follows:
(i) for issuers with 50,000,000 shares outstanding or less, the Annual Fee would be increased by $2,500 (or 9.1%), from $27,500 to $30,000;
(ii) for issuers with 50,000,001 to 75,000,000 shares outstanding, the
(iii) for issuers with shares outstanding in excess of 75,000,000, the Annual Fee would be increased by $5,000 (or 12.5%), from $40,000 to $45,000.
The Exchange also proposes certain non-substantive changes. Specifically, the Exchange proposes to remove the asterisks and accompanying text that states that the Annual Fees are applicable as of January 1, 2010 because this text is obsolete and unnecessary.
The proposed changes to the Company Guide are intended to increase the overall revenue that the Exchange collects relating to listings from the issuers described above and to add clarity to the Company Guide. The Exchange's Original Listing Fees and Annual Fees have not been increased since 2009.
The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Securities Exchange Act of 1934 (the “Act”),
The Exchange believes that amending Section 140 of the Company Guide to increase the Original Listing Fee for issuers with outstanding shares in excess of 15,000,000 and amending Section 141 of the Company Guide to increase the Annual Fees is reasonable because the resulting fees would help to offset the Exchange's costs related to listings. The fee increases also would reflect the value that listings provide to the issuers, and the Exchange does not believe the increases to be material. In this regard, the Exchange notes that it has not recently increased these fees, but continually enhances and upgrades the level of service it provides in the listings area, including with respect to technology, compliance, and other regulatory matters related to listings.
The Exchange also believes that the proposed Original Listing Fee increase for issuers with outstanding shares in excess of 15,000,000 is equitable and not unfairly discriminatory because the Exchange wants to continue to incentivize small and large issuers that are qualified to list on the Exchange to do so, and not raising the Original Listing Fees for smaller issuers will help maintain that incentive, as such issuers generally are more cost-conscious. The Exchange does not believe the proposed increase in the Original Listing Fee for issuers with outstanding shares in excess of 15,000,000 will be a disincentive to list on the Exchange or unfairly discriminatory because it is the same as the entry fee charged by another national securities exchange for such issuers.
The Exchange believes that the proposed increases in Annual Fees also are equitably allocated and not unfairly discriminatory because all issuers will pay an increased amount in a narrow range of $2,500-$5,000 (or 9.1% to 12.5%) based on total shares outstanding.
The Exchange believes its tiered fee structure, with issuers with more total shares outstanding paying relatively higher Original Listing Fees and Annual Fees, is equitable and not unfairly discriminatory. Total shares outstanding provides a simple, objective, and efficient metric to take into account the relative size of issuers so that the Exchange can continue to incentivize listing by both large and small qualified companies; other exchanges also use such a metric.
The Exchange further notes that it operates in a highly competitive market in which issuers can readily favor competing venues. In such an environment, the Exchange must continually review, and consider adjusting, its fees and services to remain competitive with other exchanges. For the reasons described above, the Exchange believes that the proposed
Additionally, the Exchange believes that the non-substantive changes that are proposed, which are technical and conforming changes, are reasonable because they will result in the removal of unnecessary and obsolete text from the Company Guide. These changes are also equitable and not unfairly discriminatory because they will benefit all issuers and all other readers of the Company Guide.
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
No written comments were solicited or received with respect to the proposed rule change.
The foregoing rule change is effective upon filing pursuant to Section 19(b)(3)(A)
At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an email to
• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
The purpose of the proposed rule change is to provide for the clearing of Western European Sovereign CDS contracts in connection with Paragraph 13 of ICE Clear Europe's CDS Procedures on the following sovereign reference entities: Republic of Ireland, Italian Republic, Hellenic Republic, Portuguese Republic, and Kingdom of Spain (the “New Sovereign Contracts”).
In its filing with the Commission, ICE Clear Europe included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. ICE Clear Europe has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of these statements.
ICE Clear Europe has identified Western European Sovereign CDS
ICE Clear Europe's risk management framework has several features designed to address particular risks of the New Sovereign Contracts. To address so-called “wrong way risk” involving correlation between the risk of default of an underlying sovereign and the risk of default of a clearing member that has written credit protection on such a sovereign, the New Sovereign Contracts are denominated in U.S. dollars, rather than Euro (and related margin and guaranty fund requirements are denominated in U.S. dollars). In addition, the rules contain limitations on self-referencing trades (i.e., trades where the clearing member is an affiliate of the underlying sovereign reference entity). Such trades may not be submitted for clearing, and if a clearing member subsequently becomes affiliated with the underlying reference entity, the rules applicable to New Sovereign Contracts provide for the termination of relevant positions.
The margin model applicable to New Sovereign Contracts will use a combination of ICE Clear Europe's spread risk margin calculation methodology used for other CDS trades and a separate margin calculation using a Monte Carlo simulation. The initial margin requirement will reflect the higher of the two calculations.
ICE Clear Europe believes that the proposed rule change to add New Sovereign Contracts for clearing are consistent with the requirements of Section 17A of the Act and the CDS procedures and regulations thereunder applicable to it.
ICE Clear Europe does not believe the proposed rule change would have any impact, or impose any burden, on competition.
Written comments relating to the proposed rule change have not been solicited or received. ICE Clear Europe will notify the Commission of any written comments received by ICE Clear Europe.
Within 45 days of the date of publication of this notice in the
(A) By order approve or disapprove the proposed rule change or
(B) Institute proceedings to determine whether the proposed rule change should be disapproved.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. In addition, the Commission seeks comment generally on the following issues.
(1) What would be the effect on the promotion of efficiency, competition, and capital formation of ICE Clear Europe clearing New Sovereign Contracts?
(2) Would the clearing of New Sovereign Contracts create incentives among market participants to initiate trades that they otherwise would not? If so, would this increase or create new risks to the financial system or to the central counterparty that would offset the potential benefits of centralized clearing of New Sovereign Contracts?
(3) Would ICE Clear Europe's risk management framework, as described above, appropriately address risks arising from ICE Clear Europe's clearing of New Sovereign Contracts, including but not limited to “wrong-way risk”?
(4) Is the information set forth in this notice or otherwise available to the public sufficient to allow the public to provide meaningful comment on the proposed rule change?
Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an email to
• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-ICEEU-2012-08 and should be submitted on or before November 23, 2012.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
CME is proposing to amend certain rules in connection with its status as a “deemed registered” clearing agency for purposes of clearing security-based swap products. The proposed changes are designed to comply with certain requirements in the Act. The text of the proposed changes is available on the CME's Web site at
In its filing with the Commission, CME included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. CME has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
CME began clearing credit default swaps prior to the passage of the Dodd-Frank Act. These activities were facilitated by temporary exemptive relief granted by the Commission to CME. This temporary exemptive relief expired on July 16, 2011. At that time, certain provisions in the Dodd-Frank Act became effective that were intended to ensure that derivatives clearing organizations such as CME that were clearing credit default swaps prior to the passage of Dodd-Frank based on exemptions granted by the Commission could continue to do so without interruption. These provisions provided that CME became “deemed registered” as a clearing agency solely for the limited purpose of clearing security-based swaps. Commission staff has interpreted this Dodd-Frank “deemed registered” provision to mean that CME Inc., the legal entity that houses all of CME's futures and swap businesses, is generally subject to all of the requirements of the Act that apply to clearing agencies, including the obligation to submit rule filings of CME Inc. under SEC Rule 19b-4.
To-date, CME has not offered any products for clearing that fall under the Commission's jurisdiction since the passage of the Dodd-Frank Act.
Commission staff has reviewed CME's rulebook and requested that CME make certain changes in accordance with existing Commission interpretive guidance.
The financial statements would, at a minimum include: (i) The balance of the clearing fund and the breakdown of the fund balance between the various forms of contributions to the fund, e.g., cash and secured open account indebtedness; (ii) the types and amounts of investments made with respect to the cash balance; (iii) the amounts charged to the clearing fund during the year in excess of a defaulting clearing member's Guaranty Fund contribution; and (iv) any other charges to the fund during the year not directly related and chargeable to a specific clearing member's Guaranty Fund contribution. CME also would make available to CDS Clearing Members clearing security-based swaps a report of CME Group Inc. by independent public accountant regarding its system of internal accounting control, describing any material weaknesses discovered and any corrective action taken or proposed to be taken.
CME would also furnish to all CDS Clearing Members engaged in security-based swap clearing activities, within 40 days following the close of each fiscal quarter, unaudited quarterly financial statements. These unaudited quarterly financial statements shall at a minimum consist of: (i) A statement of financial position as of the end of the most recent fiscal quarter and as of the end of the corresponding period of the preceding fiscal year; (ii) a statement of changes in financial position for the period between the end of the last fiscal year and the end of the most recent fiscal quarter and for the corresponding period of the preceding fiscal year; and (iii) a statement of results of operations, which may be condensed, for the most recent fiscal quarter and for the period between the end of the last fiscal year and the end of the most recent fiscal quarter and for the corresponding periods of the preceding fiscal year.
Commission staff has asked CME to provide an explanation of how CME's current governance arrangements relating to its CDS clearing offering should be viewed in light of the requirements of Section 17A(b)(3)(C) of the Act. This provision requires that the rules of a clearing agency assure a “fair representation” of its participants in the selection of its directors and administration of its affairs.
As an initial matter, CME notes that the Board of Directors of the CME Group Inc., the parent of CME, also serves as the Board of the CME. CME Group is a public company whose stock is listed on
CME is also subject to governance and conflict of interest provisions under the core principles set out in the Commodity Exchange Act (“CEA”) for a derivatives clearing organization (“DCO”). The CFTC reviews CME for compliance with these principles. For example, Section 5b(c)(2)(O) of the CEA sets out governance fitness standards that apply to DCOs, including transparent governance arrangements, that are designed to ensure the consideration of views of owners and participants. Further, Section 5b(c)(2)(Q) of the CEA requires a DCO's board to include market participants. CFTC regulations also require a DCO's governance arrangements to be clear and transparent and “to support the objectives of relevant stakeholders”.
CME also believes it is relevant that CDS participants will have a meaningful input into decisions affecting the clearing operations for CDS through participation on the CME CDS Risk Committee. Under CME Rule 8H27, the CDS Risk Committee was formed to provide guidance and oversight to CME Clearing on matters relating to CDS Products. The CDS Risk Committee, among other things, is responsible for reviewing CDS financial safeguards, and CDS clearing member requirements, risk management policies and practices, review of CDS rule changes, etc.
The Charter of the CDS Risk Committee sets forth certain composition requirements that ensure the perspectives of CDS Clearing Members are represented. More specifically, the Charter requires that at all times the CDS Risk Committee is populated with up to nine and no fewer than five individuals who are representative of CDS Clearing Members. Because of these composition requirements of the CDS Risk Committee, and the scope of its responsibilities, CME believes the Commission could find that its current governance arrangements meet the requirements of the Act.
Further, CME also notes that the Charter of the CDS Risk Committee specifically provides that its Chairman shall be a member of the CME Inc. Board of Directors. In this capacity, the Chairman of the CDS Risk Committee serves as a liason to the full board of directors of CME. He or she can relay any concerns addressed by the CDS Risk Committee to the full CME Board. CME notes that the CDS Risk Committee is required to reassess the adequacy of this Charter on an annual basis and submit any recommended changes to the full CME Board for approval. CME believes these features provide a concrete nexus between the activities of the CDS Risk Committee and the full CME Board and ensure that there will be a “fair representation” of CDS Clearing Members in accordance with the spirit and letter of the Act.
The CME believes the proposed rule changes are consistent with the requirements of the Act, including Section 17A of the Act. The changes are specifically designed to meet Section 17A requirements as interpreted by Commission staff for clearing agencies.
CME does not believe that the proposed rule change will have any impact, or impose any burden, on competition.
CME has presented these proposed changes to the representatives of its CDS Risk Committee. CME has not otherwise solicited, and does not intend to solicit, comments regarding this proposed rule change. CME has not received any unsolicited written comments from interested parties.
Within 45 days of the date of publication of this notice in the
(A) By order approve or disapprove the proposed rule change or
(B) Institute proceedings to determine whether the proposed rule change should be disapproved.
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an email to
Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CME-2012-26 and should be submitted on or before November 23, 2012.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
U.S. Small Business Administration.
Notice.
This is a notice of an Administrative declaration of a disaster for the Commonwealth of Massachusetts dated 10/22/2012.
Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155.
A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street SW., Suite 6050, Washington, DC 20416.
Notice is hereby given that as a result of the Administrator's disaster declaration, applications for disaster loans may be filed at the address listed above or other locally announced locations.
The following areas have been determined to be adversely affected by the disaster:
The Interest Rates are:
The number assigned to this disaster for physical damage is 13348 6 and for economic injury is 13349 0.
The States which received an EIDL Declaration # are Massachusetts, Rhode Island.
Susquehanna River Basin Commission.
Notice.
As part of its regular business meeting held on September 20, 2012, in Harrisburg, Pennsylvania, the Commission took the following actions: approved or tabled the applications of certain water resources projects; and took additional actions, as set forth in the Supplementary Information below.
September 20, 2012
Susquehanna River Basin Commission, 1721 N. Front Street, Harrisburg, PA 17102-2391.
Richard A. Cairo, General Counsel, telephone: (717) 238-0423, ext. 306; fax: (717) 238-2436; email:
In addition to its related actions on projects identified in the summary above and the listings below, the following items were also presented or acted on at the business meeting: (1) Approved/ratified grants involving the Chesapeake Bay Nutrient Monitoring Program, the development of Total Maximum Daily Loads (TMDLs) studies, and the Public Water System Assistance Initiative Project with the PA Dept. of Environmental Protection; (2) amended the Water Quality Protection and Pollution Prevention Grant (known as the 106 grant); (3) authorized expansion of the SRBC Remote Water Quality Monitoring Network; (4) approved two listing agreements with Latus Commercial Realty for sale of the current headquarters building and leasing of space in the new headquarters building now under construction; (5) approved the partial waiver of application fees when a project sponsor withdraws an application prior to SRBC beginning its technical review; (6) approved a request by Talon Holdings, LLC for a conditional transfer extension related to the Hawk Valley Golf Course, Lancaster County, Pa.; and (7) approved issuance of a corrective docket to Nature's Way Purewater Systems, Inc. to correct an error misidentifying a project feature for which monitoring is required.
The Commission approved the following project applications:
1. Project Sponsor and Facility: Borough of Adamstown, Adamstown Borough, Lancaster County, Pa. Renewal of groundwater withdrawal of up to 0.069 mgd (30-day average) from Well 4 (Docket No. 19801104).
2. Project Sponsor and Facility: Anadarko E&P Company LP (Second Fork Larrys Creek), Mifflin Township, Lycoming County, Pa. Surface water withdrawal of up to 0.200 mgd (peak day).
3. Project Sponsor and Facility: Cabot Oil & Gas Corporation (Susquehanna River), Susquehanna Depot Borough, Susquehanna County, Pa. Renewal of surface water withdrawal of up to 1.500 mgd (peak day) (Docket No. 20080908).
4. Project Sponsor and Facility: Cabot Oil & Gas Corporation (Susquehanna River), Great Bend Township, Susquehanna County, Pa. Renewal of surface water withdrawal of up to 2.000 mgd (peak day) (Docket No. 20080905).
5. Project Sponsor and Facility: Carrizo (Marcellus), LLC (Muddy Run), Gulich Township, Clearfield County, Pa. Surface water withdrawal of up to 0.720 mgd (peak day).
6. Project Sponsor and Facility: East Hempfield Township Municipal Authority, East Hempfield Township, Lancaster County, Pa. Surface water withdrawal of up to 0.070 mgd (30-day average) from S-1 (Baker Spring); and Groundwater withdrawal of up to 0.268 mgd (30-day average) from Well W-1, 0.673 mgd (30-day average) from Well W-2, 0.264 mgd (30-day average) from Well W-3, 0.321 mgd (30-day average)
7. Project Sponsor and Facility: Enerplus Resources (USA) Corporation (West Branch Susquehanna River), East Keating Township, Clinton County, Pa. Surface water withdrawal of up to 2.000 mgd (peak day).
8. Project Sponsor and Facility: EXCO Resources (PA), LLC (Larrys Creek), Mifflin Township, Lycoming County, Pa. Renewal of surface water withdrawal with modification, for a total of 0.200 mgd (peak day) (Docket No. 20080936).
9. Project Sponsor and Facility: Forest Springs Water Company, Wayne Township, Schuylkill County, Pa. Groundwater withdrawal of up to 0.075 mgd (30-day average) from Borehole BH-1, and modification to consumptive water use approval removing previous sources Spring 1 and Spring 2 and adding new source Borehole BH-1 (Docket No. 20010206).
10. Project Sponsor: Hydro Recovery-Antrim LP. Project Facility: Antrim Treatment Plant, Duncan Township, Tioga County, Pa. Modification to project features and to increase surface water withdrawal by an additional 1.152 mgd, for a total of 1.872 mgd (peak day) (Docket No. 20090902).
11. Project Sponsor and Facility: Keystone Clearwater Solutions, LLC (Lycoming Creek), Lewis Township, Lycoming County, Pa. Modification to increase surface water withdrawal, for a total of 2.125 mgd (peak day) (Docket No. 20110616).
12. Project Sponsor and Facility: Keystone Clearwater Solutions, LLC (Moshannon Creek), Snow Shoe Township, Centre County, Pa. Renewal of surface water withdrawal of up to 1.000 mgd (peak day) (Docket No. 20080946).
13. Project Sponsor and Facility: Keystone Clearwater Solutions, LLC (West Branch Susquehanna River), Goshen Township, Clearfield County, Pa. Renewal of surface water withdrawal of up to 1.000 mgd (peak day) (Docket No. 20080944).
14. Project Sponsor and Facility: Roaring Spring Water—Division of Roaring Spring Blank Book, Roaring Spring Borough, Blair County, Pa. Modification to increase consumptive water use by an additional 0.125 mgd, for a total of 0.255 mgd (peak day) (Docket No. 20120309), and to increase surface water withdrawal by an additional 0.131 mgd, for a total of 0.302 mgd (peak day) (Docket No. 20120309).
15. Project Sponsor and Facility: Talisman Energy USA Inc. (Susquehanna River), Sheshequin Township, Bradford County, Pa. Renewal of surface water withdrawal of up to 1.500 mgd (peak day) (Docket No. 20080909).
The following project applications were tabled by the Commission:
1. Project Sponsor and Facility: Caernarvon Township Authority, Caernarvon Township, Berks County, Pa. Application for renewal of groundwater withdrawal of up to 0.035 mgd (30-day average) from Well 6 (Docket No. 19820912).
2. Project Sponsor and Facility: EQT Production Company (Pine Creek), Porter Township, Lycoming County, Pa. Application for surface water withdrawal of up to 1.000 mgd (peak day).
3. Project Sponsor and Facility: Falling Springs Water Works, Inc. (Falling Springs Reservoir), Ransom Township, Lackawanna County, Pa. Application for surface water withdrawal of up to 0.800 mgd (peak day).
4. Project Sponsor and Facility: Gaberseck Brothers (Odin Pond 2), Keating Township, Potter County, Pa. Application for surface water withdrawal of up to 0.249 mgd (peak day).
5. Project Sponsor and Facility: Houtzdale Municipal Authority (Beccaria Springs), Gulich Township, Clearfield County, Pa. Application for surface water withdrawal of up to 10.000 mgd (peak day).
6. Project Sponsor and Facility: Southwestern Energy Production Company (Middle Lake), New Milford Township, Susquehanna County, Pa. Application for surface water withdrawal of up to 0.720 mgd (peak day).
Pub. L. 91-575, 84 Stat. 1509
In notice document 2012-26799, appearing on page 65929 in the issue of Wednesday, October 31, 2012, make the following correction:
On page 65929, in the first column, under the
Federal Highway Administration (FHWA), DOT.
Notice of limitation on claims for judicial review of actions by FHWA and other federal agencies.
By this notice, the FHWA is advising the public of final agency actions subject to 23 U.S.C. 139(l)(1). The actions relate to a proposed project to improve the Brent Spence Bridge over the Ohio River, as well as improvements to Interstate Routes 71 and 75 and interchanges in the City of Cincinnati, Hamilton County, State of Ohio and City of Covington, Kenton County, Commonwealth of Kentucky, including a new bridge over the Ohio River. This notice covers those Federal agency actions to grant licenses, permits, and approvals for the project.
A claim seeking judicial review of the Federal agency actions on the highway project will be barred unless the claim is filed on or before May 1, 2013. If the Federal law that authorizes judicial review of a claim provides a time period of less than 180 days for filing such claim, then that shorter time period still applies.
Noel F. Mehlo Jr., Environmental Program Manager, Federal Highway Administration, 200 North High Street, Room 328, Columbus, Ohio 43215, Telephone: (614) 280-6896; or Stefan Spinosa, PE, Ohio Department of Transportation (ODOT), 505 South State Route 741, Lebanon, Ohio 45036, Telephone: (513) 933-6639.
Notice is hereby given that the FHWA and other Federal agencies including, but not limited to; the United States Coast Guard, United States Army Corps of Engineers, United States Fish and Wildlife Service, Advisory Council on
1.
2.
3.
4.
5.
6.
7.
8.
23 U.S.C. 139(l)(1).
Union Railroad Company (URR) and McKeesport Connecting Railroad Company (MCK) (collectively, applicants) have jointly filed a verified notice of exemption under 49 CFR 1180.2(d)(3) for a corporate family transaction pursuant to which MCK would be merged into URR.
URR and MCK are both Delaware corporations and Class III rail carriers. United States Steel Corporation (USS), a noncarrier, owns all of the issued and outstanding stock of Transtar, Inc. (Transtar), a noncarrier holding company, which owns all of the issued and outstanding stock of six Class III rail carriers (collectively, the Transtar railroads), including URR and MCK.
URR is a switching and terminal railroad that operates approximately 27.8 route miles, extending from an interchange with the Bessemer & Lake Erie Railroad at North Bessemer, PA, south to an interchange with Wheeling & Lake Erie Railway at Mifflin Junction, PA, with branches to Clairton, South Duquesne and Munhall, PA. URR connects at the intermediate point of Bessemer, PA, with CSX Transportation, Inc. (CSXT) and at Kenny and Clarion, PA, with Norfolk Southern Railway. MCK is a switching and terminal railroad that operates at McKeesport, PA. It connects with CSXT and serves USS' McKeesport Tubular Operations.
Applicants state that, pursuant to the provisions of a Plan of Merger executed by the parties, MCK will be merged into URR upon the effective date of the merger, with URR as the surviving corporation. According to applicants, the corporate existence of the surviving corporation will continue unimpaired and unaffected by the merger.
Unless stayed, the exemption will be effective on November 18, 2012. Applicants state that the merger of MCK into URR is expected to become effective as of January 1, 2013, and that the transaction will be consummated as of that date.
According to applicants, the purpose of the corporate transaction is to simplify the corporate structure of the Transtar railroads by reducing the number of subsidiary railroads controlled by Transtar to five which will reduce the administrative, accounting, reporting, and related burdens associated with the maintenance of the two separate corporate entities.
This is a transaction within a corporate family of the type specifically exempted from prior review and approval under 49 CFR 1180.2(d)(3). Applicants state that the transaction will not result in adverse changes in service levels, significant operational changes, or any changes in the competitive balance with carriers outside the corporate family. Applicants further state that the service presently provided by the involved carriers will be continued by URR and all current connections of the involved carriers will be continued.
Under 49 U.S.C. 10502(g), the Board may not use its exemption authority to relieve a rail carrier of its statutory obligation to protect the interests of its employees. Section 11326(c), however, does not provide for labor protection for transactions under sections 11324 and 11325 that involve only Class III rail carriers. Accordingly, the Board may not impose labor protective conditions here, because all of the carriers involved are Class III rail carriers.
If the notice contains false or misleading information, the exemption is void
An original and 10 copies of all pleadings, referring to Docket No. FD 35679, must be filed with the Surface Transportation Board, 395 E Street SW., Washington, DC 20423-0001. In addition, one copy of each pleading must be served on John A. Vuono, Vuono & Gray, LLC, 310 Grant Street, Suite 2310, Pittsburgh, PA 15219.
Board decisions and notices are available on our Web site at
By the Board, Rachel D. Campbell, Director, Office of Proceedings.
Under 49 CFR 1011.7(a)(2)(x)(A), the Director of the Office of Proceedings (Director) is delegated the authority to determine whether to issue notices of exemption under 49 U.S.C. 10502 for lease and operation transactions under 49 U.S.C. 10902. However, the Board reserves to itself the consideration and disposition of all matters involving issues of general transportation importance. 49 CFR 1011.2(a)(6). Accordingly, the Board revokes the delegation to the Director with respect to issuance of the notice of exemption for lease and operation of the rail lines at issue in this case. The Board determines that this notice of exemption should be issued, and does so here.
According to Arkansas-Oklahoma Railroad, Inc. (AOK), a Class III rail carrier, AOK and Union Pacific Railroad Company (UP) have entered into a new Lease Agreement (Agreement). AOK has filed a verified notice of exemption under 49 CFR 1150.41
Pursuant to 49 CFR 1150.43(h), AOK states that, although the Agreement contains no direct restrictions on interchange, the lease fee is based upon the percentage of traffic AOK interchanges with UP. AOK states that this arrangement is unchanged from the original lease agreement covering the lines.
AOK certifies that its projected annual revenues as a result of this transaction will not exceed those that would qualify it as a Class III rail carrier and will not exceed $5 million.
AOK states that consummation of the transaction will occur on or about November 19, 2012. The earliest the transaction can be consummated is November 18, 2012, the effective date of the exemption (30 days after the verified notice was filed).
If the verified notice contains false or misleading information, the exemption is void
An original and 10 copies of all pleadings, referring to Docket No. FD 35667, must be filed with the Surface Transportation Board, 395 E Street SW., Washington, DC 20423-0001. In addition, one copy of each pleading must be served on Daniel A. LaKemper, General Counsel, Arkansas-Oklahoma Railroad, Inc., P.O. Box 185, Morton, IL 61550.
Board decisions and notices are available on our Web site at
1. The delegation of authority to the Director of the Office of Proceedings under 49 CFR 1011.7(a)(2)(x)(A) to determine whether to issue a notice of exemption in this proceeding is revoked.
2. Notice of the exemption will be published in the
3. This decision is effective on the date of service.
Decided: October 29, 2012.
By the Board, Chairman Elliott, Vice Chairman Mulvey, and Commissioner Begeman. Vice Chairman Mulvey dissented with a separate expression.
Vice Chairman Mulvey, dissenting.
According to AOK's notice, AOK has been leasing a line of railroad from UP since 1997 under an agreement that gives AOK a financial incentive to interchange its traffic with UP, rather than with Kansas City Southern (KCS). The shippers whose traffic was subject to the interchange commitment contained in the 1997 lease may or may not have been aware of it, given that the notice authorizing that lease made no mention of the presence of a special lease fee arrangement.
In support of its desire to continue a lease credit arrangement encouraging interchange with UP rather than KCS—one that has already been in place for more than 15 years—AOK argues that the interchange commitment does not materially change its interchange practices. That argument, of course, begs the question as to why such a provision
On November 1, 2012, the Board announced that it was proposing new rules to require carriers to disclose more information when proposing transactions, such as this one, that contain an interchange commitment.
Securities and Exchange Commission.
Final rule.
The Securities and Exchange Commission (“SEC” or “Commission”) is adopting a new rule in accordance with the Securities Exchange Act of 1934 (“Exchange Act”), and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). The new rule establishes minimum requirements regarding how registered clearing agencies must maintain effective risk management procedures and controls as well as meet the statutory requirements under the Exchange Act on an ongoing basis.
Jeffrey Mooney, Assistant Director; Katherine Martin, Senior Special Counsel; Doyle Horn, Special Counsel; Stephanie Park, Special Counsel; or Justin Byrne, Attorney-Advisor; Office of Clearance and Settlement, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010 at (202) 551-5710.
The Commission is adopting rules for the operation of a registered clearing agency that identify minimum standards designed to enhance the regulatory framework for clearing agency supervision.
Congress directed the Commission to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of securities transactions when it added Section 17A to the Exchange Act as part of the Securities Acts Amendments of 1975.
The Commission used this experience with regulating clearing agencies to help address developments recently in the over-the-counter (“OTC”) derivatives markets. In December 2008, the Commission acted to facilitate the central clearing of credit default swaps (hereinafter referred to as “credit default swaps” or “CDS”), the largest category of OTC security-based swaps, by permitting certain entities that performed central counterparty (“CCP”) services to clear and settle credit default swaps on a temporary, conditional basis.
Section 17A of the Exchange Act
On July 21, 2010, President Barack Obama signed the Dodd-Frank Act into law.
Title VII of the Dodd-Frank Act (“Title VII”) provides the Commission and the Commodity Futures Trading Commission (“CFTC”) with enhanced authority to regulate certain OTC derivatives in response to the recent financial crisis.
Title VII was designed to provide greater certainty that, wherever possible and appropriate, swap and security-based swap contracts formerly traded exclusively in the OTC market are centrally cleared.
In addition to the provisions from Title VII that expand the Commission's authority under the Exchange Act to include activities related to security-based swaps, Title VIII of the Dodd-Frank Act, entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (“Clearing Supervision Act”), establishes an enhanced supervisory and risk control system for systemically important clearing agencies and other financial market utilities (“FMUs”).
The definition of “financial institution,” which is contained in Section 803(5) of the Clearing Supervision Act, outlines numerous exclusions but defines financial institution as a branch or agency of a foreign bank, an organization operating under Section 25 or 25A of the Federal Reserve Act, a credit union, a broker or dealer, an investment company, an insurance company, an investment adviser, a futures commission merchant, commodity trading advisor or commodity pool operator and any company engaged in activities that are financial in nature or incidental to a financial activity. 12 U.S.C. 5462(5)(A).
Section 17A(i) of the Exchange Act provides that the Commission, in establishing clearing agency standards and in its oversight of clearing agencies, may conform such standards and such oversight to reflect evolving international standards.
The Board applies these standards in its supervisory process and expects systemically important systems, as determined by the Board and subject to its authority, to complete a self-assessment against the standards set forth in the policy.
On March 3, 2011, the Commission proposed for comment a series of rules related to standards for the operation and governance of clearing agencies (“Proposing Release”).
(1) Proposed Rule 17Ad-22, which would require certain minimum standards for all clearing agencies registered with the Commission;
(2) Proposed Rule 17Aj-1, which would require dissemination of pricing and valuation information by security-based swap CCPs;
(3) Proposed Rule 17Ad-23, which would require all clearing agencies to have adequate safeguards and procedures to protect the confidentiality of trading information of clearing agency participants;
(4) Proposed Rule 17Ad-24, which would exempt certain security-based swap dealers and security-based swap execution facilities from the definition of clearing agency;
(5) Proposed Rule 17Ab2-1, which would amend an existing Commission rule concerning registration of clearing agencies to account for security-based swap clearing agencies and to make other technical changes;
(6) Proposed Rule 17Ad-25, which would require all clearing agencies to have procedures that identify and address conflicts of interest;
(7) Proposed Rule 17Ad-26, which would require clearing agencies to set standards for all members of their boards of directors or committees; and
(8) Proposed Rule 3Cj-1, which is modeled on Section 3C(j) of the Exchange Act and would require all clearing agencies to designate a chief compliance officer.
The Commission also noted in the Proposing Release that the definition of clearing agency under Section 3(a)(23)(A) of Exchange Act includes any person who:
• Acts as an intermediary in making payments or deliveries or both in connection with transactions in securities;
• Provides facilities for the comparison of data regarding the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or for the allocation of securities settlement responsibilities;
• Acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry, without physical delivery of securities certificates (such as a securities depository); or
• Otherwise permits or facilitates the settlement of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates (such as a securities depository).
Since the publication of the Proposing Release, the Commission has received 25 comment letters on the Proposing Release from a broad range of market participants, and the Commission and staff also had discussions with representatives of clearing agencies, trade associations, public interest groups and other interested parties.
After careful review and consideration of the comments, the Commission is today adopting Rule 17Ad-22, with certain modifications discussed below, to address comments received. As adopted, Rule 17Ad-22 is meant to establish minimum requirements for registered clearing agency risk management practices and operations with due consideration given to equivalent standards of other regulators in the United States
The Proposing Release was published in the
Set forth below is a description of the comments received by the Commission that express concerns about the general approach to clearing agency reform reflected in the Proposing Release. The Commission has carefully considered these general comments that were provided concerning the larger framework for our rule making efforts involving clearing agencies.
Three commenters asked for the implementation of the proposed rules to be subject to appropriate phase-in periods.
One commenter asked the Commission to publish any modifications it may make to the proposed rules for an additional comment period.
One commenter stated that clearing agency rules such as those related to governance, conflicts of interest, registration, and financial resources should be adopted early in the implementation of rules for the security-based swap market.
In light of the request by commenters for a phased approach to implementation of the clearing agency standards set forth in the Proposing Release,
• In the first stage, the Commission is adopting only Rule 17Ad-22. The compliance date for Rule 17Ad-22 will be sixty days from publication in the
• The second planned stage in the implementation of standards for clearing agencies is the consideration by the Commission of rules that correspond to proposed Rules 17Aj-1; 17Ad-23; 17Ad-24; 17Ab2-1 and 3Cj-1 as well as the clearing agency governance and conflict of interest concerns that its previous proposal addressed through its proposal of Rule 17Ad-25, Rule 17Ad-26 and Regulation MC.
• The third planned stage is for the Commission to consider rules tailored to clearing agencies that perform certain post-trade processing services. The Commission sought comment concerning these types of clearing agencies in the Proposing Release and preliminarily intends to propose rules addressed to them as described in more detail in Sections II.B.4 and III.A below. As appropriate, the Commission may
The Commission believes the phased approach to implementation provides clearing agencies with the benefit of additional time with respect to some of the requirements contemplated in the Proposing Release, while putting into place minimum standards for operational and risk management practices of registered clearing agencies. This approach will allow the Commission to consider further the comments received on the Proposing Release and evolution of clearance and settlement activity in light of the requirements of Title VII and Title VIII of the Dodd-Frank Act, including the implementation of the mandatory clearing requirements with respect to security-based swaps mandated by the Dodd-Frank Act. Because the Commission is adopting 17Ad-22 largely as proposed, the Commission is not republishing Rule 17Ad-22 for additional comments.
We believe that the implementation of these standards is an important first step in crafting regulatory changes contemplated by Title VII and Title VIII of the Dodd-Frank Act as intended by Congress. The adoption of Rule 17Ad-22 will also allow the Commission to coordinate its activities as the supervisory agency for clearing agencies designated as systemically important financial market utilities under Title VIII of the Dodd-Frank Act with the complementary responsibilities of the Federal Reserve.
Generally, commenters supported the requirements of proposed Rules 17Ad-22(b)(1)-(4) that would govern the risk management standards and practices of registered clearing agencies that perform CCP services or CCPs.
For instance, proposed Rule 17Ad-22(b)(1) would require a CCP to establish, implement, maintain and enforce written policies and procedures reasonably designed to measure credit exposures to participants at least once a day and limit exposures to potential losses from defaults by its participants in normal market conditions so that the operations of the clearing agency would not be disrupted and non-defaulting participants would not be exposed to losses that they cannot anticipate or control. Of those commenters who asked the Commission to consider modifications to the proposed rule, two suggested that public disclosure requirements should accompany any choice made by a CCP to reduce margin requirements on the basis of an inverse or offsetting correlation between participants' positions.
Proposed Rule 17Ad-22(b)(2) would require a CCP to establish, implement, maintain and enforce written policies and procedures reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions and use risk-based models
With respect to proposed Rule 17Ad-22(b)(3), commenters asked the Commission to give further consideration to whether it is appropriate to create different financial resources standards for a security-based swap CCP. As proposed, the rule would require a CCP to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain sufficient financial resources to withstand, at a minimum, a default by the participant to which it has the largest exposure in extreme but plausible market conditions, provided that a security-based swap clearing agency would be required to maintain sufficient financial resources to withstand, at a minimum, a default by the two participants to which it has the largest exposures in extreme but plausible market conditions. One commenter argued that characteristics of the instruments traded in the security-based swap market support differentiating the requirements of the rule
Similarly, some commenters asked the Commission to reconsider how prescriptive it should be in its approach to the requirements of Rule 17Ad-22(b)(4).
A more complete discussion of these comments and others that pertain to Rules 17Ad-22(b)(1)-(4) is contained in Section III.C below.
The Commission acknowledges the many thoughtful comments we received regarding the risk management standards and practices reflected in the Proposing Release and agrees that the topic deserves particular care and attention.
• Many of the risk management standards and practices underlying proposed Rule 17Ad-22 require relatively significant judgments to be made and at times there are no established or definitive sources of guidance to aid decision-making. Therefore, for a CCP's risk management practices to be most effective, the CCP must have some degree of flexibility to tailor the practices appropriately to meet the demands of the specific financial markets it serves, and the Commission's interpretation of Rule 17Ad-22 should not be rigidly applied as uniform standards without variation.
• The specific risk management practices most appropriate for any individual CCP and for registered clearing agencies generally are unlikely to remain static.
For example, the Commission recognizes that a less prescriptive approach can help promote efficient practices and encourage regulated entities to consider how to manage their regulatory obligations and risk management practices in a way that complies with Commission rules while accounting for the particular characteristics of their business and believes the approach reflected in proposed Rule 17Ad-22 is consistent with this perspective.
The Commission believes that one outgrowth of this less prescriptive approach is that there may be additional questions from the clearing agencies regarding how various regulatory requirements apply with regard to clearance and settlement services for particular instruments or products having different market characteristics. Commenters were particularly concerned with the application of Rules 17Ad-22(b)(1)-(4) and with particular risk management standards, including, but not limited to, the proper amount of financial resources, measurement and management of credit exposures, back testing, model validation, use of concentration, liquidity and other factors to determine margin requirements, and the appropriate meaning of “extreme but plausible market conditions.”
We note that the Commission or its staff may from time to time issue additional guidance to the extent necessary to address questions arising from the dynamic nature of clearing agency risk management practices, changing market practices, and technological advances.
To date, the Exchange Act and the related regulations promulgated by the Commission have not established particularized requirements regarding clearing agencies' risk management practices.
To meet this standard, the current practice of registered CCPs is to calculate daily margin requirements using risk-based models to ensure coverage at a 99% confidence interval over a designated time horizon.
Furthermore, the Commission notes that a CCP can develop rules and
Three commenters strongly encouraged the Commission and the CFTC to coordinate and cooperate in the development of their parallel regulation of clearing agencies and derivatives clearing organizations (“DCOs”) to build a harmonized U.S. framework for OTC derivatives and to bring appropriate consistency to the two agencies' regulation of similar products, practices and markets.
One commenter stressed that rules applicable to clearance and settlement of single name credit default swaps should be comparable to the final requirements applicable to clearance and settlement of index-based credit default swaps because clearinghouses will undoubtedly service both and therefore different sets of compliance standards could lead to unnecessary operational inefficiencies and may have the unintended consequence of tilting the market in favor of one class of instruments.
Three commenters urged the Commission to incorporate specific requirements for processing, clearing and transfer of customer positions.
Three commenters expressed a preference for principles-based rather than prescriptive rules.
One commenter strongly encouraged the Commission to avoid final action on its proposed rules before it has clarity on what clearinghouse regulations are ultimately adopted by European and United Kingdom regulators and what approaches to regulation are embraced by the final FMI Report.
We recognize that both domestic and foreign regulators may be undertaking similar regulatory initiatives with respect to risk management and operation of clearing agencies. We believe that adopting Rule 17Ad-22 now, largely in the form proposed, and the phased implementation schedule set forth above
In the Proposing Release, the Commission identified certain services in the area of post-trade securities processing that may be captured by the definition of a clearing agency in the Exchange Act. Two commenters generally supported the distinctions the Commission proposed for rules that should apply to all types of clearing agencies versus those that should apply only to CCPs.
We are not persuaded by commenters who suggested that post-trade processing services should be automatically excluded from the definition of a clearing agency in the Exchange Act.
On July 1, 2011, the Commission published a conditional, temporary exemption from clearing agency registration for entities that perform certain post-trade processing services for security-based swap transactions.
The Commission preliminarily agrees with commenters that it is appropriate to consider a tailored framework of regulation for clearing agencies that perform certain post-trade processing services because such activities do not involve the same credit, market and operational risk concerns that are presented by clearing agencies that perform CCP or CSD services.
(1) Calculation and communication of unsettled financial transactions between counterparties;
(2) netting of transactions;
(3) provision and maintenance of trade, contract, or instrument information;
(4) management of risks and activities associated with continuing financial transactions;
(5) transmittal and storage of payment instructions;
(6) movement of funds;
(7) final settlement of financial transactions; and
(8) other similar functions that the Council may determine.
Accordingly, at this time, the Commission does not intend for Rule 17Ad-22 to apply to clearing agencies that perform post-trade processing services. The scope of Rule 17Ad-22 will be limited to clearing agencies that are registered with the Commission and the rule will not apply to any clearing agencies operating pursuant to an exemption from registration as a clearing agency granted by the Commission, unless the terms of future exemptions specifically contemplate its application, in whole or in part. The Commission has clarified this as part of the final Rule 17Ad-22 adopted today by adding the word “registered” before the term “clearing agency” appearing in the first instance in paragraphs (b), (c)(1), (c)(2), and (d). For this reason, references to the term “clearing agency” in this release are generally intended to capture only registered clearing agencies, unless the context suggests otherwise. The Commission may consider at a later time whether rules tailored to clearing agencies that provide post-trade processing services would be appropriate.
The Commission is adopting Rule 17Ad-22 with minor modifications from the proposal to implement the statutory provisions for clearing agencies under the Exchange Act. Rule 17Ad-22 requires registered clearing agencies to establish, implement, maintain and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for their operations and risk management practices on an ongoing basis. These minimum requirements will work in tandem with the requirements in
The Commission anticipates that the clearing agency's rules and procedures will likely continue to evolve so that the clearing agency can adequately respond to changes in technology, legal requirements, trading volume, trading practices, linkages between financial markets and the financial instruments traded in the markets that a clearing agency serves. Accordingly, registered clearing agencies must evaluate continually and make appropriate updates and improvements to their operations and risk management practices to facilitate the prompt and accurate clearance and settlement of securities transactions and to safeguard securities and funds in their custody or control.
Rule 17Ad-22 consists of the following parts: (1) Rule 17Ad-22(a) provides definitions for certain terms; (2) Rule 17Ad-22(b) contains risk management and participation requirements for registered CCPs; (3) Rule 17Ad-22(c) establishes a reporting requirement for registered clearing agencies with respect to certain matters including financial resources and methodologies used to calculate financial requirements; and (4) Rule 17Ad-22(d) requires registered clearing agencies, as applicable, to meet certain minimum standards.
As noted above, at this time, the Commission intends for Rule 17Ad-22 to apply only to registered clearing agencies. The Commission may consider at a later time whether any additional rules tailored to clearing agencies that perform post-trade processing services would be appropriate. In addition, Rule 17Ad-22 will not apply to any clearing agencies operating pursuant to an exemption from registration as a clearing agency granted by the Commission unless the terms of future exemptions specifically contemplate its application, in whole or in part.
Proposed Rule 17Ad-22(a) contains five definitions. Proposed Rule 17Ad-22(a)(1) would define “central counterparty” as a clearing agency that interposes itself between counterparties to securities transactions to act functionally as the buyer to every seller and as the seller to every buyer. Proposed Rule 17Ad-22(a)(2) would define “central securities depository services” to mean services of a clearing agency that is a securities depository as described in Section 3(a)(23) of the Exchange Act.
Commenters generally supported proposed Rule 17Ad-22(a)(3) because it would require a clearing agency to take account of an entire group of affiliated entities when complying with the financial resources requirements of proposed Rule 17Ad-22(b)(3), as well as the requirements in proposed Rule 17Ad-22(d)(14) for risk controls to address participants' failures to settle.
One commenter expressed concern about the definition of “normal market conditions” as conditions in which the expected movement of the price of cleared securities would produce changes in a clearing agency's exposures to its participants that would be expected to breach margin requirements or other risk control mechanisms only one percent of the time.
The Commission received no comments on proposed Rules 17Ad-22(a)(1), (2) and (5).
As described more fully below, the Commission is adopting Rules 17Ad-22(a)(1), (2), (4) and (5) as proposed. We are also adopting Rule 17Ad-22(a)(3) with certain modifications to address concerns of commenters.
We agree with commenters who suggested that in the interest of clarity and to avoid confusion with use of the term “participant” elsewhere in Exchange Act regulations, Rule 17Ad-22(a)(3) should be modified so that the term defined by the rule is “participant family” instead of “participant.” We are also modifying Rule 17Ad-22(a)(3) with respect to the language that describes the test for determining when a sufficient relationship of control exists between participants to qualify them as a “participant family.” The definition has been expanded to include entities controlled by a participant and to cover direct and indirect relationships. Accordingly, Rule 17Ad-22(a)(3) now provides that participants will be deemed to be a “participant family” for purposes of Rules 17Ad-22(b)(3) and 17Ad-22(d)(14) when “a participant directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, another participant.” This modification is intended to respond to the recommendation of commenters and more closely conform the text of Rule 17Ad-22(a)(3) to the language in which this standard appears in other contexts within the U.S. federal securities
The Commission agrees with the commenter that well-designed margin models include factors that adjust to periods of market turbulence. The Commission, however, is not persuaded by the argument that the definition of normal market conditions in Rule 17Ad-22(a)(4) is at odds with the concept of certain periods of market turbulence.
The definition of “normal market conditions” in Rule 17Ad-22(a)(4) is also modeled on relevant and analogous international standards. The RCCP stipulates that a CCP should limit its exposures to potential losses from defaults by its participants in normal market conditions and defines “normal market conditions” as price movements that produce changes in exposures that are expected to breach margin requirements or other risk controls only 1% of the time.
Rules 17Ad-22(b)(1)-(4) contain several requirements that address risk management practices by registered CCPs. Specifically, the proposed rules would create standards with respect to: (1) Measurement and management of credit exposures; (2) margin requirements; (3) financial resources; and (4) annual evaluations of the performance of the clearing agency's margin models.
During the comment period, commenters pointed out that to properly frame these requirements requires a great deal of technical expertise and that a failure to properly allow that expertise to influence final rules adopted by the Commission could result in inefficient requirements that lack the proper degree of flexibility to achieve prudent risk management practices without being overly burdensome. In some cases, commenters argued that personnel at the clearing agencies possess the requisite levels of experience and expertise to help the Commission shape CCP risk management standards.
As an initial matter, the Commission believes that Rules 17Ad-22(b)(1)-(4) are appropriate minimum standards for registered CCPs and that they are consistent with existing international standards of practice. However, we agree that the process of evaluating, testing and refining CCP risk management standards will be ongoing and necessarily include an open dialogue among the CCPs, investors, the Commission and various other interested parties. In particular, the Commission will carefully consider further input from interested parties obtained through outreach to various constituencies and in response to any rules or rule amendments that may be proposed by the Commission upon considering the international standards developed by CPSS-IOSCO in the FMI Report.
Further, Rules 17Ad-22(b)(1), (2), and (3) establish targets for clearing agencies to meet without prescribing a particular method. Accordingly, the rules provide clearing agencies with the flexibility to establish risk management procedures (
Proposed Rule 17Ad-22(b)(1), as proposed, would require a CCP to establish, implement, maintain and enforce written policies and procedures reasonably designed to measure its credit exposures to its participants at least once each day, and limit its exposures to potential losses from defaults by its participants under normal market conditions
Three commenters urged the Commission to consider adopting a more prescriptive version of the rule.
The Commission is adopting Rule 17Ad-22(b)(1) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. We agree with commenters that the risks CCPs face are subject to change over time due to the potential for significant changes in the risk profiles of participants and if those risks are not appropriately measured and managed by the CCP, they can result in the accrual of significant liabilities.
The Commission agrees with commenters that clearing agencies may need to measure credit exposures more frequently than once each day in order to ensure that the CCP can facilitate the prompt and accurate clearance and settlement of securities transactions and ensure that they operate safely and efficiently. That point of view is reflected in the rule requirement that the measurement must be performed at least once each day. However, the Commission believes that a less prescriptive and more flexible rule sets a more appropriate baseline standard. Each CCP is exposed to participants in different markets characterized by different trading patterns, volumes, liquidity, transparency and other unique market characteristics. Rather than prescribing a specific frequency for risk exposure measurements (other than the once daily minimum), the Commission believes that CCPs should monitor exposure and margin coverage on an intraday basis depending on the individual risk characteristics of their members and businesses, and adjust their risk management processes as needed. This stance is also consistent with our understanding that the practice at many CCPs is to measure credit exposures more than once daily.
While the Commission also agrees with commenters who expressed the view that a CCP should provide reductions in initial margin requirements based on offsetting or inversely correlated positions only if the CCP can demonstrate a robust correlation between those positions—including under stressed market conditions,
As adopted, Rule 17Ad-22(b)(1) does not require that a registered CCP publicly disclose its correlation methodology and related margin requirements.
We are also adopting Rule 17Ad-22(b)(1), as it was proposed, to require registered CCPs to establish, implement, maintain, and enforce written policies and procedures reasonably designed to limit their exposures to potential losses from participant defaults. By collecting sufficient margin and having other liquid resources at its disposal, the Commission expects that a clearing agency will be able to limit its exposures to potential losses from defaults by clearing members in normal market conditions.
Proposed Rule 17Ad-22(b)(2) would require a CCP to establish, implement, maintain and enforce written policies and procedures reasonably designed to: (i) Use margin requirements to limit its credit exposures to participants under normal market conditions;
One commenter recommended that the rule be amended to require that the CCP's margin requirements must be sufficient to limit credit exposures to both the CCP's participants and the clients of the CCP's participants.
In response to a question asked by the Commission in the Proposing Release, one commenter stated that adopting Rule 17Ad-22(b)(2) as proposed is unlikely to create the risk that CCPs will lower margin standards to compete for business.
One commenter contended that certain aspects of a CCP's margin methodology, such as choice of confidence levels (used to estimate expected shortfall), the number of days' data relied on, and the various weights used to determine stress test charges do not need to be reviewed on a monthly basis.
One commenter focused more narrowly on the appropriate confidence level that should be applied to initial margin collected by a clearing agency.
The Commission is adopting Rule 17Ad-22(b)(2) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. This requirement recognizes that the collection of assets (
The Commission does not believe it is necessary to amend the rule to state that a registered CCP's margin requirements must limit credit exposures to customers of participants as well as participants.
The Commission is aware that some CCPs may already have the ability to measure credit exposures to customers of participants as well as to participants. To the extent that such margin practices are already in place or develop over time to help ensure prompt and accurate clearance and settlement in the market the clearing agency serves, we believe those practices can be effective in limiting aggregate credit exposures of clearing agencies. We agree that the ability to limit credit exposures to customers of participants using margin may help inform and shape appropriate credit risk management practices in certain cases—for example, where (i) direct access to a clearing agency by some participants may be relatively more constrained by the operational or financial demands commensurate with participation; (ii) open interest periods associated with the instruments cleared by the clearing agency are relatively significant; or (iii) customer margin requirements are established independently from the CCP (
The Commission is not amending Rule 17Ad-22(b)(2) to specify which aspects or components of the CCP's risk-based models must be reviewed in the context of the CCP's monthly review.
The Commission notes that, to the extent a CCP believes that an assumption in a model or parameter does not lend itself to empirical testing, a review of that assumption can in some cases be accomplished by the CCP performing a theoretical assessment of that assumption compared to alternative assumptions. For example, a CCP may evaluate the appropriateness of the number of days of market data used in its margin model or the expected amount of time needed to liquidate a security in an event of default by comparing the performance of the margin model when a range of representative values is input.
Also consistent with the intent of preserving appropriate flexibility for clearing agencies to tailor their methods of achieving compliance, the Commission is not prescribing a particular confidence level for initial margin in Rule 17Ad-22(b)(2).
We agree with commenters who asserted that a CCP's disclosure of its margin-setting methodology to customers facilitates prompt and accurate clearance and settlement by enabling market participants to better plan for margin costs associated with the use of the clearing agency.
Proposed Rule 17Ad-22(b)(3) would require a CCP to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain sufficient financial resources to withstand, at a minimum, a default by the participant to which it has the largest exposure in extreme but plausible market conditions, provided that a security-based swap clearing agency would be required to maintain sufficient financial resources to withstand, at a minimum, a default by the two participants (also referred to as the “cover two” standard) to which it has the largest exposures in extreme but plausible market conditions.
Commenters expressed a wide range of views concerning proposed Rule 17Ad-22(b)(3). Some commenters generally supported the proposed rule.
A commenter also suggested that CCPs should consider the simultaneous default of multiple clearing members when sizing their financial resources but that a simultaneous default of the two largest clearing members is an extremely implausible occurrence, and accordingly it is not a scenario that should be embedded as a fixed requirement in the Commission's rules.
One commenter disagreed with assertions in the Proposing Release that the performance of CCP services for security-based swaps entails risks that are unique to those products and that those unique risks support the proposed “cover two” requirement.
Commenters supported the position that the Commission's regulatory standards for CCPs should be modified where appropriate to account for the relevant work of international standard setters such as the CPSS and IOSCO.
Commenters disagreed over what role the Commission should play in defining the term “extreme but plausible market conditions” as that term appears in proposed Rule 17Ad-22(b)(3).
The Commission is adopting Rule 17Ad-22(b)(3) with certain modifications to address concerns raised by commenters, including but not limited to the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies and clarifications relating to the term “participant family” as discussed above.
While the Commission is sensitive to the consequences of establishing a different standard for CCPs that clear security-based swaps, the Commission believes that the financial resources of the entity must be robust enough to accommodate the risks that are particular to each market served—irrespective of whether such analysis results in different standards. The Commission believes that requiring a security-based swap CCP to cover its two largest potential exposures is the appropriate standard due to the nature of these products. Security-based swaps pose unique risk management issues. In particular, credit default swaps, a subset of security-based swaps, are non-linear financial instruments subject to additional risk factors such as jump-to-default risk
The Commission does not believe that changes in the security-based swap market resulting from the Dodd-Frank Act (
The Commission notes that current industry participants recognize the need for more stringent financial resource requirements for CCPs that clear credit default swaps.
Given that both of the registered CCPs providing clearing services for security-based swap transactions already meet the proposed standard, and that CME, which proposes to provide such services, is currently following a “cover two” standard in index credit default swap clearing, the Commission believes that Rule 17Ad-22(b)(3) does not represent a change in existing market practices and would not hinder the growth of existing security-based swap CCPs.
We are adopting Rule 17Ad-22(b)(3) with modifications intended to recognize different types of structures currently employed by CCPs clearing security-based swaps and similar structures that may be developed in the future. The final rule allows that the policies and procedures may provide that the additional financial resources required to be held under the “cover two” standard may be maintained for the entire CCP or in separately maintained funds. This modification from the proposal recognizes that clearing agencies' practices may be structured as (i) conducting security-based swap clearing activities in a separate legal entity or (ii) maintaining within one legal entity separate rules, membership requirements, risk management practices, and financial resources specifically designed to cover the CCP's exposures to a separate pool of instruments that includes security-based swaps. The Commission also believes that as security-based swap CCPs introduce new products for clearing on an incremental basis in the future, the adopted rule will provide them with appropriate flexibility to organize their operations to obtain additional financial resources to cover exposures for each new security-based swap product in the manner most appropriate for their organization.
Some commenters argued that the Commission should not adopt a standard for the level of financial resources that may be inconsistent with the FMI Report and that there should be industry and regulatory consensus on the level of financial resources that must be maintained.
The Commission also is not persuaded that the “cover two” standard reflects an implausible occurrence that therefore should not be embedded into the Commission's rules. The financial crisis of 2008 demonstrated the plausibility of the default of two large participants in a clearing agency over a brief period. One large investment bank was saved from the brink of default in March 2008.
One clearing agency commented that since its modeling assumptions for simultaneous default of two participants assume significant market volatility but its modeling assumptions for the default of the largest participant assume low volatility, it is possible that a requirement for financial resources to cover the default of the largest two participants may result in only a slightly higher or even a lower requirement than one for financial resources to cover the default of the largest participant.
Finally, the Commission does not believe that Rule 17Ad-22(b)(3) will require major changes to the practices that have been developed to measure the sufficiency of financial resources at registered CCPs. The Commission understands that all CCPs currently registered with the Commission maintain enough financial resources to withstand the default of their largest participant under extreme but plausible market conditions.
The Commission agrees with the commenter who suggested that it is important for the Commission to provide concrete guidance regarding the meaning of “extreme but plausible market conditions” to assure consistent treatment of that term across clearing CCPs. In general, “extreme but plausible market conditions” are tail event conditions in which the price movement of a cleared security results in losses exceeding expectations at a 99% confidence interval, causing a clearing agency's exposures to its participants to breach margin requirements or other risk controls (
Rule 17Ad-22(b)(4), as proposed, would require a CCP to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for an annual model validation process consisting of evaluating the performance of the CCP's margin models and the related parameters and assumptions associated with such models by a qualified person who does not perform functions associated with the clearing agency's margin models (except as part of the annual model validation) and does not report to a person who performs these functions.
Commenters generally supported proposed Rule 17Ad-22(b)(4)
Commenters also argued that the CCP is in the best position to determine how to conduct a candid assessment free from outside influence concerning its margin models and that qualified internal personnel at the CCP are capable of validating the models if reasonable steps are taken to ensure objectivity (
One commenter recommended that the Commission should replace the text in proposed Rule 17Ad-22(b)(4) that addresses independence with language from the Proposing Release that “the person validating the clearing agency's model should be sufficiently free from outside influences so that he or she can be completely candid in their [sic] assessment of the model.”
Another commenter stated that requiring a CCP to bring independence to the model review process by detaching it from the model development process would effectively require maintenance of two quantitative teams.
The same commenter suggested that proposed Rule 17Ad-22(b)(4) should be revised to require a CCP to do the following: (1) Maintain a culture of commitment to quality where correcting and improving models is career-enhancing; (2) adopt sound policies and procedures that create a transparent and auditable model review process; and (3) require that reporting lines must come together at a person who is well-versed in technical quantitative matters.
The Commission is adopting Rule 17Ad-22(b)(4) with certain modifications to address concerns raised by commenters, including the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. In light of comments asking the Commission to clarify the standard of independence of the qualified person who performs the model validation, the Commission is revising the text of Rule 17Ad-22(b)(4) so that the annual model validation must be performed by a qualified person who is free from influence from the persons responsible for development or operation of the systems and models being validated. Generally, the Commission would consider that a person was free from influence when that person does not, including but not limited to, perform functions associated with the clearing agency's margin models (except as part of the annual model validation) and does not report to a person who performs these functions. The Commission believes that the change from the proposal addresses the concerns raised by commenters.
As proposed, Rule 17Ad-22(b)(4) would not have permitted the model validation to be performed by a person performing functions associated with the CCP's margin models (except as part of the annual model validation), or who reports to a person who performs those functions.
The Commission also notes that the “sufficiently free from influence” standard is consistent with the FMI Report, which does not prescribe a specific method to assure the effectiveness of the validation process,
The Commission is not persuaded that the model validation must be performed by an outside independent expert.
The Commission is not persuaded that the frequency of the model validation should be left to the discretion of the CCP. Current model validation practices vary among CCPs. Some CCPs conduct annual validations, while other conduct them on an ad hoc basis. Because of the role margin plays in a default, a CCP needs assurance of its value in the event of liquidation, as well as the capacity to draw upon its margin promptly. The Commission believes, especially considering its statutory responsibilities and the importance of model validation in limiting systemic risk, that it is important to create a consistent and uniformly applied minimum standard across all clearing CCPs. The Commission believes that requiring model validation at least annually is appropriate because model performance is not ordinarily expected to vary significantly over short periods but should be reevaluated as market conditions change. Furthermore, the Commission does not think the standard of an annual model validation is too burdensome, particularly given the fact that the Commission is not prescribing any specific qualifications or credentials of the person performing the model validation and is not requiring the person performing the model validation to be independent of the clearing agency and given how important understanding of the margin methodology is to the risk management framework.
The requirement for an annual model validation does not preclude the CCP from adjusting its model any time it has reason to believe that the model is no longer adequate. In fact, as noted above, Rule 17Ad-22(b)(2) requires a CCP to review its risk-based models to set margin requirements at least monthly.
The Commission continues to believe that clearing agencies that provide CCP services must have a qualified person conduct a review of models that are used to set margin levels, along with related parameters and assumptions, to assure that the models perform in a manner that facilitates prompt and accurate clearance and settlement of transactions. In determining whether a person is qualified to conduct the model validation, registered CCPs may consider several factors, including the person's experience in validating margin models, expertise in risk management generally, and understanding of the clearing agency's particular operations and procedures.
While the Commission agrees with the commenter who suggested that CCPs should strive to create a culture of commitment to quality where improving models is career-enhancing and to adopt sound policies and procedures to create a transparent and auditable model review process,
Section 17A of the Exchange Act requires that a clearing agency shall not be registered unless the Commission determines, among other things, that the clearing agency's rules do not impose burdens on competition that are unnecessary or inappropriate to promote the purposes of the Exchange Act
Rules 17Ad-22(b)(5), (6) and (7) introduce certain requirements regarding access to registered CCPs. Respectively, the rules would require a registered CCP to do the following: (1) Provide the opportunity for a person who does not perform any dealer or security-based swap Dealer services to obtain membership; (2) refrain from using minimum portfolio size and minimum volume transaction thresholds as conditions to membership; and (3) provide the ability to obtain membership to persons who maintain net capital equal to or greater than $50 million.
Rules 17Ad-22(b)(5), (6) and (7) each address the common topic of access to and participation in CCPs. Several commenters provided general comments on that shared focus. Those comments represent a wide range of views and are reflected immediately below.
Some commenters expressed their general support for the ways that Rules 17Ad-22(b)(5), (6), and (7) would promote fair and open access to CCP services through CCP participation
Two commenters urged the Commission not to adopt proposed Rules 17Ad-22(b)(5), (6) and (7).
The second commenter, while not opposed to the substance of proposed Rules 17Ad-22(b)(5), (6) and (7), generally questioned the need to hard wire these requirements into the Commission's rules.
In the “Final Rule and Guidance” sections for Rules 17Ad-22(b)(5), (6) and (7) below, we address these more general comments in the context of a discussion of the more specific comments the Commission received on the proposed rules.
Rule 17Ad-22(b)(5), as proposed, would require a registered CCP to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide the opportunity for a person that does not perform any dealer
Some commenters generally supported the goals of Rule 17Ad-22(b)(5),
The Commission is adopting Rule 17Ad-22(b)(5) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies.
While the Commission understands concerns raised by commenters, the Commission ultimately believes that the benefits of Rule 17Ad-22(b)(5) are critical to maintaining fairness and open access to central clearing for all market participants, including security-based swaps participants. The Commission believes that no registered CCP should deny membership solely because a person does not perform any dealer or security-based swap dealer services and that such a requirement unfairly discriminates against certain market participants and should be prohibited. The Commission does not believe that performing dealer or security-based swap dealer services is, by itself, a sufficient indicator of whether an applicant should be admitted to a clearing agency.
Dealer and security-based swap dealer services generally involve services designed to facilitate securities transactions by buying and selling securities for a person's own account.
In situations where direct access to clearing agencies is limited by reasonable participation standards, firms that do not meet these standards may still be able to access clearing agencies through correspondent clearing arrangements with direct participants.
Also, the Commission is not persuaded by the comment that Rule 17Ad-22(b)(5) is likely to undermine the impartial development and application of risk-based standards for membership.
Because the factors that each CCP considers when establishing membership criteria differ based on the particular characteristics of the relevant clearing agency and the markets it serves, the Commission believes that it would be counterproductive to modify Rule 17Ad-22(b)(5) to make it more specific and therefore more constraining. One commenter, however, requested that the Commission provide additional clarity in terms of what is required to be considered “otherwise qualified” for membership at a CCP.
The Commission believes that the incentives of persons who do not perform dealer or security-based swap dealer services to promote access at a CCP in general would tend to be consistent with increased competition in the market for the relevant securities. These persons do not execute securities trades for their own account. Instead, they provide correspondent clearing services for market participants.
Rule 17Ad-22(b)(6), as proposed, would prohibit a CCP from having membership standards that require participants to maintain a portfolio of any minimum size or to maintain a minimum transaction volume.
Some commenters expressed general support for the goals of proposed Rule 17Ad-22(b)(6).
The Commission is adopting Rule 17Ad-22(b)(6) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies.
We believe that imposing minimum thresholds on the size or transaction volume of a participant's portfolio would not function as a good indicator of whether the participant is able to meet its obligations to a CCP.
New participants to a CCP that do not, at least initially, intend to transact in substantial size or volume may nevertheless have the operational and financial capacity to perform the activities that other participants are able to perform. Therefore, the Commission believes that Rule 17Ad-22(b)(6) will help facilitate compliance with the requirement in Section 17A of the Exchange Act that the rules of a CCP must permit fair and open access.
For the same reasons discussed in connection with Rule 17Ad-22(b)(5), the Commission is not persuaded by the comment that Rule 17Ad-22(b)(6) is likely to undermine the impartial development and application of risk-based standards for membership.
Proposed Rule 17Ad-22(b)(7) would require a CCP to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide a person that maintains net capital
Some commenters supported proposed Rule 17Ad-22(b)(7).
Another commenter supportive of Rule 17Ad-22(b)(7) urged the Commission to modify the rule to eliminate the ability of a CCP to raise its minimum net capital threshold above $50 million.
One commenter stated that net capital, without regard to other risk factors, does not conclusively establish creditworthiness or any of the other generally accepted qualifications for becoming a member of a CCP.
Several commenters expressed concern over proposed Rule 17Ad-22(b)(7).
Another commenter expressed concern that because not all market participants use a net capital computation, the proposed rule could give unfair advantages to some market participants over others in terms of gaining and retaining membership at a CCP.
One commenter noted the Commission's reference in the Proposing Release to the tiered membership standards of the FICC as an example of capital-related requirements that differentiate between types of participants.
The Commission is adopting Rule 17Ad-22(b)(7) with certain modifications, including the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. As noted by the commenters expressing support for the rule,
The Commission also does not believe that $50 million net capital standard contained in Rule 17Ad-22(b)(7) would give an advantage to some prospective members at a CCP over others. Further, the rule explicitly is not intended in any way to create an “entitlement” to membership for firms with more than $50 million in capital. Upon adoption of Rule 17Ad-22, a registered CCP cannot restrict access because a participant does not have a net capital level of $50 million or more; however, the CCP's policies and procedures can prescribe other reasonable membership standards and can be reasonably designed to limit the activities of the participant in comparison to the activities of other participants that maintain a higher net capital level. For example, as a way to help make its requirements scalable, a registered CCP may elect to place limits on its potential exposure to participants operating at certain net capital thresholds by restricting the maximum size of the portfolio such participants are permitted to maintain at the CCP.
Rule 17Ad-22(b)(7) also permits a registered CCP to provide for a higher net capital requirement (
Finally, the Commission did not make any changes to Rule 17Ad-22(b)(7) in response to suggestions that the rule could create margin call risk because a participant with the minimum net capital level might access multiple clearing agencies.
Proposed Rule 17Ad-22(c)(1) would provide that each fiscal quarter (based on calculations made as of the last business day of the clearing agency's fiscal quarter), or at any time upon Commission request, a CCP shall calculate and maintain a record
Commenters generally supported proposed rule 17Ad-22(c)(1).
We are adopting Rule 17Ad-22(c)(1) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. The Commission believes that it is appropriate to require registered clearing agencies to make these calculations quarterly or at any time based on the request of the Commission because it provides a periodic update of the financial resources that are needed by the clearing agencies as market conditions change. The structure of Rule 17Ad-22(c)(1) also provides flexibility for the Commission to request such calculations on a real-time basis, which we believe to be useful during periods of market stress or other circumstances where more timely information is desired. The Commission believes that these calculations and related documentation will also help our oversight of compliance by clearing agencies with Rule 17Ad-22(b)(3) by providing a clear record of the method used by the clearing agency to maintain sufficient financial resources.
Rule 17Ad-22(c)(2), as proposed, would require a clearing agency to post on its Web site an annual audited financial report. Each financial report would be required to: (i) Be a complete set of financial statements of the clearing agency for the most recent two fiscal years of the clearing agency and be prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), except that for a clearing agency that is a corporation or other organization incorporated or organized under the laws of any foreign country, the financial statements may be prepared according to U.S. GAAP or International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”); (ii) be audited in accordance with standards of the Public Company Accounting Oversight Board by a registered public accounting firm that is qualified and independent in accordance with Rule 2-01 of Regulation S-X (17 CFR 210.2-01); and (iii) include a report of the registered public accounting firm that complies with paragraphs (a) through (d) of Rule 2-02 of Regulation S-X (17 CFR 210.2-02).
Commenters generally supported proposed Rule 17Ad-22(c)(2).
We are adopting Rule 17Ad-22(c)(2) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. We have also changed references to “annual audited financial report” to “annual audited financial statements” to be consistent with the term used in Regulation S-X. Furthermore, we have clarified that a registered clearing agency will be required to post its financial statements of income, changes in stockholders' equity and other comprehensive income and cash flows
Consistent with recommendations from commenters, we are adopting Rule 17Ad-22(c)(2) in a form that does not require a reconciliation to U.S. GAAP for clearing agency reports that are prepared using IFRS.
Rule 17Ad-22(d) sets forth certain minimum standards regarding the operations of registered clearing agencies providing CCP or CSD services. The standards established in Rule 17Ad-22 address areas including: (1) Transparent and enforceable rules and procedures; (2) participation requirements; (3) custody of assets and
Like Rules 17Ad-22(b) and (c), Rule 17Ad-22(d) is designed to work in tandem with the Commission's existing mandate under Section 17A of the Exchange Act by establishing minimum standards for clearing agency operations. In particular, Congress directed the Commission to facilitate the establishment of (1) a national system for the prompt and accurate clearance and settlement of transactions in securities (other than exempt securities) and (2) linked or coordinated facilities for clearance and settlement of transactions in securities, securities options, contracts of sale for future delivery and options thereon, and commodity options.
• The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors.
• Inefficient procedures for clearance and settlement impose unnecessary costs on investors and persons facilitating transactions by and acting on behalf of investors.
• New data processing and communications techniques create the opportunity for more efficient, effective, and safe procedures for clearance and settlement.
• The linking of all clearance and settlement facilities and the development of uniform standards and procedures for clearance and settlement will reduce unnecessary costs and increase the protection of investors and persons facilitating transactions by and acting on behalf of investors.
These findings serve as objectives in the Commission's ongoing efforts to enhance efficiency and reduce risk in the operation of the U.S. clearance and settlement system. Over the years, the Commission's view of the actions by a clearing agency that are necessary to meet these objectives as well as the other requirements in Section 17A has changed with prevailing market conditions and as new technologies are developed. For example, in the years after the October 1987 market break, the Commission worked to implement a number of changes in the securities markets, including the reduction of the standard settlement time frame for a securities transaction to the third day after the securities trade date (
Over time, changes to the U.S. legal framework have also led to enhancements in the operation of the U.S. clearance and settlement system. For example, the adoption of Revised Article 8 of the Uniform Commercial Code in 1995 strengthened the laws governing the holding and transfer of securities.
Consistent with these examples of how the Commission's approach to administrative oversight and practices by clearing agencies have changed over time to meet the objectives of Section 17A, the Commission believes that Rule 17Ad-22(d) creates standards for various aspects of the payment, clearance and settlement process and that to meet these standards clearing agencies will likely need to update their rules and procedures as market conditions evolve (
Rule 17Ad-22(d)(1), as proposed, would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for a well-founded, transparent and enforceable structure for each aspect of their activities in all relevant jurisdictions.
Commenters generally supported Rule 17Ad-22(d)(1).
The Commission is adopting Rule 17Ad-22(d)(1) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. We believe that well-founded, transparent and enforceable policies and procedures established to underpin a clearing agency's operational and business activities are essential to reduce legal risks and enhance a clearing agency's ability to facilitate the prompt and accurate clearance and settlement of securities transactions and safeguard securities and funds as required for the protection of investors by Section 17A of the Exchange Act.
To achieve compliance with Rule 17Ad-22(d)(1), a clearing agency must have written policies and procedures
Rule 17Ad-2(d)(2), as proposed, would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the clearing agency; have procedures in place to monitor that participation requirements are met on an ongoing basis; and have participation requirements that are objective, publicly disclosed, and permit fair and open access.
Some commenters supported proposed Rule 17Ad-22(d)(2).
One commenter stated its specific preference for proposed Rule 17Ad-22(d)(2) to facilitate the Commission's regulation of access at clearing agencies compared to Rules 17Ad-22(b)(5), (6) and (7) for CCPs.
One commenter recommended that the Commission should take an expansive, prescriptive approach to its rule requirements for clearing agency participation and participant monitoring.
One commenter supported the requirement in Rule 17Ad-22(d)(2) for clearing members to have written policies and procedures for risk management but also emphasized the importance of placing emphasis on practical experience in risk management.
One commenter encouraged the Commission to prohibit clearing agencies from imposing rules or engaging in conduct that is prejudicial to indirect clearing participants compared to direct clearing participants (
Some commenters expressed concern that clearing agency participants may rely on the resources and services of a third party to meet the requirements developed by clearing agencies pursuant to Rule 17Ad-22(d)(2).
Several commenters argued that Rule 17Ad-22(d)(2) is only appropriate for CCPs.
The Commission is adopting Rule 17Ad-22(d)(2) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies.
Rule 17Ad-22(d)(2) is intended to reduce the likelihood of defaults by participants, while also providing flexibility for clearing agencies to tailor standards that are linked to the obligations of the participant. The Commission believes the rule fosters compliance with the requirement under Section 17A of the Exchange Act that the rules of a clearing agency must not be designed to permit unfair discrimination in the admission of participants by requiring standards that are designed to be measurable, open and fair.
We agree with those commenters who supported Rule 17Ad-22(d)(2) as a mechanism to help ensure that clearing agencies meet the Exchange Act requirements in their participation standard practices.
We agree with commenters that comprehensive and explicit requirements are an appropriate part of a clearing agency's risk management framework, including participation standards.
We agree with commenters that credit facility arrangements represent a contractual right to funds and that enforcement of that contractual right may become more difficult during stressed market conditions.
We agree with commenters who stated that clearing agencies should not process trades differently on the sole basis of whether the trade is between direct clearing members or involves participants that access the clearing agency through those clearing members, and so the Commission does not find it necessary to create disparate standards for the treatment of direct and indirect participants.
Proposed Rule 17Ad-22(d)(3) would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to hold assets in a manner whereby risk of loss or of delay in access to them is minimized, and invest in instruments with minimal credit, market and liquidity risks. Compliance with the requirement is intended to improve the ability of the clearing agency to meet its settlement
Some commenters expressed concerns about the application and scope of proposed Rule 17Ad-22(d)(3). One commenter stated that proposed Rule 17Ad-22(d)(3) is not sufficiently clear in its scope.
However, another commenter asked the Commission to clarify that proposed Rule 17Ad-22(d)(3) applies to customer assets only and not to the assets of the clearing agency (or its sponsor).
The Commission is adopting Rule 17Ad-22(d)(3) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. The Commission believes that Rule 17Ad-22(d)(3) strengthens the requirement in Section 17A(b)(3)(F) of the Exchange Act that the rules of a clearing agency must be designed to ensure the safeguarding of securities and funds in the custody or control of the clearing agency or for which the clearing agency is responsible.
We appreciate the concerns expressed by commenters who asked the Commission to clarify how Rule 17Ad-22(d)(3) applies in the context of the different services that a clearing agency may perform, and note that Rule 17Ad-22 only applies to registered clearing agencies and does not apply to entities that are exempt from registration as a clearing agency.
Rule 17Ad-22(d)(4), as proposed, would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to identify sources of operational risk and minimize these risks through the development of appropriate systems, controls, and procedures; implement systems that are reliable, resilient and secure and have adequate scalable capacity; and have business continuity plans that allow for timely recovery of operations and ensure the fulfillment of a clearing agency's obligations.
Rule 17Ad-22(d)(4) should help to ensure that clearing agencies are able to operate with minimal disruptions, even during times of market stress when there may be greater demands on their systems due to higher volume. In addition, the rule would require that clearing agencies have business continuity plans that allow for timely recovery of operations and ensure the fulfillment of a clearing agency's obligations. This requirement would be relevant in the event of, among other things, deficiencies in information systems or internal controls, human errors, management failures, unauthorized intrusions into corporate or production systems, or disruptions from external events such as natural disasters.
Several commenters recommended that the rule should not apply to the activities of clearing agencies that perform post trade processing services. For example, one commenter reasoned that the application of proposed Rule 17Ad-22(d)(4) to a clearing agency that performs post-trade comparison services is unnecessary if that clearing agency is operating pursuant to a conditional exemptive order from the Commission.
Another commenter expressed its view that operational risk management and disaster recovery systems are critical to any well-founded compression service or collateral management service.
The Commission is adopting Rule 17Ad-22(d)(4) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. We believe that Rule 17Ad-22(d)(4) complements the existing guidance provided by the Commission in its Automation Review Policy Statements
As discussed above, Rule 17Ad-22 applies only to registered clearing agencies. It does not apply to entities that perform post-trade processing services or that are exempt from registration as a clearing agency. As discussed above, entities that perform certain post trade processing services, and that fall within the definition of clearing agency, may be subject to different rulemaking by the Commission at a later time.
Proposed Rule 17Ad-22(d)(5) would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to employ money settlement arrangements that eliminate or strictly limit the clearing agency's settlement bank risks, that is, its credit and liquidity risks from the use of banks to effect money settlements with its participants, and require funds transfers to the clearing agency to be final when effected. Money settlement arrangements, among other things, are meant to reduce the risk that financial obligations related to the activities of the clearing agency are not timely settled or discharged with finality. Generally, money settlement by a clearing agency and its participants involves the use of a settlement bank
The Commission is providing clearing agencies with flexibility to implement arrangements in a manner fit for them to meet the requirement of the rule. The Commission notes that there are a number of arrangements that clearing agencies could establish to comply with the rule, including criteria for use of settlement banks that address the banks' creditworthiness, access to liquidity, and operational reliability, and legal agreements with settlement banks to ensure that funds transfers to the clearing agency are final when affected.
One commenter stressed that if the Commission adopts Rule 17Ad-22(d)(5) as proposed then the Commission should clarify that a clearing agency cannot eliminate all exposure to settlement bank risk.
The same commenter stressed that the Commission should not mandate a minimum number of settlement banks and that the requirements of Rule 17Ad-22(d)(5) should focus on providing clearing agencies with discretion to select settlement banks with care, diversifying risk among those settlement banks to the extent practicable, and monitoring their financial status.
Two commenters argued that proposed Rule 17Ad-22(d)(5) should be applicable only to clearing agencies that take in or process securities or funds from users.
The Commission is adopting Rule 17Ad-22(d)(5) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. We believe Rule 17Ad-22(d)(5) limits the potential that a clearing agency's money settlement arrangements will cause the clearing agency to face higher levels of credit and liquidity risks. In addition, the Commission believes that the rule is consistent with the requirement of Section 17A(b)(3)(F) of the Exchange Act, which requires the rules of a clearing agency to be designed to assure the safeguarding of securities and funds that are in the custody or control of the clearing agency or for which it is responsible.
As noted, some commenters pointed out that a clearing agency may not be positioned to eliminate all exposure to credit and liquidity risks from the use of banks to effect money settlements.
As discussed above, Rule 17Ad-22 only applies to registered clearing agencies and does not apply to entities that are exempt from registration as a clearing agency except to the extent specifically contemplated by the terms of a future exemption.
Rule 17Ad-22(d)(6), as proposed, would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to be cost-effective in meeting the requirements of participants while maintaining safe and secure operations.
Having clearing agencies be mindful of the costs that are incurred by their participants, while maintaining such compliance, should help to reduce inefficiencies in the provision of clearing agency services. This point is particularly important in circumstances where clearing agencies may not be subject to strong competitive forces (such as when there is only one clearing agency for an asset class) for the provision of their services and therefore may have less of an incentive to be cost-effective in meeting the requirements of participants. Accordingly, the Commission believes the rule should potentially help reduce the costs incurred for clearing agency services while also maintaining appropriate standards for a clearing agency's operations.
Two commenters expressed reservations about the rule.
Another commenter stressed that unless a provider of compression or collateral management services is systemically important, or market participants are obliged to purchase its services, then it should be free to set fees in a fair and commercial manner that encourages broad participation while permitting sufficient flexibility to offer favorable rates to high-volume users, early adopters, magnet clients and other key participants.
The Commission is adopting Rule 17Ad-22(d)(6) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. As discussed above, the Commission believes Rule 17Ad-22(d)(6) is appropriate and serves to advance the statutory goals of prompt and accurate clearance and settlement.
With regard to suggestions that Rule 17Ad-22(d)(6) should not apply to entities that perform certain post-trade services (
Rule 17Ad-22(d)(7), as proposed, would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to evaluate the potential sources of risks that can arise when the clearing agency establishes links either cross-border or domestically to clear or settle trades, and to ensure that these risks are managed prudently on an ongoing basis. Tying the operations of different clearing agencies together by link arrangements potentially exposes a clearing agency and its members to the risk that the other entity may experience a financial loss or is otherwise unable to meet its settlement obligations that causes the clearing agency or its members to fail to meet their obligations.
Three commenters expressed concerns about the rule.
The Commission is adopting Rule 17Ad-22(d)(7) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. We believe the rule is consistent with and furthers the purposes of the Exchange Act. Section 17A(a)(1)(D) of the Exchange Act states that the linking of all clearance and settlement facilities and the development of uniform standards and procedures for clearance and settlement will reduce unnecessary costs and increase the protection of investors and persons facilitating transactions by and acting on behalf of investors.
The Commission agrees with the suggestion from some commenters that the specific type of link arrangements contemplated by Rule 17Ad-22(d)(7) is link arrangements between clearing agencies.
Rule 17Ad-22 only applies to registered clearing agencies and does not apply to entities that are exempt from registration as a clearing agency, unless the terms of future exemptions specifically contemplate its application, in whole or in part.
Proposed Rule 17Ad-22(d)(8) would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to have governance arrangements that are clear and transparent to fulfill the public interest requirements in Section 17A of the Exchange Act applicable to clearing agencies,
Two commenters registered their preference for what they regard as the principles-based approach in proposed Rule 17Ad-22(d)(8) to regulation of clearing agency governance rather than the prescriptive rules set forth in the Commission's proposed Regulation MC applicable to the security-based swap clearing agencies.
One commenter urged the Commission to ensure that Rule 17Ad-22(d)(8) as well as any requirements adopted from the Commission's proposed Regulation MC pertaining to the mitigation of conflicts of interest are designed to ensure that buy-side market participants have a meaningful voice in the operating committees of clearing agencies because that representation is critical to promoting robust governance arrangements at clearing agencies and serving the best interests of the U.S. financial system.
One commenter urged the Commission to consider complementing proposed Rule 17Ad-22(d)(8) with a minimum board independence requirement so that at least two-thirds of all board directors would be required to be independent.
Several commenters made recommendations to the Commission concerning the application of Rule 17Ad-22(d)(8) to clearing agencies that perform post-trade processing services.
The Commission is adopting Rule 17Ad-22(d)(8) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. Rule 17Ad-22(d)(8) is designed to promote these types of arrangements and the ability of a clearing agency to serve the interests of its various constituents and the interests of the general public while maintaining prudent risk management processes to promote prompt and accurate clearance and settlement.
Governance arrangements have the potential to play an important role in making sure that clearing agencies fulfill the Exchange Act requirements that the rules of a clearing agency be designed to protect investors and the public interest and to support the objectives of owners and participants. Similarly, governance arrangements may promote the effectiveness of a clearing agency's risk management procedures by creating an oversight framework that fosters a focus on the critical role that risk management plays in promoting prompt and accurate clearance and settlement.
We appreciate the perspective of commenters who prefer the more general policies and procedures design of Rule 17Ad-22(d)(8) to any more prescriptive rulemaking by the Commission in the area of clearing agency governance.
At this time, the Commission also is not acting on the recommendation of some commenters to structure Rule 17Ad-22(d)(8) so that it would require at least two-thirds of a clearing agency's board of directors to be independent.
With regard to suggestions that Rule 17Ad-22(d)(8) should not apply to entities that perform certain post-trade services (
We are not persuaded by the argument that the operation of a clearing agency through a utility model negates the need for Rule 17Ad-22(d)(8) because regardless of the business model adopted, the board should reflect the interests of the full range of stakeholders in order to effective.
Proposed Rule 17Ad-22(d)(9) would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide market participants with sufficient information for them to identify and evaluate the risks and costs associated with using the clearing agency's services.
The Commission believes that requiring a clearing agency to disclose information sufficient for participants to identify risks and costs associated with using the clearing agency will allow participants to make informed decisions about the use of the clearing agency and take appropriate actions to mitigate their risks and costs associated with the use of the clearing agency.
One commenter stated that it does not believe that the proposed rule is necessary because among other things a clearing agency's fees, collateral deposits, and operational requirements are already included in the clearing agency's rules and its published procedures and are already required to be sufficiently available to market participants and the public at large.
Two commenters expressed that application of proposed Rule 17Ad-22(d)(9) to clearing agencies that do not handle securities or funds is unnecessary.
We are adopting Rule 17Ad-22(d)(9) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies We believe that requiring a clearing agency to have policies and procedures that require a clearing agency to disclose
Because clearing agencies are SROs, their rules are published by Commission and are generally available on each clearing agency's Web site. Nevertheless, discrete rule proposals do not necessarily provide a complete picture of a clearing agency's operations and the risk mitigation procedures. Accordingly, the rule is intended to promote a better understanding among market participants of a clearing agency's operations. A better understanding should foster confidence in the clearing agency's ability to manage those risks and costs, including, but not limited to, any margin requirements, restrictions or limitations of the clearing agency's obligations, and conditions used by the clearing agency to test the adequacy of its financial resources.
We acknowledge that existing requirements address the need for clearing agencies to incorporate matters such as the clearing agency's fees, collateral deposits, and operational requirements in its rules and procedures, which are already made available to market participants and the public.
We agree with commenters who recommended that Rule 17Ad-22(d)(9) should only apply categorically to clearing agencies that take in or process securities or funds. Rule 17Ad-22 only applies to registered clearing agencies and does not apply to entities exempt from registration as a clearing agency except to the extent specifically contemplated by a future exemption.
Proposed Rule 17Ad-22(d)(10) would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to immobilize
The Commission believes that the immobilization and dematerialization of securities and their transfer by book entry results in reduced costs and risks associated with securities settlements and custody by removing the need to hold and transfer many, if not most, physical certificates.
One commenter expressed concern that proposed Rule 17Ad-22(d)(10) places responsibilities on clearing agencies that perform CSD services to immobilize or dematerialize securities that are beyond the clearing agency's control. Therefore, the commenter requested that the rule be revised to reflect the need for cooperation from market participants and regulators.
Another commenter stated its belief that the proposed Rule 17Ad-22(d)(10) should not apply to portfolio compression and collateral management services for security-based swaps.
The Commission is adopting Rule 17Ad-22(d)(10) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. Rule 17Ad-22(d)(10) does not require a clearing agency to take any actions that are beyond the scope of its rules, procedures and operations. We agree that collaboration between regulators, market participants, and clearing agencies is necessary to achieve total immobilization or dematerialization of securities
In response to comments about the application of the rule to portfolio compression and collateral management services, the Commission notes that Rule 17Ad-22 only applies to registered clearing agencies and does not apply to entities exempt from registration as a clearing agency, unless the terms of future exemptions specifically contemplate its application, in whole or in part.
Proposed Rule 17Ad-22(d)(11) would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to make key aspects of their default procedures publicly available and establish default procedures that ensure that the clearing agency can take timely action to contain losses and liquidity pressures and to continue meeting its obligations in the event of a participant default.
The Commission believes that the rule would provide certainty and predictability to market participants about the measures a clearing agency will take in the event of a participant default because default procedures, among other things, are meant to reduce the likelihood that a default by a participant, or multiple participants, will disrupt the clearing agency's operations. By creating a framework of default procedures that are designed to permit a clearing agency to take actions to contain losses and liquidity pressures it faces while continuing to meet its obligations, the clearing agency should be in a better position to continue providing its services in a manner that promotes accurate clearance and settlement during times of market stress.
The Commission also believes that the requirements in Rule 17Ad-22(d)(11) would increase the possibility that defaults by participants, should they occur, would proceed in an orderly and transparent manner. In particular, the rule would help to ensure that all participants are aware of the default process and are able to plan accordingly and that clearing agencies would have sufficient time to take corrective actions to mitigate potential losses.
One commenter urged the Commission to place additional requirements on clearing agencies to conduct and document a test of their default management plans.
One commenter responded to a question asked by the Commission in the Proposing Release about how much flexibility clearing agencies should have in the amount of time they are permitted to manage a default and perform a liquidation of positions. The commenter recommended that in the context of security-based swaps the time permitted should be the time necessary for the clearing agency to actually liquidate a security-based swap portfolio rather than establishing a predetermined period by rule.
Two commenters argued that proposed Rule 17Ad-22(d)(11) should not apply to entities that perform post-trade processing services such as comparison of data,
The Commission is adopting Rule 17Ad-22(d)(11) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. The Commission believes that the requirements in Rule 17Ad-22(d)(11) increase the possibility that defaults by participants, should they occur, will proceed in an orderly and transparent manner because Rule 17Ad-22(d)(11) helps to ensure that all participants are able to plan for the default process and that clearing agencies will have sufficient time to take corrective action to mitigate potential losses.
As an initial matter, we believe that how frequently a clearing agency conducts default management tests should be determined by each individual clearing agency, in consultation with, and subject to oversight by, the Commission.
With respect to the commenter who advised the Commission not to establish a particular period in Rule 17Ad-22(d)(11) during which a clearing agency would be required to manage and complete a default liquidation process for security-based swaps, we are not adopting specifically bounded timing requirements in Rule 17Ad-22(d)(11) for a clearing agency to achieve compliance with the rule. Instead, our current belief is that the more general approach we are adopting in Rule 17Ad-22(d)(11) allows clearing agencies to establish, implement, maintain and enforce policies and procedures that comply with Rule 17Ad-22(d)(11) and take into account the particular characteristics of the financial instruments and market dynamics involved in a default at a particular clearing agency. We believe this is the best approach to allow clearing agencies to contain losses and the liquidity pressures that they face while continuing to meet their obligations.
We also agree with commenters who suggested that it is appropriate for clearing agencies to consider concentration risk in margin practices and that if certain concentrations indicate that liquidation of the concentrated positions could not be performed within the parameters of the clearing agency's default management plan, then the clearing agency should consider extra initial margin charges to account for that occurrence.
With regard to suggestions that Rule 17Ad-22(d)(11) categorically should not apply to entities that perform certain post-trade services (
Proposed Rule 17Ad-22(d)(12) would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure that final settlement occurs no later than the end of the settlement day and that intraday or real-time finality is provided where necessary to reduce risks. The Commission believes that settlement finality should occur not later than the end of the settlement day because it will help to limit the volume of outstanding obligations that are subject to settlement at any one time and thereby reduce the settlement risk exposure of participants and the clearing agency.
One commenter that operates several clearing agencies expressed concern that the second clause of proposed Rule 17Ad-22(d)(12), which reads “and require that intraday or real-time finality be provided where necessary to reduce risks” could be interpreted to require intraday or real-time settlement finality beyond what its clearing agencies currently provide and are capable of providing without significant systems and process changes.
One commenter expressed general support for proposed Rule 17Ad-22(d)(12) but requested that the Commission provide clarification regarding how the rule is compatible with correction of errors and also clarify that “title transfer” of initial margin may not occur when it is posted to a clearing agency.
One commenter expressed concern that proposed Rule 17Ad-22(d)(12) fails to provide clear standards for real-time trade processing and therefore does not provide a workable framework for trade processing and clearing of security-based swaps.
Two commenters argued that proposed Rule 17Ad-22(d)(11) should not apply to entities that perform post-trade processing services such as comparison of data,
The Commission is adopting Rule 17Ad-22(d)(12) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. Rule 17Ad-22(d)(12) does not require a clearing agency that has policies and procedures in place to facilitate final settlement by the end of the settlement day to alter its rules and procedures. As stated in the Proposing Release, “intraday or real-time finality may be necessary to reduce risk in circumstances where the lack of intraday or real-time finality may impede the clearing agency's ability to facilitate prompt and accurate clearance and settlement, cause the clearing agency's participants to fail to meet their obligations, or cause significant disruptions in the securities markets.”
We agree with commenters that the timing of the effective transfer of initial margin is an important consideration related to achieving settlement finality in an event of default.
With respect to the commenter who said that the rules in 17Ad-22(d)(12): “Fail to provide clear standards for real time trade processing,” the Commission does not intend for the rule to provide standards for security-based swaps that are centrally cleared to be confirmed, accepted for clearing and guaranteed by a clearing agency at the point of trade execution.
We agree with commenters that Rule 17Ad-22(d)(12) should not apply if a clearing agency's services do not involve the handling of securities or funds to facilitate settlement of obligations. As discussed above, Rule 17Ad-22 applies only to registered clearing agencies and does not apply to entities exempt from registration as a clearing agency, unless the terms of future exemptions specifically contemplate its application, in whole or in part.
Proposed Rule 17Ad-22(d)(13) would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to eliminate principal risk by linking securities transfers to funds transfers to achieve delivery versus payment (“DVP”).
DVP eliminates the risk that a party would lose some or its entire principal because payment is made only if securities are delivered. The Commission believes that clearing agencies should be required to use this payment method to reduce the potential that delivery of the security is not appropriately matched with payment for a security, thereby impeding the clearing agency's ability to facilitate prompt and accurate clearance and settlement.
One commenter pointed out that the Commission previously approved an SRO rule change which eliminated the commenter's right to reject matched trades that are reported to it by an exchange even if the purchasing clearing member eventually fails to pay the purchase price of the option.
Two commenters argued that proposed Rule 17Ad-22(d)(13) should not apply to entities that perform post-trade processing services such as comparison of data,
The Commission is adopting Rule 17Ad-22(d)(13) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. As described in the Proposing Release, DVP is achieved in the settlement process when the mechanisms facilitating settlement ensure that delivery occurs if and only if payment occurs.
The elimination by a clearing agency of its right to reject matched trades and subsequently relying on mutualization of resources to make settlement if necessary does not violate Rule 17Ad-22(d)(13), as mutualization of risk by participants is an acceptable means of eliminating principal risk that would otherwise exist for a clearing agency. The rule requires a clearing agency to establish policies and procedures to link the transfer of securities and funds in a manner that mitigates principal risk in the event of a participant default. The rule does not govern when a clearing agency guarantees a transaction or the clearing agency's loss allocation procedures in the event of a default.
We agree with commenters who suggested that Rule 17Ad-22(d)(13) is not applicable to clearing agencies that do not handle securities or funds to perform settlement. As discussed above, Rule 17Ad-22 only applies to registered clearing agencies and does not apply to entities exempt from registration as a clearing agency, unless the terms of future exemptions specifically contemplate its application, in whole or in part.
Proposed Rule 17Ad-22(d)(14) requires clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to institute risk controls, including collateral requirements and limits to cover the clearing agency's credit exposure to each participant exposure fully, that ensure timely settlement in the event that the participant with the largest payment obligation is unable to settle when the clearing agency provides CSD services
The Commission believes it is important for clearing agencies that provide CSD services to institute risk controls, including collateral requirements and limits, to cover the clearing agency's credit exposure to each participant exposure fully, that
One commenter asked the Commission to revise Rule 17Ad-22(d)(14) to expressly state that the rule applies to a clearing agency that provides CSD services and extends intraday credit through the operation of a net settlement system.
Responding to a question posed by the Commission in the Proposing Release, the same commenter stated its belief that clearing agencies that provide CSD services should not be required to maintain enough financial resources to be able to withstand a settlement failure by the two participant families with the largest settlement obligations to the clearing agency that performs central depository services.
One commenter stated that the requirements of proposed Rule 17Ad-22(d)(14) should not apply to portfolio compression or collateral management service providers for security-based swaps.
We are adopting Rule 17Ad-22(d)(14) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. The Commission believes it is important for clearing agencies that provide CSD services to institute risk controls, including collateral requirements and limits to cover the clearing agency's credit exposure to each participant exposure fully, that ensure timely settlement in these circumstances to address the risk that the participant may fail to settle after credit has been extended. The Commission also believes that requiring the controls that ensure timely settlement in the event that the participant with the largest payment obligation is unable to settle, in such circumstances, reduces the likelihood of disruptions at the clearing agency.
The Commission considered the concerns of commenters who asked the Commission to abstain from any action that would modify Rule 17Ad-22(d)(14) to require a clearing agency that performs CSD services and extends intraday credit to participants to maintain enough financial resources to be able to withstand a settlement failure by the two participant families with the largest settlement obligations to the clearing agency.
We understand the request for clarification from some commenters who asked the Commission to revise Rule 17Ad-22(d)(14) to apply solely to a clearing agency that performs CSD services and extends intraday credit to participants through a net settlement system.
We agree with commenters who argued that Rule 17Ad-22(d)(14) does not apply to clearing agencies that do not perform CSD services and do not extend intraday credit to participants.
Proposed Rule 17Ad-22(d)(15) would require clearing agencies to establish, implement, maintain and enforce written policies and procedures reasonably designed to disclose to their participants the clearing agency's obligations with respect to physical deliveries.
The Commission believes that such policies and procedures will help to ensure that participants have information that is likely to enhance the participants' understanding of their rights and responsibilities with respect to using the clearance and settlement services of the clearing agency. The Commission also believes that providing such information to participants would promote a shared understanding regarding physical delivery practices between the clearing agency and its participants that could help reduce the potential for fails and thereby facilitate prompt and accurate clearance and settlement.
The rule also would require clearing agencies to reasonably design their operations to identify and manage the risks that arise in connection with their obligations for physical deliveries. The risks associated with physical deliveries could stem from, among other factors, operational limitations with respect to assuring receipt of physical deliveries and processing of physical deliveries.
One commenter stated that the requirements of proposed Rule 17Ad-22(d)(15) should not apply to portfolio compression or collateral management service providers for security-based swaps.
The Commission is adopting Rule 17Ad-22(d)(15) as proposed, except for the clarification discussed in Sections II.B.4 and III.A regarding the application of the rule only to registered clearing agencies. The Commission believes that Rule 17Ad-22(d)(15) helps ensure that participants will have information that enhances their understanding of their rights and responsibilities with respect to using the physical delivery services of a clearing agency which will help reduce the potential for fails. Accordingly, the Commission believes this requirement should help facilitate prompt and accurate clearance and settlement consistent with Section 17A of the Exchange Act.
As discussed above, Rule 17Ad-22 only applies to registered clearing agencies and does not apply to entities exempt from registration as a clearing agency, unless the terms of future exemptions specifically contemplate its application, in whole or in part.
Certain provisions of the final rules contain new “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).
As an initial matter, we note that the PRA burden estimates in this adopting release are significantly lower than the PRA burden estimates in the Proposing Release.
Additionally, the Proposing Release estimated that the proposed rules would have applied to seventeen entities. A number of these entities—in particular those providing post-trade processing services for security-based swap transactions—would have been completely unfamiliar with the Commission's registration process for clearing agencies. Further, these entities typically do not have written rule books to govern their relationship with their users. As a result, they would have experienced significant initial burdens associated with the proposed rules.
In contrast, the final rules being adopted today apply only to the seven clearing agencies currently registered with the Commission that provide CCP or CSD services, as discussed above in Section II.B.4.
Finally, the Commission has revised the PRA burden estimates in recognition that many parts of Rule 17Ad-22—specifically Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15)—reflect usual and customary practices of registered clearing agencies. Since registered clearing agencies already comply with significant aspects of Rule 17Ad-22 in the normal course of their activities, many aspects of Rule 17Ad-22 impose minimal PRA burdens on registered clearing agencies limited to the review of the rule and their existing policies and procedures. As discussed below, because certain rules would involve adjustments to a registered clearing agency's rule book and its policies and procedures rather than the creation of entirely separate policies and procedures to support entirely new operations and practices, the Commission recognizes that some aspects of Rule 17Ad-22 will impose incremental new PRA burdens on registered clearing agencies.
Accordingly, the estimated PRA burdens discussed below reflect these updated assessments of the likely PRA burdens.
The discussion of the PRA burdens and costs associated with Rule 17Ad-22 is organized in the following manner:
Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15) are discussed together because these rules represent usual and customary practices already being implemented by registered clearing agencies. Because Rules 17Ad-22(b)(4), (b)(5)-(7) and (c), respectively establish new minimum practices for registered clearing agencies with regard to model validation, membership practices and certain financial information, the adopting release discusses these rules separately. The burden discussion for Rules 17Ad-22(c)(1) and (2) has been split into sections to account for the different information collection requirements for varying numbers of respondents.
As noted earlier, the Commission received 25 comment letters concerning the proposed rules.
The rules in the adopting release contain requirements subject to the PRA. Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15) contain “collection of information requirements” within the meaning of the PRA. These rules would require a registered clearing agency to have policies and procedures to adequately document all material aspects of its liquidity risk management processes and its compliance with their requirements. The information collected by virtue of written policies and procedures requirements contained in Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15) generally codify usual and customary practices at CCPs and registered clearing agencies, and thus the PRA burden would be expected to be minimal. Rules 17Ad-22(b)(1)-(3) require written policies and procedures that address risk management practices by CCPs. Specifically, the rules would create standards with respect to: (1) Measurement and management of credit exposures; (2) margin requirements; and (3) financial resources. The Commission did not receive comments on the burdens associated with Rules 17Ad-22(b)(1)-(3).
Rule 17Ad-22(d) sets forth certain minimum standards regarding the operations of registered clearing agencies. The standards established in 17Ad-22(d) address areas including: (1) Transparent and enforceable rules and procedures; (2) participation requirements; (3) custody of assets and investment risk; (4) operational risk; (5) money settlement risk; (6) cost-effectiveness; (7) links; (8) governance; (9) information on services; (10) immobilization and dematerialization of securities certificates; (11) default procedures; (12) timing of settlement finality; (13) delivery versus payment; (14) risk controls to address participants' failures to settle; and (15) physical delivery risks. Commenters did not comment on the burdens associated with Rule 17Ad-22(d).
Rule 17Ad-22(b)(4) contains “collection of information requirements” within the meaning of the PRA. Rule 17Ad-22(b)(4) will require a CCP to establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for an annual model validation consisting of evaluating the performance of the clearing agency's margin models and the related parameters and assumptions associated with such models by a qualified person who is free from influence so that he can be candid in his assessment of the model.
One commenter stated that “a regulatory requirement of model validation on an annual basis is unnecessary (and may be overly burdensome) * * *. [and] can be achieved in a less directive manner.”
The Commission is not persuaded by the position that the frequency of the model validation should be left to the discretion of the CCP.
Rules 17Ad-22(b)(5)-(7) contain “collection of information requirements” within the meaning of the PRA. The information collection under the written policies and procedures requirements contained in Rules 17Ad-22(b)(5)-(7) would establish requirements regarding access to CCPs.
One commenter expressed that proposed Rules 17Ad-22(b)(5)-(7) providing for mandatory access to CCPs in certain circumstances goes “beyond anything in current or proposed global standards * * *. [and is, therefore,] unnecessary and counterproductive to the goal of fair and open access within a framework of safe and sound operation.”
While the Commission understands the concerns raised, the Commission ultimately believes that the benefits of Rules 17Ad-22(b)(5)-(7) are critical to maintaining fairness and open access to central clearing for all market participants, including security-based swaps participants.
Rule 17Ad-22(c)(1)-(2) contains “collection of information requirements” within the meaning of the PRA. The information collection under the written policies and procedures requirements contained in Rule 17Ad-22(c) establishes a recordkeeping requirement for CCPs regarding their responsibilities under Rule 17Ad-22(b)(3) and for registered clearing agencies with respect to posting on their respective Web sites annual audited financial statements.
Commenters did not specifically comment on the burdens associated with Rule 17Ad-22(c)(1)-(2).
The requirements to develop written policies and procedures in Rules 17Ad-22(b)(1)-(3) and Rules 17Ad-22(d)(1)-(15) impose a PRA burden. The requirements in Rules 17Ad-22(b)(1)-(3) will apply to CCPs that are registered clearing agencies. The Commission estimates that a total of nine CCPs
As noted above, registered clearing agencies already have written policies and procedures that meet the standards set forth in Rules 17Ad-22(b)(1)-(3) and (d)(1)-(15) as part of their usual and customary business practice. Accordingly, the Commission believes that the registered clearing agencies would not need to build new infrastructure or modify operations to continue to meet Rule 17Ad-22(b)(1)-(3) and (d)(1)-(15). The Commission believes that registered clearing agencies will incur the incremental burdens of reviewing existing policies and procedures for compliance and updating existing policies and procedures where appropriate. The requirements would impose an aggregate one-time burden of approximately 1,750 hours for all registered clearing agencies.
For each respondent clearing agency, the estimated annualized burden for Rules 17Ad-22(b)(1)—(3) and (d)(1)—(15) is 98 hours (figure calculated as follows: 175 hours (Year 1 burden) + 60 hours (Year 2 burden) + 60 hours (Year 3 burden) = 295 hours (estimated total burden over 3 years) ÷ 3 years = 98 hours).
The requirement to develop written policies and procedures in Rule 17Ad-22(b)(4) imposes a PRA burden. The requirement in Rule 17Ad-22(b)(4) will apply to all CCPs. As discussed above, the Commission estimates that nine CCPs will be subject to the burdens under Rule 17Ad-22(b)(4).
Based on the analogous policies and procedures requirements and the corresponding burden estimates in Regulation NMS, the Commission has preserved the burden estimates from the Proposing Release. The Commission estimates that Rule 17Ad-22(b)(4) would impose a one-time burden on each respondent CCP of 210 hours, corresponding to an aggregate one-time burden on all respondent CCPs of 1,890 hours.
Rule 17Ad-22(b)(4) would require one-time systems adjustments related to the capability to perform an annual model validation. These adjustments would amount to an aggregate one-time burden of approximately 900 hours.
CCPs would be required to collect information relating to their model validation standards required by Rule 17Ad-22(b)(4) on an ongoing basis. The Commission expects that the exact burden of administering the procedures for model validation standards would vary depending on how frequently each CCP may need to update its procedures. Based on the analogous policies and procedures requirements and the corresponding burden estimates in Regulation NMS, the Commission estimates that the ongoing requirements of this rule would impose an annual burden of 60 hours on each respondent CCP, corresponding to an aggregate annual burden for all respondent CCPs of 540 hours.
For each respondent CCP, the estimated annualized burden for Rule 17Ad-22(b)(4) is 143 hours (figure calculated as follows: 210 hours + 100 hours (Year 1 burden) + 60 hours (Year 2 burden) + 60 hours (Year 3 burden) = 430 hours (estimated total burden over 3 years) ÷ 3 years = 143 hours).
Based on its oversight of clearing agencies, the Commission estimates that Rule 17Ad-22(b)(4) would impose an annual cost on all respondent CCPs for work on model validation. The Commission believes clearing agencies would hire a consulting firm that dedicates two consultants to the project. Consistent with the Proposing Release,
The requirements to develop written policies and procedures in Rules 17Ad-22(b)(5)-(7) impose a PRA burden. These PRA burdens will apply to all CCPs. As discussed above, the Commission estimates that nine CCPs will be subject to the burdens under Rules 17Ad-22(b)(5)-(7). The Commission believes that CCPs are more likely to be able to address the changes required by Rules 17Ad-22(b)(5)-(7) in an integrated, not piecemeal, review and drafting process to implement policies and procedures responsive to these rules. Therefore, the revised PRA burden estimates no longer account for each requirement as a separate burden.
Based on the analogous policies and procedures requirements and the corresponding burden estimates in Regulation NMS, the Commission has preserved the burden estimates from the Proposing Release. The Commission estimates that Rules 17Ad-22(b)(5)-(7) would impose a one-time burden on each respondent CCP of 210 hours, corresponding to an aggregate one-time burden on all respondent CCPs of 1,890 hours.
CCPs would be required to collect information relating to standards of Rules 17Ad-22(b)(5)-(7) on an ongoing basis. Based on the analogous policies and procedures requirements and the corresponding burden estimates in Regulation NMS, the Commission estimates that the ongoing requirements of this rule would impose an annual burden of 60 hours on each respondent CCP, corresponding to an aggregate annual burden for all respondent CCPs of 540 hours.
For each respondent CCP, the estimated annualized burden for Rules 17Ad-22(b)(5)-(7) is 110 hours (figure calculated as follows: 210 hours (Year 1 burden) + 60 hours (Year 2 burden) + 60 hours (Year 3 burden) = 330 hours (estimated total burden over 3 years) ÷ 3 years = 110 hours).
The standards in Rule 17Ad-22(c) impose a PRA burden.
The Commission believes the one-time burden imposed would involve adjustments needed to synthesize and format existing information in a manner sufficient to explain the methodology the clearing agency uses to meet the requirement of Rule 17Ad-22(c). The Commission believes these adjustments would impose a one-time burden of 100 hours on each clearing agency, corresponding to an aggregate one-time
Clearing agencies would be required to collect information relating to standards of Rule 17Ad-22(c) on an ongoing basis. Based on the analogous policies and procedures requirements and the corresponding burden estimates in Regulation NMS, the Commission estimates that the ongoing requirements of this rule would impose an annual burden of 60 hours on each respondent clearing agency, corresponding to an aggregate annual burden for all respondent clearing agencies of 600 hours.
For each respondent clearing agency, the estimated annualized burden for Rule 17Ad-22(c) is 137 hours (figure calculated as follows: 191 hours + 100 hours (Year 1 burden) + 60 hours (Year 2 burden) + 60 hours (Year 3 burden) = 411 hours (estimated total burden over 3 years) ÷ 3 years = 137 hours).
The standards in Rule 17Ad-22(c)(1) impose a PRA burden. In contrast to the Proposing Release's burden estimates for proposed Rule 17Ad-22(c)(2), which accounted for 17 clearing agencies, the burden estimate in the adopting release for Rule 17Ad-22(c)(1) reflects a smaller number of clearing agencies. The requirements of Rule 17Ad-22(c)(1) will apply to nine CCPs.
On an ongoing basis, the Commission estimates that for a CCP to generate the required reports concerning its financial resources would impose a burden of three hours per respondent CCP per quarter. This amounts to an annual burden of 12 hours for each CCP and corresponds to an aggregate annual burden of 108 hours for all respondent CCP.
For each respondent CCP, the estimated annualized burden for Rule 17Ad-22(c)(1) is 8 hours (figure calculated as follows: 0 hours (Year 1 burden) + 12 hours (Year 2 burden) + 12 hours (Year 3 burden) = 24 hours (estimated total burden over 3 years) ÷ 3 years = 8 hours).
The standards in Rule 17Ad-22(c)(2) impose a PRA burden. In contrast to the Proposing Release's burden estimates for proposed Rule 17Ad-22(c)(2), which accounted for 17 clearing agencies, the burden estimate in the adopting release for Rule 17Ad-22(c)(2) reflects a smaller number of clearing agencies. The requirements of Rule 17Ad-22(c)(2) will apply to all registered clearing agencies, a total of ten respondents.
The Commission expects that the exact burden of collecting information relating to the procedures for facilitating an annual audited financial statement of the clearing agency and posting that annual audited financial statement to the clearing agency's Web site would vary depending on how frequently each clearing agency may need to update its procedures. Also, the Commission estimates based on its experience with entities of similar size to the respondents to this collection, that the initial burden of generating annual audited financial statements would generally require on average 500 hours per respondent clearing agency.
Clearing agencies also would be required to collect information relating to any procedures used to support compliance with Rule 17Ad-22(c)(2) on an ongoing basis. Based on the analogous policies and procedures requirements and the corresponding burden estimates in Regulation NMS, the Commission estimates that the ongoing requirements of this rule would impose an annual burden of 250 hours on each respondent clearing agency for collecting information relating to administering policies and procedures for facilitating an annual audited financial statement of the clearing agency and posting that annual audited financial statement to the clearing agency's Web site for an aggregate burden of 2,500 hours.
Annualized, the estimated burden for Rule 17Ad-22(c)(2) is 333 hours (figure calculated as follows: 500 hours (Year 1 burden) + 250 hours (Year 2 burden) + 250 hours (Year 3 burden) = 1,000 hours (estimated total burden over 3 years) ÷ 3 years = 333 hours). This figure represents a weighted average for 10 respondent clearing agencies. The burden will be higher for clearing agencies that have not yet implemented Rule 17Ad-22(c)(2). The burden will be less for clearing agencies that have already implemented the requirement as part of their usual and customary practices.
The requirement also would require the services of a registered public accounting firm. The Commission estimates those services would on average cost approximately $500,000 annually.
The total initial burden for Rule 17Ad-22 is 11,340 hours.
The collection of information relating to Rule 17Ad-22(b) and Rule 17Ad-22(c)(1) will be mandatory for all CCPs. The collection of information relating to Rule 17Ad-22(c)(2) and Rule 17Ad-22(d) will be mandatory for all registered clearing agencies.
The Commission expects that the written policies and procedures that will be generated pursuant to Rules 17Ad-22(b)(1)-(7), Rule 17Ad-22(c)(2), and Rules 17Ad-22(d)(1)-(15) will be communicated to the members, subscribers, and employees (as applicable) of all entities covered by the Rule. To the extent that this information is made available to the Commission, it will not be kept confidential. Any records generated in connection with the requirement of Rules 17Ad-22(b)(1)-(3), Rules 17Ad-22(b)(5)-(7), Rule 17Ad-22(c)(2), and Rules 17Ad-22(d)(1)-(15) to establish written policies and procedures will be required to be preserved in accordance with, and for the periods specified in, Exchange Act Rules 17a-1
The information collected pursuant to Rule 17Ad-22(c)(1) relating to the calculation and maintenance of a record of the financial resources necessary to meet the requirements of Rule 17Ad-22(b)(3) will be retained by the registered clearing agencies that perform CCP services and will be available to the Commission. To the extent that the Commission receives confidential information pursuant to this collection of information, such information would be kept confidential, subject to the provisions of applicable law.
The rules that we are adopting today are designed to enhance the substantive regulation of securities clearing agencies. The Commission is sensitive to the economic effects of the rules it is adopting today, including their costs and benefits. Some of these costs and benefits stem from statutory mandates, while others are affected by the discretion we exercise in implementing the mandates. We requested comment on all aspects of the costs and benefits of the proposal, including any effect our proposed rules may have on efficiency, competition, and capital formation.
As required by Title VII and Title VIII of the Dodd Frank Act, Rule 17Ad-22 will establish a regulatory framework for CCPs for security-based swap transactions and clearing agencies that are designated as systemically important by the Council. In so doing, Rule 17Ad-22 will help ensure that clearing agencies maintain effective operational and risk management procedures as well as meet the statutory requirements under the Exchange Act on an ongoing basis. Rule 17Ad-22 is consistent with the Dodd-Frank Act and the Congressional findings in the adoption of Section 17A. Specifically, Congress found that:
(A) The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors.
(B) Inefficient procedures for clearance and settlement impose unnecessary costs on investors and persons facilitating transactions by and acting on behalf of investors.
(C) New data processing and communications techniques create the opportunity for more efficient, effective, and safe procedures for clearance and settlement.
(D) The linking of all clearance and settlement facilities and the development of uniform standards and procedures for clearance and settlement will reduce unnecessary costs and increase the protection of investors and persons facilitating transactions by and acting on behalf of investors.
Section 17A of the Exchange Act was adopted in direct response to the paperwork crisis of the late 1960's that nearly brought the securities industry to a standstill and directly or indirectly resulted in the failure of large numbers of broker-dealers
Economic characteristics of FMIs,
While the Commission believes that the U.S. clearance and settlement system currently works well, it is important that the operations of clearing agencies evolve with the securities markets, especially as clearing agencies affect a wider array of market participants. A clearing agency's direct participants, such as broker-dealers, banks and other types of financial intermediaries, use clearing agencies to clear and settle proprietary trading activity. They also use clearing agencies as intermediaries for institutional investors, retail investors, and proprietary trading firms,
Because clearing agencies concentrate risk, a disruption in a clearing agency's operations or the failure of a clearing agency to meet its obligations could cause a systemic disruption that can be costly for more than just the clearing agency and its members. For example, a significant dollar value of financial transactions pending for clearance or to be cleared in the future through the clearing agency could fail to settle on time or at the original contract terms. If the clearing agency acting as a CCP does not have the funds to cover the fail, members of the clearing agency would suffer losses and liquidity constraints due to their inability to access their clearing fund contributions and the clearing agency's inability to honor its obligations.
The standards adopted today as part of Rule 17Ad-22 are intended to help mitigate these risks by requiring measures that would reinforce the safety of clearing agencies. Safe and reliable clearing agencies are essential not only to the stability of the securities markets they serve but often also to payment systems, which may be used by a clearing agency or may themselves use a clearing agency to transfer collateral. The safety of securities settlement arrangements and post-trade custody arrangements is also critical to the goal of protecting the assets of investors from claims by creditors of intermediaries and other entities that perform various functions in the operation of the clearing agency. Investors are more likely to participate in markets when they have confidence in the safety and reliability of clearing agencies; therefore the rule being adopted today should promote capital formation.
In addition, the rule seeks to promote the efficiency of clearing agencies. As described below, the structure of the clearing agency market and the structure of the clearing agencies themselves may not provide the competitive incentives necessary to promote transparency, fair access, and efficient operations. Transparency helps to ensure that clearing members can make more informed decisions and that market participants in general have better information about the stability of the system. In turn, transparency promotes competition by facilitating comparisons across clearing agencies. Fair access ensures that a variety of market participants can gain access to clearing and settlement services and thus promotes competition by lowering barriers to entry for clearing agency participants.
The analysis below examines the projected economic effects of the adopted rules. The analysis starts with a baseline discussion of the current regulatory landscape and existing industry practices of clearing agencies relating to their operations and risk management procedures and membership policies. This discussion provides a point of comparison for the second half of the economic analysis, which is a discussion of the benefits and costs of the rules, as well as alternative approaches to the rules that were considered by the Commission.
Rule 17Ad-22 impacts the market for clearing agency services in securities, with an emphasis on CCP services. There are currently seven clearing agencies registered with the Commission that provide CCP or CSD services. Six of these clearing agencies offer CCP services, and one is a CSD. Together, they processed over $1 quadrillion in financial market transactions in 2011.
Central clearing facilitates the management of counterparty credit risk among dealers and other institutions by shifting that risk from individual counterparties to CCPs, thereby helping protect counterparties from each other's potential failures and preventing the buildup of risk in such entities, which could be systemically important. Central clearing generally reduces the counterparty risk of market participants, including market makers and dealers. If market makers and dealers cannot diversify this counterparty risk, they generally pass the costs on to their clients in the form of higher transaction costs. In order for central clearing to reduce risk, mark-to-market pricing and margin requirements need to be applied in a consistent manner.
The market for CCP services in the United States tends to be segmented by financial instrument, with clearing agencies often specializing in particular instruments. As such, some market segments may have characteristics of natural monopolies capable of being sustained despite the presence of competitors with the potential to enter the market segment in question.
The following sections set the baseline for comparison in our analysis of the economic effects. In particular, they describe the legal framework under which registered clearing agencies operate and the current practices of clearing agencies as they relate to the rules being adopted today.
In recognition of the risks posed by the concentration of clearance and settlement activity at clearing agencies, the Exchange Act and Titles VII and VIII of the Dodd-Frank Act provide a framework for enhanced regulation and supervision of clearing agencies by the Commission.
Section 17A of the Exchange Act
As described in Section I above, the Dodd-Frank Act was enacted to, among other things, mitigate systemic risk and promote the financial stability of the United States by improving accountability and transparency in the financial system and by providing for enhanced regulation and oversight of institutions designated as systemically important.
In addition to the provisions in Title VII that expand the Commission's authority under the Exchange Act to include security-based swap activities, Title VIII of the Dodd-Frank Act, entitled the Clearing Supervision Act, establishes an enhanced supervisory and risk control system for systemically important clearing agencies and other FMUs.
In part, the Clearing Supervision Act provides that the Commission, considering relevant international standards and existing prudential requirements, may prescribe regulations that set risk management standards for the operations related to PCS Activities
As noted above, the final FMI Report was published on April 16, 2012 to replace the earlier CPSS-IOSCO
Rule 17Ad-22 and the rules for DCOs adopted by the CFTC
First, Rule 17Ad-22(b)(1) requires a CCP to measure its credit exposures to its participants at least once a day while the CFTC's DCO rules require that DCOs perform that function periodically throughout the day. Second, consistent with the current practice at registered CCPs providing clearing of security-based swaps, Rule 17Ad-22(b)(3) requires CCPs for security-based swaps to maintain enough financial resources to withstand a default by the two largest participant families.
The CFTC applies the latter standard to all DCOs. In its October 2010 rule proposal, the CFTC proposed requiring that systemically important DCOs maintain sufficient financial resources to meet their financial obligations to their clearing members notwithstanding a default by the two clearing members creating the largest combined financial exposure for the systemically important DCO in extreme but plausible market conditions.
Third, Rule 17Ad-22(b)(4) requires model validations to be performed “annually” by a person who is free from influence from the persons responsible for development or operation of the systems and models being validated so that he or she can be candid in his or her assessment of the model. The CFTC rule requires an “independent” validation on a “regular basis.”
Fourth, Rule 17Ad-22(b)(7) provides for scalability of net capital requirements in proportion to the riskiness of the participants' activities and permits CCPs to seek Commission approval to impose a net capital requirement on participants that is higher than $50 million. In contrast, the CFTC's DCO rules do not provide for scalability and do not allow DCOs the option to seek approval for a higher net capital requirement.
Finally, a DCO is required to publicly disclose its margin-setting methodology and default procedures on its Web site. Rule 17Ad-22(d)(11) requires a clearing agency to make key aspects of its default procedures publicly available, but nothing in the rules the Commission is adopting today would require publication of the clearing agency's margin methodology.
An overview of the risk management practices, operations, policies and procedures of registered clearing agencies is set forth below. The discussions under the headings “Risk Management—Measurement of credit exposures,” “—Margin” “—Financial Resources” and under the heading “Other Clearing Services” are based upon public representations
CCPs have a range of tools that can be used to manage the financial risks to which they are exposed, and the tools that an individual CCP uses will depend upon the nature of its obligations. Nonetheless, there is a common set of procedures that are implemented by many CCPs to manage counterparty credit and liquidity risks. Broadly, these procedures enable CCPs to manage their risks by limiting the likelihood of defaults, by limiting the potential losses and liquidity pressures if a default should occur, and by ensuring that there are adequate resources to cover losses and meet payment obligations on schedule.
To manage its counterparty credit exposures to its participants effectively, a clearing agency must be able to measure those exposures. A clearing agency can ascertain its current credit exposure to each participant by marking each participant's outstanding contracts to current market prices and (to the extent permitted by a clearing agency's rules and supported by law) netting any gains against any losses. A clearing agency faces the risk that its exposure to
The current practice of each CCP registered with the Commission includes these procedures: (1) Measuring credit exposures at least once a day; (2) setting margin coverage at a 99% confidence level over some set period; (3) using risk-based models; (4) establishing a fund that mutualizes losses of defaults by one or more participants that exceed margin coverage; and (5) maintaining sufficient financial resources to withstand the default of at least the largest participant,
Currently, registered clearing agencies measure credit exposures at least once per day. Clearing agencies that guarantee trades on the trade date, such as the FICC/GSD and OCC, measure credit exposures multiple times per day. NSCC does not guarantee trades until midnight of T+1, and it only measures credit exposures daily, though it is considering an accelerated trade guarantee proposal that would potentially revise these practices.
Clearing agencies use risk-based models to set initial and variation margin. Inputs to the margin calculation include, among other things, portfolio size, asset price volatility, current asset values, the likely liquidity of the asset should a particular market maker fail (market-maker domination charges), the likely time it would take to liquidate the assets, potential correlations between the value of assets posted as collateral and the assets being cleared, and the correlation of the prices in the portfolio of assets being cleared by the participant.
The current practice of many CCPs registered as clearing agencies is to calculate daily margin requirements using risk-based models to ensure coverage at a 99% confidence interval over a designated time horizon. Losses beyond this level are typically covered by the CCP's guaranty fund. This standard is consistent with the RCCP, which has been the internationally accepted minimum standard for CCPs.
This standard comports with the international standard for bank capital requirements established by the Bank for International Settlements, which requires banks to measure market risks at a 99% confidence interval when determining regulatory capital requirements.
All clearing agencies that act as CCPs in the United States collect contributions from their members to guaranty funds or clearing funds for the mutualization of losses under extreme but plausible market scenarios. The guaranty funds or clearing funds consist of liquid assets, the sizes of which vary depending on the products that the CCP clears. In particular, the guaranty funds for CCPs that clear security-based swaps are relatively larger (as measured by the size of the fund as a percentage of the total and largest exposures) than the guaranty funds or clearing funds for other financial instruments. The guaranty funds for security-based swaps are sized to achieve protection against a default by two participant families to whom the clearing agency has the largest exposures and are designed to protect the clearing agency from the extreme jump-to-default risk associated with large protection sellers. Security-based swap CCPs have organized their security-based swap clearing operations either in a separate legal entity or by establishing a separate fund and separate procedures (rules, membership requirements and risk management practices) within a single legal entity. The registered clearing agencies clearing products other than security-based swaps maintain the financial resources to withstand the default of the single largest participant family.
Clearing agencies registered with the Commission typically have a model validation process in place that evaluates the adequacy of margin models, parameters, and assumptions. Current model validation practices vary among clearing agencies. Some registered clearing agencies conduct annual validations, while others conduct them on an ad hoc basis or perform validations on new models or changes to existing models before implementing them. In addition to validating models, registered clearing agencies typically review models used to calculate margin on a regular basis and back-test them regularly to assess the reliability of the methodology in achieving the desired coverage. Based on our experience in supervising registered CCPs, we understand that registered CCPs' approaches to model validation include model validations
Because registered clearing agencies are SROs, they have written policies and procedures in place that, at a minimum, address the significant aspects of their operations and risk management practices.
Registered clearing agencies must be able to enforce those policies and procedures and such enforcement powers are specifically contemplated by operative provisions of the Exchange Act, subject to oversight by the Commission.
Applicants for membership must provide a registered clearing agency with certain financial and operational information prior to being admitted as a member and on an ongoing basis as a condition of continuing membership. The registered clearing agency reviews this information to ensure that the applicant has the operational capability to meet the technical demands of interfacing with the clearing agency. In particular, registered clearing agencies require that an applicant demonstrate that it has adequate personnel capable of handling transactions with the clearing agency and adequate physical facilities, books and records and procedures to fulfill its anticipated commitments to, and to meet the operational requirements of, the clearing agency and other participants with necessary promptness and accuracy and to conform to any condition or requirement that the clearing agency reasonably deems necessary for its protection.
Registered clearing agencies use the ongoing monitoring process to ensure they understand relevant changes in the financial condition of their participants and to mitigate credit risk exposure of the clearing agency to its participants. Financial statements filed with the regulatory agencies, information obtained from other SROs and information gathered from various financial publications are analyzed by risk management staff so that the clearing agency may evaluate whether the participant continues to be financially stable.
Registered clearing agencies currently seek to minimize the risk of loss or delay in access by holding assets that are highly-liquid (
Registered clearing agencies develop and maintain plans to assure the safeguarding of securities and funds, the integrity of the Automated Data Processing systems, and recovery of securities, funds, or data under a variety of loss or destruction scenarios.
Registered clearing agencies use settlement banks to facilitate the cash portion of securities settlements. Because DTC is organized as a limited purpose trust company and is a member of the Federal Reserve System,
Registered clearing agencies have procedures to control costs and to regularly review pricing levels against operating costs. These clearing agencies may use a formal budgeting process to control expenditures, and may review pricing levels against their costs of operation during the annual budget process. Clearing agencies also analyze workflows in order to make recommendations to improve the operating efficiency of the clearing agency.
Each registered clearing agency is linked to other clearing organizations, trading platforms, and service providers. An example of such a link is DTC Canadian Link Service, which allows qualifying DTC participants to clear and settle valued securities transactions with participants of a Canadian securities depository. The link is designed to facilitate cross-border transactions by allowing participants to use a single depository interface for U.S. and Canadian dollar transactions and eliminate the need for split inventories.
Each registered clearing agency has a board that governs the operations of the entity and supervises senior management. The key components of a clearing agency's governance arrangements include the clearing agency's ownership structure, the composition and role of its board, the structure and role of board committees, reporting lines between management and the board, and the processes that ensure management is held accountable for the clearing agency's performance.
Because registered clearing agencies are SROs, their rules are published by the Commission and are available on each clearing agency's Web site. In addition, information regarding the operations and services of each clearing agency can be found either on the clearing agency's Web site or a Web site maintained by an affiliated entity of the clearing agency.
Virtually all mutual fund securities, government securities, options, and municipal bonds in the United States are dematerialized, and most of the equity and corporate bonds in the U.S. market are either immobilized or dematerialized; some securities (
Each registered clearing agency makes publicly available rules, policies or procedures that set forth the actions the clearing agency may take in the event of a participant default, with the exception of certain of their policies and procedures that are kept non-public to ensure their integrity, such as those associated with the oversight of clearing participants. For example, clearing agency rules typically state what constitutes a default, identify whether the board or a committee of the board may make that determination and describe what steps the clearing agency may take to protect itself and its participants. In this regard, clearing agencies typically attempt, among other things, to close-out, to hedge or to liquidate a defaulting participant's positions.
Each registered clearing agency has rules, policies or procedures that provide for the settlement of their respective securities transactions no later than the end of a pre-defined settlement day. For example, DTC provides for final settlement of securities transfers no later than the end of the day and the timing of finality is clearly defined. Final cash settlement occurs at the end of the processing day at DTC. Funds transfers through DTC's account at the Federal Reserve Bank of New York that occur between DTC and a settling bank that is acting on behalf of a DTC participant are final when made.
Rule 17Ad-22(d)(13) would apply to registered clearing agencies that provide CSD services. DTC currently is the only registered clearing agency that is a CSD. DTC operates a Model 2 DVP system that provides for gross settlements of securities transfers during the day followed by an end of day net funds settlement.
The sole registered clearing agency providing CSD services, DTC, which also extends limited intraday credit to participants, has policies and procedures in place to ensure that timely settlement can be completed in the event of the default of the participant with the largest settlement obligation. DTC has policies and procedures to establish limits (called net debit caps) for each participant. The net debit cap ensures that the amount of cash that a participant owes the clearing agency at any one point in time does not exceed this pre-defined limit or cap. The net debit cap is set in relation to a participant's normal activity with the maximum net debit cap for an individual participant currently set at $1.8 billion. DTC also has implemented other risk management controls to help ensure settlement. For example, DTC monitors the value of the collateral supporting each participant's net debit in its settlement system based on the security's prior business day's closing market price, less a haircut, which is based primarily upon the availability of prices, ratings, and the price volatility of the particular security.
Each registered clearing agency has rules and procedures that describe its obligations to its participants when it assumes deliveries of physical instruments. For example, under NSCC's rules governing its continuous net settlement (“CNS”) system, NSCC becomes the contra-party for settlement purposes at the point NSCC's trade guarantee attaches, thereby assuming the obligation of its members that are receiving securities to receive and pay for those securities, and the obligation of members that are delivering securities to make the delivery. Unless NSCC has invoked its default rules, NSCC is not obligated to make those deliveries until it receives from members with delivery obligations deliveries of such securities; rather, deliveries that come into CNS ordinarily are promptly redelivered to parties that are entitled to receive them through an allocation algorithm. Members are obligated to take and pay for securities allocated to them in the CNS process. NSCC's rules also provide mechanisms allowing receiving members a right to receive high priority in the allocation of deliveries, and also permit a member to buy-in long positions that have not been delivered to it by the close of business on the scheduled settlement date.
To address credit risk management, clearing agencies establish requirements for participants' financial resources, creditworthiness, and operational capability, and maintain procedures to ensure ongoing compliance with their rules. In its regulatory capacity overseeing clearing agencies, Commission staff has observed that applicants for clearing agency membership must demonstrate standards of financial responsibility, operational capability and character. Specific criteria used by clearing agencies address the extent and nature of the business the applicant intends to conduct through the clearing agency and the applicant's capital resources and financial stability, including factors bearing on its financial capability to meet its projected clearing agency obligations.
As of December 31, 2011, registered CCPs (including those clearing nontraditional securities such as credit default swaps) had the following numbers of members:
Certain clearing agencies that provide CCP services for security-based swap transactions, however, have required members to have significant minimum portfolio sizes or trading volumes, meet significantly higher minimum capital requirements, and require members to operate a dealer business. Such requirements may present challenges to new liquidity providers in the relevant market. The CCPs argue that these requirements are necessary to mitigate the risk exposure of the CCP in the event of default by a clearing member.
To address this potential risk, these CCPs developed a default management process that requires traders from their clearing members to be seconded to the CCP to manage the defaulter's portfolio. They would be charged with neutralizing the market risk in the portfolio by entering into new OTC derivative contracts with non-defaulting clearing members. Once neutralized as much as possible, the portfolio would be divided and auctioned to non-defaulting members. The CCP would determine a reservation price for the auction, and if a non-defaulting clearing member's bid exceeds that reservation price, the auction would be deemed successful. If not, the auction would fail. In the event of a failed auction, the portfolio would be divided among the non-defaulting clearing members pro rata based on their volumes of business. Under this process, a non-defaulting CCP participant would bear the risk of entering the markets to hedge open positions created by a default only if it is a successful bidder or if one or more auctions fail and it is assigned positions because it has outstanding positions with the CCP.
This process creates a tension between the need for effective default management procedures and the maintenance of fair and open access to a CCP's services. Because of the stringent capital and other requirements imposed by the CCP's membership standards, membership in a CCP clearing security-based swaps generally has been limited to very large dealers, those meeting the outstanding swap portfolio amount and capital requirements. Current members may also have an incentive to exclude new members, either to manage counterparty risk or to block competitors. Being a member of a CCP may provide a competitive boost to a new member that is a smaller dealer by allowing the CCP's creditworthiness to be substituted for that of the new member. Requirements that prevent smaller dealers from entering as new members may, therefore, undermine competition and the entry of new liquidity providers in the relevant market. Indeed, one committee argues that access criteria in credit default swaps have had the effect of excluding market participants such as mid-tier financial institutions and buy-side firms from direct access to CCPs.
Currently, there is no rule requirement under the Exchange Act or Commission rule that mandates clearing agencies to record and maintain information about their financial resources. Nevertheless, as part of their ordinary risk management procedures developed in consultation with their members, clearing agencies produce at least quarterly internal reports regarding the ability of the CCP to withstand a default by the participant (or two participants) to which the clearing agency has the largest exposure in extreme but plausible market conditions. In addition, as part of the Commission's supervision, oversight and monitoring of clearing agencies, the Commission staff can obtain such information on request. However, clearing agencies do not all currently
Commission staff guidance to clearing agencies provides that clearing agencies should provide, within 60 days following the close of the clearing agency's fiscal year, audited annual financial statements to those participants who have made clearing fund contributions and/or have money and/or securities in the clearing agency's systems.
In 2009, based upon an agreement reached with the U.S. Department of Treasury, the operations of several U.S. clearing agencies were assessed by independent assessors from the IMF against the CPSS-IOSCO Recommendations.
The table
The purpose of each rule being adopted today is to enhance the regulatory framework for registered clearing agencies. This regulatory framework will facilitate ongoing compliance with the statutory requirements that clearing agencies have rules that facilitate the prompt and accurate clearance and settlement of securities transactions and derivative agreements, contracts and transactions for which they are responsible, and safeguard funds and securities. The rules do so by requiring certain minimum standards. The Commission believes that these requirements will help ensure resilient and cost-effective clearing agency operations as well as promote transparency that would consequently support confidence among market participants in clearing agencies' ability to serve as efficient and financially stable mechanisms for clearance and settlement and to facilitate capital formation.
In addition, the rules relating to membership requirements will help facilitate broad participation and open access to clearing agencies. If the rules enhance market participation by investors, the rules may thereby increase price competition, discovery, and price efficiency in the securities cleared by the clearing agency.
Taken together, the rules are largely consistent with existing industry practices. In particular, Rules 17Ad-22(b)(1)-(3) and (d) are modeled on the CPSS-IOSCO Recommendations, which have been in place since 2004 and are generally observed by all clearing agencies. Rule 17Ad-22(c)(2) would codify the existing practice of most registered clearing agencies of maintaining certain financial information on their Web sites. Registered CCPs already disclose their annual audited financial statements on their Web sites, and all except for one registered CCP prepare such financial statements using U.S. GAAP or IFRS.
In the Proposing Release, the Commission identified potential costs and benefits resulting from Rule 17Ad-22, as proposed, and requested comment on all aspects of the cost-benefit analysis, including the identification and assessment of any costs and benefits that were discussed in the analysis.
The Commission carefully considered all comments received on the Proposing Release. The comments are discussed above in Section III in relation to each part of Rule 17Ad-22. In particular, the Commission carefully considered comments setting forth alternatives to the requirements contained in Rule 17Ad-22. The discussion immediately below takes into account the alternatives proposed by commenters. Several commenters argued that Rule 17Ad-22(d) should not apply to entities that perform certain post-trade processing services (
As discussed above, many of the provisions in Rule 17Ad-22 are modeled on the CPSS-IOSCO Recommendations. As a general alternative to prescribing its own requirements under Rule 17Ad-22, the Commission considered requiring registered clearing agencies to perform self-assessments using the CPSS-IOSCO Recommendations. This approach would have been similar to the Board's amendment to its Payment System Risk Policy Statement that directed certain systemically important entities to conduct self-assessment using the CPSS-IOSCO Recommendations.
The Commission believes the resulting revised regulatory framework should enhance confidence in the market and better serve market participants. With the adoption of these rules, clearing agencies will be well-positioned to withstand market volatility and evolve with market developments and technological advancements. Establishing rules that are consistent with current practice minimizes up-front costs and provides a good starting point for promoting appropriate risk management practices. As clearing agency practices evolve over time in response changes in technology, legal requirements and other factors, clearing agencies may need to make appropriate updates and improvements to their operations and risk management practices, and as a result, actual costs of ongoing compliance with Rule 17Ad-22 may differ from the estimates discussed below.
The following addresses the entire rule and each rule provision being adopted today, its purpose, benefits and costs, and the impact of the rule on efficiency, competition and capital formation.
The adoption by the Commission of Rule 17Ad-22 should benefit the U.S. financial markets in several ways. Because market participants and regulatory authorities are familiar with the CPSS-IOSCO Recommendations upon which Rule 17Ad-22 is based, the provisions being adopted today will increase the consistency among regulatory frameworks worldwide and thus diminish the opportunities for regulatory arbitrage. Since their publication in 2001, and 2004, respectively, the RSSS and RCCP have been used by the World Bank and IMF in numerous technical assistance and FSAP missions.
The establishment of consistent standards for CCP and CSD operations is an important goal that underpinned the enactment of Section 17A of the Exchange Act. When Congress adopted Section 17A, as part of the 1975 Amendments to the Securities Act (“1975 Amendments”), it determined that the implementation of linked systems for clearance and settlement and uniform standards would reduce unnecessary costs and increase the protection of investors and persons facilitating transactions by and acting on behalf of investors. The legislative history noted that when broker-dealers must deal with a dozen or more different clearing and depository systems in their daily securities operations, the result is excessive cost and poorer service to investors.
Furthermore, Rule 17Ad-22 will have the benefit of serving as a minimum benchmark for the Commission in making its required determinations regarding the rules of registered clearing agencies. For example, for a clearing agency to be registered under Section 17A, the Commission must find that it has the ability to facilitate the prompt and accurate clearance and settlement of transactions, to safeguard investor funds and securities, to remove impediments to and to perfect the mechanism of a national clearance and settlement system, and in general to protect investors and the public interest. Also, the clearing agency's rules must provide adequate access to qualified participants, fair representation of shareholders and participants, equitable pricing, discipline of participants, and must not impose any undue burden on competition.
Rule 17Ad-22 will also have the benefit of augmenting the Commission's ability to regulate clearing agencies. Because clearing agencies are SROs, after a clearing agency has been registered with the Commission, the clearing agency must submit proposed rule changes to the Commission for approval under Exchange Act Rule 19b-4. To approve a clearing agency's proposed rule change, the Commission must find that it complies with Section 17A. The minimum benchmark established by Rule 17Ad-22 will help ensure and demonstrate that the existing operations of clearing agencies and their proposed rule changes meet or exceed international standards while remaining appropriate for the individual clearing agency. As a result, a clearing agency cannot use Rule 17Ad-22 to reduce the strength of its operational standards or adopt a new policy or procedure that the Commission believes does not meet the requirements of Section 17A.
Finally, the Commission believes Rule 17Ad-22 will help market participants be in a position to better compare the operations of U.S. clearing agencies with non-U.S. clearing organizations. In addition, the Commission's adoption of Rule 17Ad-22 will lead to greater confidence, both domestically and internationally, in the resiliency of clearing agencies and their ability to support the U.S. financial markets. The Commission's adoption of Rule 17Ad-22 may also reduce some of the potential regulatory burden for CCPs and CSDs that may be dually-regulated by the SEC and another domestic or foreign regulator because it is modeled on standards already employed by other regulatory authorities.
Below we discuss a number of costs and benefits that are related to the rule being adopted today. Many of these costs and benefits are difficult to quantify with any degree of certainty, especially as practices at clearing agencies are anticipated to evolve and appropriately adapt to changes in technology and market developments. In addition, the extent to which the increased ability to enforce standards that are incorporated in the rule will help limit future risks is unknown. Moreover, this difficulty is aggravated by the fact that limited public data exists that is related to a clearing agency's risk management practices that could assist in quantifying certain costs. Therefore, much of the discussion is qualitative in nature but where possible, we quantify the costs.
Many, but not all, of the costs of the rule involve a collection of information, and these costs and burdens were discussed in the Paperwork Reduction Act section. When monetized
Many parts of Rule 17Ad-22 are consistent with current practice and therefore should not impose significant costs on registered clearing agencies to comply with those provisions. As noted above, Rule 17Ad-22 also will have the benefit of augmenting the Commission's ability to regulate clearing agencies. Rule 17Ad-22 should improve access to security-based swap clearing agencies. The extent to which security-based swap participants that will be eligible under new access requirements choose to become members is unknown and we are unaware of empirical data on the potential impact that this will have on competition in the security-based swap market. Therefore, the quantification of this benefit is not feasible.
Rule 17Ad-22(a)(1) would define “central counterparty” as a clearing agency that interposes itself between counterparties to securities transactions to act functionally as the buyer to every seller and as the seller to every buyer. The definition contained in this rule is generally consistent with the common usage and understanding of that term.
Rule 17Ad-22(a)(2) would define “central securities depository services” to mean services of a clearing agency that is a securities depository as described in Section 3(a)(23) of the Exchange Act.
Rule 17Ad-22(a)(3) would define “participant family,” for the limited purposes of Rules 17Ad-22(b)(3) and 17Ad-22(d)(14), to mean that if a participant controls another participant, or is under common control with another participant, then the affiliated participants shall be collectively deemed to be a single participant. The Commission is not narrowing the definition of control in this context to mean ownership of 50% or more of the voting securities or other interests in a participant, as requested by one commenter.
Rule 17Ad-22(a)(4) would define “normal market conditions” for the limited purposes of Rules 17Ad-22(b)(1) and (2), to mean conditions in which the expected movement of the price of cleared securities would produce changes in a clearing agency's exposures to its participants that would be expected to breach margin requirements or other risk control mechanisms only one percent of the time.
The rule conforms to the generally recognized standard of “normal market conditions” as defined in the RCCP and is the benchmark for most CCPs' margin methodologies, many of which use risk-based models to ensure coverage at a 99% confidence interval, at minimum, over a designated time horizon.
Rules 17Ad-22(b)(1)-(4) concern risk management requirements for clearing agencies that perform CCP services. In particular, these rules will require a clearing agency that provides CCP services to have written policies and procedures reasonably designed to: measure its credit exposures at least once a day, use margin requirements to limit its exposures to potential losses from defaults by its participants, use risk-based models and parameters to set margin requirements and to review such requirements at least monthly, maintain sufficient financial resources to withstand a default by the two participant families, if clearing security-based swaps, or one participant family otherwise, to which it has the largest exposure,
As described above, these rules are consistent with current practice. Registered clearing agencies already have written policies and procedures designed to meet these risk management requirements, particularly Rules 17Ad-22(b)(1)-(3). While Rules 17Ad-22(b)(1)-(3) reflect the CPSS-IOSCO Recommendations, which are observed by all clearing agencies, Rule 17Ad-22(b)(4) would establish certain new minimum practices for clearing agencies.
• First, Rule 17Ad-22(b)(1) requires that each CCP measure its credit exposures at least once per day. This rule codifies the current minimum baseline adhered to by the two clearing
• Second, Rule 17Ad-22(b)(2) requires that each CCP collect margin from its participants to limit exposures resulting from changes in prices or participant positions in current market conditions. This margin can also be used to minimize the CCPs losses in the event of a participant default. This rule is consistent with the current practice of each CCP to calculate daily margin requirements using risk-based models to ensure coverage at a 99% confidence interval (
• Third, and consistent with Rule 17Ad-22(b)(3), each CCP currently maintains sufficient financial resources to withstand, at a minimum, a default by the participant to which it has the largest exposure in extreme but plausible market conditions.
• Fourth, Rule 17Ad-22(b)(4) would ensure that all CCPs have annual model validations performed by a qualified person who is free from influence from the persons responsible for development or operation of the models being validated.
While not requiring major changes to existing operational practices and policies and procedures currently in place at most registered clearing agencies, Rules 17Ad-22(b)(1)-(4) provide enforceability to minimum standards regarding how clearing agencies manage counterparty credit and default risks. One of the primary roles of a CCP is to mitigate counterparty credit and default risk. Because of the role margin plays in a default, a CCP must have confidence that the liquidation value of available margin will be sufficient to cover amounts owed by a defaulting participant to the clearing agency, and that the margin will be available for liquidation without delay. As described in the baseline discussion,
Frequent measurement of counterparty credit exposures and the use of validated risk-based modeling are essential to setting adequate margin requirements. A good margin setting methodology will help avoid both under- and over-collateralization. Under-collateralization exposes a CCP to increased credit risk in the event of a participant default, as the CCP may be unable to recover amounts owed to it from the participant on an unsecured basis. Incurring losses on a counterparty default could disrupt the operations of the clearing agency as well as its non-defaulting participants by exposing them to unanticipated liabilities. These disruptions could negatively impact price efficiency and capital formation if distressed liquidations result in prices away from fundamental values for significant periods of time. Over-collateralization imposes unnecessary costs on trading by tying up clearing member assets that could otherwise be used more efficiently, harming allocative efficiency and capital formation. The Commission believes that Rules 17Ad-22(b)(1)-(4) creates standards to mitigate a CCP's risks associated with counterparty credit exposures and defaults.
Rules 17Ad-22(b)(1)-(4) acknowledge that appropriate risk management will vary based on a number of factors relating to the markets and products a CCP serves. Subject to minimum standards, the rules permit each clearing agency the flexibility to develop the most effective and economically efficient risk measurement and risk-based modeling approaches for each of its unique markets and products to achieve an optimal level of risk mitigation. By setting only a minimum standard, the rules also allow each CCP to adapt its risk management strategies as needed in response to dynamic market conditions rather than locking the CCP into a fixed set of risk mitigation rules. The minimum standards also prevent a CCP from establishing risk monitoring procedures below a baseline in an effort to reduce costs and gain a competitive advantage.
The Commission believes that credit exposures should be measured at least once a day because a clearing agency that did not do so would not be able to effectively manage its risk. However, the Commission believes that it cannot reasonably determine the most appropriate frequency for CCPs to monitor their risk exposures in all circumstances. The minimum standards in Rules 17Ad-22(b)(1)-(4) are intentionally written to comply with CPSS-IOSCO Recommendations and limit systemic risk while not precluding entry to potential new entrant CCPs. Each CCP is exposed to participants in different markets characterized by different trading patterns, volumes, liquidity, transparency and other unique market characteristics. Rules 17Ad-22(b)(1)-(4) provide each CCP the flexibility to tailor its risk management practices to each of its unique markets and products, allowing it to develop the most economically efficient and effective risk mitigation strategies possible.
The Commission considered the range of practices at registered clearing agencies with respect to monitoring risk exposures and recognizes that there is a risk that by setting the minimum standards according to the highest level of current market practice, the standards could be too high for some potential market conditions or future security types. This could result in sub-optimal risk management practices for a period in the future to the extent such factors are not appropriately recognized by the Commission.
The Commission believes it is appropriate that CCPs clearing security-based swaps are held to the higher minimum standard in Rule 17Ad-22(b)(3) than CCPs that do not clear security-based swaps. In particular, the Commission believes that the requirement to maintain at a minimum financial resources capable of withstanding the default of its two largest participant families as opposed to only its largest participant family is at this time appropriate for clearing security-based swaps but not for other securities because of the unique and heightened risks posed by credit default swaps relative to traditional securities. Credit default swaps pose additional risk management challenges in that their value can change by a large amount in an extremely short time interval (
Several other factors also complicate risk modeling for credit default swaps. CCPs have only recently introduced clearing for security-based swaps, so the risk models used by CCPs have not yet been stressed by a substantial range of market conditions. In addition, many security-based swaps are relatively illiquid, which complicates the default management process. For example, more than 98% of single-name credit default swap reference entities trade less than 10 times per day.
The Commission recognizes that requiring a different standard for CCPs for security-based swaps could discourage new entrants from entering into the market for these instruments because of higher financial resource requirements relative to other types of instruments. In particular, the higher the financial resource requirements, the higher the costs to establish a new clearing agency, potentially resulting in fewer clearing agencies.
While the Commission is sensitive to the consequences of establishing a different standard for CCPs for security-based swaps, the Commission believes that the financial resources of a CCP must be robust enough to accommodate the risks that are particular to each market served—irrespective of whether such analysis results in different standards. As described above, the Commission believes that Rule 17Ad-22(b)(3) does not represent a change in practice for any CCP that currently clears credit default swaps, and to the extent that it represents an increased financial resources requirement for potential competitors, this increased burden is justified by the greater difficulty of risk-management in credit default swaps as opposed to traditional securities.
The Commission further recognizes the benefits associated with establishing financial resource requirements that are consistent with the international standards, such as the benefit of reduced incentives for regulatory arbitrage. The Commission notes that the “cover two” requirement for security-based swaps CCPs is consistent with the financial resource requirements for CCPs contained in the FMI Report
The Commission believes it is important to codify the practice of obtaining an annual model validation to ensure that a CCP can evaluate the continued appropriateness of its margin models. Rule 17Ad-22(b)(4) also should help CCPs better evaluate their margin models, which should promote greater confidence in clearing agencies' risk management practices.
The Commission is also mindful of the costs associated with the final rule. In particular, the Commission recognizes that though many parts of Rule 17Ad-22 being adopted by the Commission today are a codification of usual and customary practices at CCPs and clearing agencies, they may still impose costs.
As noted above, the standards contained in Rule 17Ad-22(b)(1)-(4) would impose certain burdens and related costs on respondent clearing agencies. As discussed in Section IV.C, based on policies and procedures requirements for Regulation NMS, and based on staff conversations with industry representatives, the Commission has estimated the burdens and related costs of these requirements for clearing agencies.
The clearing agency standards in Rules 17Ad-22(b)(1)-(4) may require respondent clearing agencies to review and amend their policies and procedures. The standards contained in Rule 17Ad-22(b)(4) also would impose one-time costs on clearing agencies to create policies and procedures as well as require one-time systems adjustments related to the capability to perform an annual model validation. The costs of creating these policies are included in the $3.7 million startup cost estimates discussed earlier.
The standards contained in Rules 17Ad-22(b)(1)-(3) also would impose ongoing costs on clearing agencies such as monitoring and enforcement activities with respect to the policies and procedures the registered clearing agency creates in response to the standards. The ongoing costs of these monitoring and enforcement activities are included in the estimated $10.1 million annual costs discussed earlier.
The standards contained in Rule 17Ad-22(b)(4) would also impose ongoing costs on clearing agencies. For example, the clearing agency standards in Rule 17Ad-22(b)(4) would collectively require respondent CCPs to perform certain ongoing monitoring and enforcement activities with respect to the policies and procedures the clearing agency creates in response to the standard and to provide for an annual model validation. The Commission believes clearing agencies would hire a consulting firm
Except as noted above, Rules 17Ad-22(b)(1)-(4) establish standards that are already largely adhered to in practice by each CCP registered with the Commission. Thus, while Rules 17Ad-22(b)(1)-(4) will require each currently registered CCP to continue the
In the Proposing Release, the Commission identified potential costs and benefits resulting from Rules 17Ad-22(b)(1)-(4), as proposed, and requested comment on all aspects of the cost-benefit analysis, including the identification and assessment of any costs and benefits that were not discussed in the analysis. Although the Commission did not receive any comments on the specific cost-benefit analysis contained in the Proposing Release, several commenters raised concerns, which are discussed above in Section III.C.1.b, that have a bearing on the costs and benefits associated with the rule. In response to these comments, the Commission carefully considered alternatives to the approach we are adopting in Rule 17Ad-22, including more prescriptive alternatives (
The Commission also considered alternatives to Rule 17Ad-22(b)(3), such as (1) requiring each clearing agency, regardless of the securities cleared, to maintain sufficient financial resources to withstand, at a minimum, a default by the participant family to which it has the largest exposure in extreme but plausible market conditions, and (2) requiring each clearing agency, regardless of the securities cleared, to maintain sufficient financial resources to withstand, at a minimum, a default by the two participant families to which it has the largest exposure in extreme but plausible market conditions. The Commission decided to create separate standards for the two different kinds of CCPs because it believes that clearing security-based swaps is inherently riskier than clearing other types of securities, as discussed above.
Furthermore, the Commission considered a number of alternatives to provisions in Rule 17Ad-22(b)(4). For example, one alternative was to be more prescriptive in identifying who could perform the annual model validations. The Commission recognizes there is a tradeoff between the need for expertise in conducting model validations and the independence of the validator. Therefore, Rule 17Ad-22(b)(4) sets a principle that allows the clearing agencies to balance this trade-off in a way that satisfies the purpose of the validation. The Commission also considered alternatives, which would have required that model validations occur more or less frequently than annually. The Commission believes that requiring model validation at least annually is appropriate because it complies with CPSS-IOSCO Recommendations and clearing agencies have economic incentives to evaluate their models more frequently if market conditions change, whether or not they are required to do so by Commission rules.
These rules establish requirements for policies and procedures detailing membership practices. Although we believe that these rules reflect current practices for some CCPs, they may require a change in practice for others. Specifically, Rules 17Ad-22(b)(5), (6) and (7) would introduce certain requirements regarding access to CCPs, including that each CCP must: (1) Provide the opportunity for a person who does not perform any dealer or security-based swap dealer services to obtain membership; (2) preclude the use of minimum portfolio size thresholds and minimum transaction volume thresholds as conditions to membership; and (3) provide the ability to obtain membership to persons who maintain net capital equal to or greater than $50 million.
The Commission is adopting Rules 17Ad-22(b)(5), (6) and (7) to establish a regulatory framework for registered CCPs regarding membership practices. These rules also address concerns about access to central clearing in light of the proposed implementation of mandatory clearing requirements around the world.
As described above, CCPs for securities other than security-based swaps generally do not engage in the practices that Rules 17Ad-22(b)(5), (6), and (7) are designed to prevent. However, CCPs for security-based swaps have required members to have a minimum portfolio size (
CCPs have membership requirements so that the CCPs and their members can limit their exposures to less creditworthy market participants. However, as noted above, members may have the incentive to promote membership requirements that limit access to the CCP for competitive reasons. While such requirements have to date been adopted only by CCPs that engage in the clearance and settlement of credit default swaps, the Commission believes that preventing the introduction of such requirements also may be an important consideration for CCPs that clear other instruments.
The Commission believes that no registered CCP should deny
Rule 17Ad-22(b)(7) will significantly increase access to clearing membership in CCPs that clear credit default swaps while still allowing CCPs to maintain what the Commission believes will be sufficient net capital standards for members. For example, the rule establishes a minimum net capital requirement of $50 million that only approximately 201 broker-dealers, or four percent of the total number of registered broker-dealers, can satisfy today according to broker-dealer data available to the Commission. A net capital threshold of $100 million would reduce the number of broker-dealers that could meet the standard by 73 (36%) to 128 eligible firms, while a further reduction of the net capital requirement to $25 million would increase the number of eligible broker-dealer firms by 86 (42%) to 287 (6% of all registered broker-dealers).
The Commission carefully considered the tradeoffs of selecting a lower or higher net capital threshold. A higher net capital requirement may permit CCPs to exercise market power for the benefit of members by limiting membership to an unduly small group of firms.
In addition, we note that the $50 million requirement is the same as the CFTC's capital requirement for DCO membership.
The Commission believes that Rules 17Ad-22(b)(5), (6) and (7) will create the potential for greater access to clearing services for, and opportunities for competition among market participants, particularly for credit default swaps. The Commission believes that greater access to clearing should benefit market participants by allowing them to provide equivalent access to CCP clearing services for security-based swaps to their customers. Doing so should increase opportunities for competition among clearing firms on both price and service which should, in turn, reduce costs to the ultimate customers for the financial services being offered.
Rules 17Ad-22(b)(5), (6) and (7) may impose some costs on clearing agencies due to the increased complexity of the policies and procedures regulating access to the clearing agency. The Commission acknowledges that lowering membership standards to increase the number of participants may increase the likelihood of a participant default. Nevertheless, broadening direct access will tend to reduce the concentration of risk in any individual
Typically, dealers innovate and customize in new financial contracts to address specific risk-management problems of their clients. It is not uncommon for these contracts to become exchange-traded, as the market for the product matures. Dealers, however, may have an incentive to maintain wider bid-ask spreads associated with a customized contract relative to the spreads that might apply if it were a standardized product. Greater access to a CCP could promote greater standardization because all CCP members could submit transactions to the CCP based on the CCP's pre-established rules. Accordingly, the Commission believes that expanded membership will promote the natural evolution of customized contracts to standardized contracts with deeper liquidity and reduced bid-asked spreads.
In terms of comments received, one commenter believed that the proposed rules are unnecessary and pointed to the existing requirement in Section 17A(b)(3)(F) of the Exchange Act that a clearing agency shall not be registered unless the Commission determines that the clearing agency's rules are not designed to permit unfair discrimination in the admission of participants or among participants in the use of the clearing agency. The Commission believes Rules 17Ad-22(b)(5)-(7) will guide registered CCPs to practices that support the requirement to provide fair and open access.
The Commission is mindful of the costs associated with the final rules. In particular, the Commission recognizes that creating new policies and procedures can impose costs even if those policies and procedures largely codify current practice.
As noted above, the standards contained in Rules 17Ad-22(b)(5)-(7) would impose certain burdens and related costs on respondent clearing agencies. As discussed in Section IV.C.3, based on policies and procedures requirements for Regulation NMS, and based on staff conversations with industry representatives, the Commission has estimated the burdens and related costs of these requirements for clearing agencies.
The clearing agency standards in Rules 17Ad-22(b)(5)-(7) would require respondent clearing agencies to create policies and procedures. The standards contained in Rules 17Ad-22(b)(5)-(7) would also impose ongoing costs on clearing agencies. For example, the clearing agency standards in Rules 17Ad-22(b)(5)-(7) would collectively require respondent clearing agencies to perform certain ongoing monitoring and enforcement activities with respect to the policies and procedures the clearing agency creates in response to the standard. The costs of creating these policies and procedures, and performing ongoing monitoring and enforcement activities were included, respectively, in the $3.7 million startup costs and $10.1 million annual ongoing costs discussed earlier. These provisions may also impose incremental costs related to, for example, employee training, systems testing, and other operational considerations designed to ensure both initial and continued compliance with the clearing agency's participant access policies and procedures.
Rule 17Ad-22(c)(1) provides that each fiscal quarter (based on calculations made as of the last business day of the clearing agency's fiscal quarter), or at any time upon Commission request, a CCP shall calculate and maintain a record
Rule 17Ad-22(c)(2) requires a clearing agency, within 60 days after the end of its fiscal year, to post on its Web site annual audited financial statements. Such financial statements shall: (i) Include, for the clearing agency and its subsidiaries, consolidated balance sheets as of the end of the two most recent fiscal years and statements of income, changes in stockholders' equity and other comprehensive income
Rule 17Ad-22(c)(1) is, for the most part, identical to what is described in the baseline section above, and thus, this rule will, for the most part, codify an existing practice of clearing agencies. The difference is that CCPs will now have to format and synthesize existing information in a manner sufficient to explain the methodology the clearing agency uses to meet the requirement of Rule 17Ad-22(b)(3).
In addition, Rule 17Ad-22(c)(2) is substantially similar to what is described in the baseline section above. Most clearing agencies report financial statements in accordance with Rule 17Ad-22(c)(2) with one exception.
As described above, these two rules, except where noted above, codify current practice. To the extent that current practice is not currently required by rule, the rules being adopted today allow for greater enforceability of these disclosure practices, and as a result ensure that CCPs continue to maintain an environment of transparency.
Rule 17Ad-22(c)(1) ensures that the Commission continues to be able to monitor whether CCPs maintain the financial resources necessary to meet its requirement in proposed Rule 17Ad-22(b)(3). The requirement that CCPs will have to format and synthesize existing information in a manner sufficient to explain the methodology the clearing agency uses to meet the requirement of Rule 17Ad-22(c)(1), facilitates the
Rule 17Ad-22(c)(2) ensures that CCPs continue to provide transparency to regulators and market participants. Transparency helps to ensure that market participants in general have better information about the stability of the system, and facilitates monitoring by the Commission and other regulators, clearing members, investors, academics and the public in general. Further, to the extent that CCPs are systemically important institutions, regulators may also be monitoring systemic risk when monitoring CCPs.
Transparency is particularly important to clearing members, whose capital is at risk if a clearing member fails. Clearing members can use the information codified in this rule to assess risks related to their participation in the CCP and manage those risks. The information codified in this rule can also be used by clearing members in a way that promotes competition. In situations where multiple CCPs clear the same product, clearing members may base their decision on which CCP to use on the financial information codified in Rule 17Ad-22(c)(2), which requires that CCPs make their financial information available to the public, even during times of market stress. It is possible that if the financial position of the CCP deteriorates, clearing members and investors may discontinue membership in or otherwise limit their use of that CCP, therefore driving CCPs with substandard risk management practices out of business.
The Commission carefully considered alternatives to these provisions. For example, an alternative to the requirements of Rule 17Ad-22(c)(2) would be to permit registered clearing agencies to post audited financial statements prepared in accordance with the laws of their country of origin, reconciled to U.S. GAAP. Indeed, one registered clearing agency, ICE Clear Europe, currently posts on its Web site audited financial statements prepared according to UK GAAP. Having foreign CCPs prepare financial statements using more widely applied bases of accounting such as U.S. GAAP or IFRS may offer greater utility to market participants, regulators and other stakeholders of clearing agencies. Therefore, we have limited the different bases of accounting upon which the annual audited consolidated financial statements may be prepared to IFRS and U.S. GAAP. The Commission recognizes that there are costs associated with requiring that a registered CCP comply with these reporting standards. However, to the extent that the parent company of ICE Clear Europe already prepares financial statements according to U.S. GAAP, we expect the costs of this requirement to be less burdensome. The Commission also believes that allowing CCPs to prepare financial statements in accordance with the laws of their countries of origin and then reconcile the differences to U.S. GAAP would add complexity associated with the reconciliation that may offer less utility to market participants, regulators and other stakeholders of clearing agencies because of the burden of understanding and interpreting additional bases of accounting would create for users.
The Commission is mindful of the costs associated with the final rule. The exact nature of the procedures a clearing agency will establish to support this requirement is likely to vary between clearing agencies. Nevertheless, clearing agencies already make this type of information available to the Commission and/or on their Web sites. Therefore, the incremental cost of this Rule is unlikely to be significant.
As noted above, the standards contained in Rules 17Ad-22 (c)(1) and (2), would impose certain burdens and related costs on respondent clearing agencies. As discussed in Section IV.C.4, based on policies and procedures requirements for Regulation NMS, and based on staff conversations with industry representatives, the Commission has estimated the burdens and related costs of these requirements for clearing agencies.
The clearing agency standards in Rules 17Ad-22(c)(1) and (2) would require respondent clearing agencies to create policies and procedures. The requirements would impose one-time costs related to the adjustment of systems. These costs are included in the $3.7 million in startup costs discussed earlier.
The standards contained in Rule 17Ad-22(c) would also impose ongoing costs on clearing agencies. For example, the clearing agency standards in Rules 17Ad-22 (c)(1) and (2) would collectively require respondent clearing agencies to perform certain ongoing monitoring and enforcement activities with respect to the policies and procedures the clearing agency creates in response to the standard. These costs are included in the $10.1 million in annual costs discussed earlier. These rules may impose additional incremental costs related to, for example, employee training, systems testing, and other operational considerations designed to ensure both initial and continued compliance with such policies and procedures.
Rule 17Ad-22(c)(2) would require each clearing agency to post on its Web site its annual audited financial statements. The audited financial statements would have to (i) be a complete set of consolidated financial statements of the clearing agency and its subsidiaries for the most recent two fiscal years and be prepared in accordance with U.S. GAAP, except that for a clearing agency that is a corporation or other organization incorporated or organized under the laws of any foreign country the consolidated financial statements may be prepared according to U.S. GAAP or IFRS; (ii) be audited in accordance with standards of the Public Company Accounting Oversight Board by a registered public accounting firm that is qualified and independent in accordance with Rule 2-01 of Regulation S-X (17 CFR 210.2-01); and (iii) include a report of the registered public accounting firm that complies with paragraphs (a) through (d) of Rule 2-02 of Regulation S-X (17 CFR 210.2-02). This requirement would necessitate work hours of compliance personnel and finance personnel at the clearing agency to compile relevant data, organize and analyze that data, and then post it to the clearing agency's Web site consistent with the rule. The requirement would also require the services of a registered public accounting firm. These costs are included in the $10.1 million in annual costs discussed earlier.
Rules 17Ad-22(d)(1)-(15) require certain minimum standards for rules and procedures to be met by all clearing agencies. Rule 17Ad-22(d)(1) requires that clearing agencies have rules and procedures that are well-founded, transparent and enforceable for each aspect of their activities in all relevant jurisdictions.
• Require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the clearing agency,
• Hold assets in a manner whereby risk of loss or of delay in access to them is minimized,
• Identify sources of operational risk and minimize these risks through the development of appropriate systems, controls, and procedures,
• Employ money settlement arrangements that eliminate or strictly limit the clearing agency's settlement bank risks,
• Provide that their operations are cost-effective in meeting the requirements of participants while maintaining the safety and security of operations,
• Evaluate the potential sources of risks that can arise when the clearing agency establishes links either cross-border or domestically to clear or settle trades, and to ensure that these risks are managed prudently on an ongoing basis,
• Have governance arrangements that are clear and transparent to fulfil the public interest requirements in Section 17A of Exchange Act applicable to clearing agencies,
• Provide market participants with sufficient information for them to identify and evaluate the risks and costs associated with using clearing agencies' services,
• Immobilize or dematerialize securities certificates and transfer them by book entry to the greatest extent possible when the clearing agency provides CSD services,
• Make key aspects of their default procedures publicly available and establish default procedures that ensure that the clearing agency can take timely action to contain losses and liquidity pressures and to continue meeting its obligations in the event of a participant default,
• Ensure that final settlement occurs no later than the end of the settlement day and that intraday or real-time finality is provided where necessary to reduce risks,
• Eliminate principal risk by linking securities transfers to funds transfers to achieve delivery versus payment (DVP),
• Institute risk controls, including collateral requirements and limits to cover the clearing agency's credit exposure to each participant family exposure fully, that ensure timely settlement in the event that the participant with the largest payment obligation is unable to settle when the clearing agency provides CSD services
• Disclose to their participants the clearing agency's obligations with respect to physical deliveries.
In the Proposing Release, the Commission identified potential costs and benefits resulting from Rules 17Ad-22(d)(1)-(15), as proposed, and requested comment on all aspects of the cost-benefit analysis, including the identification and assessment of any costs and benefits that were not discussed in the analysis. The Commission did not receive any comments on the specific cost-benefit analysis contained in the Proposing Release.
Rules 17Ad-22(d)(1)-(15) are consistent with CPSS-IOSCO Recommendations.
The requirements would impose one-time costs and ongoing costs to perform certain ongoing monitoring and enforcement activities with respect to the policies and procedures that are included in the $3.7 million in startup costs and $10.1 million in ongoing cost discussed earlier.
As stated above, there are currently seven clearing agencies registered with the Commission that provide CCP or CSD services. These clearing agencies are SROs so the rules and procedures governing each aspect of the clearance and settlement process are filed with the Commission for notice and approval. Rule 17Ad-22(d)(1) will codify the existing practices of registered clearing agencies of establishing a rule book and developing policies and procedures to address each aspect of their operations. Therefore, the SRO rule filing process should help to ensure that such rules are well-founded, transparent, and provide an enforceable legal framework for its activities.
As described above, each registered clearing agency has established membership criteria and has procedures in place to monitor the sufficiency of its participants' financial resources. Rule 17Ad-22(d)(2) will codify these existing practices. The operational and financial stability of participants is subject to market forces and can therefore change over time. Because participants collectively contribute to the operational and financial stability of a registered clearing agency, the Commission believes that the proposed requirement to continue to monitor compliance with the registered clearing agency's participation requirements supports the Exchange Act requirement that clearing agencies are able to facilitate prompt and accurate clearance and settlement.
In addition, clearing agencies would be required to have participation requirements that are objective,
During the clearance and settlement process, registered clearing agencies are responsible for safeguarding assets that secure participants' obligations. Registered clearing agencies currently seek to minimize the risk of loss or delay in access by holding assets that are highly-liquid (
Pursuant to guidance provided by the Division's Automated Review Policy Statement,
Registered clearing agencies use settlement banks to facilitate the cash portion of the securities transaction. Failure by that bank to effectuate timely and final settlement adversely affects the registered clearing agency by exposing it to credit and liquidity pressures that can adversely affect the registered clearing agency's ability to facilitate prompt and accurate clearance and settlement. Rule 17Ad-22(d)(5) is designed to reduce the risk that financial obligations related to the activities of a registered clearing agency are not settled in a timely manner or not discharged with finality. The Commission also believes that the rule would assist a registered clearing agency in meeting the requirement of Section 17A(b)(3)(F) of the Exchange Act, which requires the rules of a registered clearing agency to be designed to assure the safeguarding of securities and funds which are in the custody or control of the registered clearing agency or for which it is responsible.
Registered clearing agencies have procedures to control costs and to regularly review pricing levels against operating costs. The Commission believes that Rule 17Ad-22(d)(6) codifies this practice and may help to reduce the fees a participant in a registered clearing agency incurs for clearance and settlement services while also helping to ensure that registered clearing agency maintains appropriate operational standards. Having clearing agencies be mindful of the costs that are incurred by their participants, while maintaining such compliance, should help to reduce inefficiencies in the provision of clearance and settlement services. Because there is often only a single registered clearing agency per asset class per market, competitive forces may not be sufficient by themselves in creating incentives to be cost-effective in meeting the requirements of participants.
Section 17A(a)(1)(D) of the Exchange Act states that the linking of all clearance and settlement facilities and the development of uniform standards and procedures for clearance and settlement will reduce unnecessary costs and increase the protection of investors and persons facilitating transactions by and acting on behalf of investors.
Each registered clearing agency has a board that governs the operations of the entity and supervises its senior management. Rule 17Ad-22(d)(8) is designed enhance the board's governance of the registered clearing agency and the ability of the registered clearing agency to serve the interests of its various constituencies while maintaining prudent risk management processes. Clear and transparent governance arrangements promote accountability and reliability in the decisions, rules and procedures of the registered clearing agency because they provide interested parties (such as owners, participants, and the general public) with information about how such decisions are made and what the
Governance arrangements have the potential to play an important role in making sure that clearing agencies fulfill the Exchange Act requirements that the rules of a registered clearing agency be designed to protect investors and the public interest and to support the objectives of owners and participants. Similarly, governance arrangements may promote the effectiveness of a registered clearing agency's risk management procedures by creating an oversight framework that fosters a focus on the critical role that risk management plays in promoting prompt and accurate clearance and settlement.
Because clearing agencies are SROs, their rules are published by the Commission and are available on each registered clearing agency's Web site. In addition information regarding the operations and services of each clearing agency can be found either on the clearing agency's Web site or a Web site maintained by an affiliated entity of the clearing agency. Rule 17Ad-22(d)(9) will maintain and enhance this existing practice by requiring a registered clearing agency to disclose information sufficient for participants to identify risks and costs associated with using the registered clearing agency, thereby allowing participants to make informed decisions about the use of the registered clearing agency and to take appropriate actions to mitigate their risks and costs associated with the use of the registered clearing agency.
While U.S. markets have made great strides in achieving immobilization and/or dematerialization for institutional and broker-to-broker transactions, many industry representatives believe that the small percentage of securities held in certificated form impose unnecessary risk and expense to the industry and to investors. Rule 17Ad-22(d)(10) will codify the existing practice, and promote further immobilization and dematerialization of securities and their transfer by book entry. This would result in reduced costs and risks associated with securities settlements and custody for both clearing agencies and participants by removing the need to hold and transfer many, if not most, physical certificates.
Each registered clearing agency makes public rules, policies or procedures that set forth the actions the clearing agency may take in the event of a participant default and each makes key aspects of their default procedures publicly available, with the exception of certain of their policies and procedures that are kept non-public to ensure their integrity, such as those associated with the oversight of clearing participants. Rule 17Ad-22(d)(11) codifies this existing practice. The Commission believes that default procedures reduce the likelihood that a default by a participant, or multiple participants, will disrupt the operations of the clearing agency and have a cascading effect on the viability of the other participants of the clearing agency. Default procedures also allow a clearing agency to wind down positions in an orderly way and continue to perform its obligations in the event of a participant default, assuring continued functioning of the securities market in times of stress and reducing systemic risk.
The Commission believes that Rule 17Ad-22(d)(11) would increase the probability that defaults by participants, should they occur, would proceed in an orderly and transparent manner. This is the case because the rule would help to ensure that all participants are aware of the default process and are able to plan accordingly and that clearing agencies would have sufficient time to take corrective actions to mitigate potential losses. In addition, the transparency of default procedures will increase the confidence of market participants as well as members of the general public, that should a default occur, the proper procedures would be followed, decreasing uncertainty and lessening the likelihood of further market stress.
Each registered clearing agency has rules, policies or procedures that provide for the settlement of its respective securities transactions no later than the end of a pre-defined settlement day. Rule 17Ad-22(d)(12) codifies this existing practice. The Commission believes that settlement finality should occur no later than the end of the settlement day to limit the volume of outstanding obligations that are subject to settlement at any one time and thereby reduce the settlement risk exposure of participants and the registered clearing agency. Intraday or real-time finality may be necessary to reduce risk in circumstances where the lack of intraday or real-time finality may impede the registered clearing agency's ability to facilitate prompt and accurate clearance and settlement, cause the registered clearing agency's participants to fail to meet their obligations, or cause significant disruptions in the securities markets.
Generally, Rules 17Ad-22(d)(13)-(15) would apply to registered clearing agencies that provide CSD services. DTC currently is the only registered clearing agency that is a CSD. DTC operates a Model 2 DVP system which provides for gross settlements of securities transfers during the day followed by an end of day net funds settlement.
As discussed above, DTC has policies and procedures in place to ensure that timely settlement can be completed in the event of the default participant with the largest settlement obligation. DTC establishes setting limits (called net debit caps) for each participant. The net debit cap ensures that the amount of cash that a participant owes the clearing agency does not exceed this pre-defined limit or cap. Rule 17Ad-22(d)(14) codifies this existing practice. The Commission believes it is important for
A registered clearing agency faces both credit and liquidity risks from the delivery process. At delivery, the entire principal value of a transaction may be at risk, and this form of credit risk is often termed principal risk. Liquidity risk arises because the registered clearing agency, faced with a defaulting participant, must still make payment to the non-defaulting party. The Commission believes that a registered clearing agency should therefore ensure that its rules and procedures provide clear risk management controls so that it can identify and mitigate the credit and liquidity risks to which it is exposed in the delivery process. These procedures should ensure that the registered clearing agency will be able to adapt its risk management framework as appropriate, as the steps necessary to mitigate risks will depend on the obligations the registered clearing agency has assumed, the mechanisms available for settlement, and the importance of the risks from physical settlement to its overall operations.
The Commission also believes that providing such information to participants would promote a shared understanding regarding physical delivery practices between the registered clearing agency and its participants that could help reduce the potential for fails and thereby facilitate prompt and accurate clearance and settlement.
Registered clearing agencies have rules and procedures that describe their obligations to its participants when they assume deliveries of physical instruments. The Commission believes that Rule 17Ad-22(d)(15), by requiring a statement by the registered clearing agency to its participants about the cleaning agency's obligations with respect to physical deliveries, among other things, would ensure that participants have information that is likely to enhance the participants' understanding of their rights and responsibilities with respect to using the clearance and settlement services of the registered clearing agency. The Commission believes that ensuring delivery of this information to participants about the clearing agency's physical delivery obligations would promote a shared understanding about physical delivery practices between the clearing agency and its participants that would help mitigate misunderstandings in the clearing agency's physical delivery operations and would therefore facilitate prompt and accurate clearance and settlement.
The Commission carefully considered alternatives to Rule 17Ad-22(d), including a more prescriptive approach suggested by some of the commenters, and has decided to adopt the rule, modeled after recognized international standards, in the form proposed. The Commission believes the final rule will have the effect of harmonizing the Commission's regulatory requirements with such standards as are now contemplated by the Exchange Act and the Clearing Supervision Act, as well as international standards. In particular, the Commission believes Rule 17Ad-22(d) will help market participants compare the operations of U.S. clearing agencies with non-U.S. clearing organizations. The Commission's adoption of Rule 17Ad-22(d) may also reduce some of the potential regulatory burden for CCPs and CSDs that may be dually-regulated by the SEC and another domestic or foreign regulator because it is modeled on standards already employed by other regulatory authorities.
The Regulatory Flexibility Act (“RFA”)
Rule 17Ad-22 applies to all registered clearing agencies and sets standards for such clearing agencies. For the purposes of Commission rulemaking and as applicable to Rule 17Ad-22, a small entity includes, when used with reference to a clearing agency, a clearing agency that (i) Compared, cleared and settled less than $500 million in securities transactions during the preceding fiscal year, (ii) had less than $200 million of funds and securities in its custody or control at all times during the preceding fiscal year (or at any time that it has been in business, if shorter) and (iii) is not affiliated with any person (other than a natural person) that is not a small business or small organization.
Based on the Commission's existing information about the clearing agencies currently registered with the Commission, the Commission believes that such entities exceed the thresholds defining “small entities” set out above. While other clearing agencies may emerge and become eligible to operate as registered clearing agencies and while other security-based swap lifecycle event service providers may be required to register as clearing agencies, the Commission does not believe that any such entities would be “small entities” as defined in Exchange Act Rule 0-10.
For the reasons described above, the Commission again certifies that Rule 17Ad-22 will not have a significant economic impact on a substantial number of small entities.
Pursuant to the Exchange Act, particularly, Sections 17A(d) thereof, 15 U.S.C. 78q-1(d), Sections 17A(i), 17A(j) and 3C(j) thereof, 15 U.S.C. 78q-1(i), 78q-1(j) and 78c-3(j), respectively, Pub. L. 111-203, § 763, 124 Stat. 1841 (2010), and Sections 30(b) and 30(c) thereof, 15 U.S.C. 78dd(b)and (c), and Section
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is amended as follows:
15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78
Section 240.17Ad-22 is also issued under 12 U.S.C. 5464(a)(2).
(a)
(1)
(2)
(3)
(4)
(5)
(b) A registered clearing agency that performs central counterparty services shall establish, implement, maintain and enforce written policies and procedures reasonably designed to:
(1) Measure its credit exposures to its participants at least once a day and limit its exposures to potential losses from defaults by its participants under normal market conditions so that the operations of the clearing agency would not be disrupted and non-defaulting participants would not be exposed to losses that they cannot anticipate or control.
(2) Use margin requirements to limit its credit exposures to participants under normal market conditions and use risk-based models and parameters to set margin requirements and review such margin requirements and the related risk-based models and parameters at least monthly.
(3) Maintain sufficient financial resources to withstand, at a minimum, a default by the participant family to which it has the largest exposure in extreme but plausible market conditions; provided that a registered clearing agency acting as a central counterparty for security-based swaps shall maintain additional financial resources sufficient to withstand, at a minimum, a default by the two participant families to which it has the largest exposures in extreme but plausible market conditions, in its capacity as a central counterparty for security-based swaps. Such policies and procedures may provide that the additional financial resources may be maintained by the security-based swap clearing agency generally or in separately maintained funds.
(4) Provide for an annual model validation consisting of evaluating the performance of the clearing agency's margin models and the related parameters and assumptions associated with such models by a qualified person who is free from influence from the persons responsible for the development or operation of the models being validated.
(5) Provide the opportunity for a person that does not perform any dealer or security-based swap dealer services to obtain membership on fair and reasonable terms at the clearing agency to clear securities for itself or on behalf of other persons.
(6) Have membership standards that do not require that participants maintain a portfolio of any minimum size or that participants maintain a minimum transaction volume.
(7) Provide a person that maintains net capital equal to or greater than $50 million with the ability to obtain membership at the clearing agency, provided that such persons are able to comply with other reasonable membership standards, with any net capital requirements being scalable so that they are proportional to the risks posed by the participant's activities to the clearing agency; provided, however, that the clearing agency may provide for a higher net capital requirement as a condition for membership at the clearing agency if the clearing agency demonstrates to the Commission that such a requirement is necessary to mitigate risks that could not otherwise be effectively managed by other measures and the Commission approves the higher net capital requirement as part of a rule filing or clearing agency registration application.
(c)
(2) Within 60 days after the end of its fiscal year, each registered clearing agency shall post on its Web site its annual audited financial statements. Such financial statements shall:
(i) Include, for the clearing agency and its subsidiaries, consolidated balance sheets as of the end of the two most recent fiscal years and statements of income, changes in stockholders' equity and other comprehensive income and cash flows for each of the two most recent fiscal years;
(ii) Be prepared in accordance with U.S. generally accepted accounting principles, except that for a clearing agency that is a corporation or other organization incorporated or organized under the laws of any foreign country the consolidated financial statements may be prepared in accordance with
(iii) Be audited in accordance with standards of the Public Company Accounting Oversight Board by a registered public accounting firm that is qualified and independent in accordance with 17 CFR 210.2-01; and
(iv) Include a report of the registered public accounting firm that complies with paragraphs (a) through (d) of 17 CFR 210.2-02.
(d) Each registered clearing agency shall establish, implement, maintain and enforce written policies and procedures reasonably designed to, as applicable:
(1) Provide for a well-founded, transparent, and enforceable legal framework for each aspect of its activities in all relevant jurisdictions.
(2) Require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the clearing agency; have procedures in place to monitor that participation requirements are met on an ongoing basis; and have participation requirements that are objective and publicly disclosed, and permit fair and open access.
(3) Hold assets in a manner that minimizes risk of loss or of delay in its access to them; and invest assets in instruments with minimal credit, market and liquidity risks.
(4) Identify sources of operational risk and minimize them through the development of appropriate systems, controls, and procedures; implement systems that are reliable, resilient and secure, and have adequate, scalable capacity; and have business continuity plans that allow for timely recovery of operations and fulfillment of a clearing agency's obligations.
(5) Employ money settlement arrangements that eliminate or strictly limit the clearing agency's settlement bank risks, that is, its credit and liquidity risks from the use of banks to effect money settlements with its participants; and require funds transfers to the clearing agency to be final when effected.
(6) Be cost-effective in meeting the requirements of participants while maintaining safe and secure operations.
(7) Evaluate the potential sources of risks that can arise when the clearing agency establishes links either cross-border or domestically to clear or settle trades, and ensure that the risks are managed prudently on an ongoing basis.
(8) Have governance arrangements that are clear and transparent to fulfill the public interest requirements in Section 17A of the Act (15 U.S.C. 78q-1) applicable to clearing agencies, to support the objectives of owners and participants, and to promote the effectiveness of the clearing agency's risk management procedures.
(9) Provide market participants with sufficient information for them to identify and evaluate the risks and costs associated with using its services.
(10) Immobilize or dematerialize securities certificates and transfer them by book entry to the greatest extent possible when the clearing agency provides central securities depository services.
(11) Make key aspects of the clearing agency's default procedures publicly available and establish default procedures that ensure that the clearing agency can take timely action to contain losses and liquidity pressures and to continue meeting its obligations in the event of a participant default.
(12) Ensure that final settlement occurs no later than the end of the settlement day; and require that intraday or real-time finality be provided where necessary to reduce risks.
(13) Eliminate principal risk by linking securities transfers to funds transfers in a way that achieves delivery versus payment.
(14) Institute risk controls, including collateral requirements and limits to cover the clearing agency's credit exposure to each participant family exposure fully, that ensure timely settlement in the event that the participant with the largest payment obligation is unable to settle when the clearing agency provides central securities depository services and extends intraday credit to participants.
(15) State to its participants the clearing agency's obligations with respect to physical deliveries and identify and manage the risks from these obligations.
By the Commission.
Commodity Futures Trading Commission.
Final rules.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “DFA”) established a comprehensive new statutory framework for swaps and security-based swaps. The Dodd-Frank Act repeals some sections of the Commodity Exchange Act (“CEA” or “Act”), amends others, and adds a number of new provisions. The DFA also requires the Commodity Futures Trading Commission (“CFTC” or “Commission”) to promulgate a number of rules to implement the new framework. The Commission has proposed and finalized numerous rules to satisfy its obligations under the DFA. This rulemaking makes a number of conforming amendments to integrate the CFTC's regulations more fully with the new framework created by the Dodd-Frank Act.
Effective January 2, 2013.
Peter A. Kals, Special Counsel, 202-418-5466,
On July 21, 2010, President Obama signed the Dodd-Frank Act into law.
To apply its regulatory regime to the swap activity of intermediaries, the Commission must make a number of changes to its regulations to conform them to the Dodd-Frank Act. On June 7, 2011, the Commission published in the
The Commission is mindful of, and continues to consider, the comments received on the Proposal's amendments to regulation 1.35 (records of commodity interest and cash commodity transactions). Those comments were submitted by various groups, including DCMs, representatives of the FCM and IB communities, energy
The amendments adopted by this rulemaking primarily affect part 1 of the Commission's regulations, but also affect parts 4, 5, 7, 8, 15, 16, 18, 21, 22, 36, 41, 140, 145, 155, and 166. This rulemaking contains amendments of three different types: ministerial, accommodating, and substantive. Many of the amendments are purely ministerial—for instance, several changes update definitions to conform them to the CEA as amended by the Dodd-Frank Act; add to the Commission's regulations new terms created by the Dodd-Frank Act; remove all regulations and references pertaining to derivatives transaction execution facilities (“DTEFs”), a category of trading facility added to the CEA by section 111 of the Commodity Futures Modernization Act of 2000 (“CFMA”),
The accommodating amendments are essential to the implementation of the DFA in that they propose to add swaps, swap markets, and swap entities to numerous definitions and regulations, but are more than ministerial because they require some judgment in drafting. Accommodating amendments include, among other things, amending numerous definitions in regulation 1.3 to reference or include swaps; creating new definitions as necessary in regulation 1.3; amending recordkeeping requirements to include information on swap transactions; adding references to swaps and swap execution facilities (“SEFs”) in various part 1 regulations; and amending parts 15, 18, 21, and 36 to implement the DFA's grandfathering and phase-out of exempt boards of trade and exempt commercial markets.
The substantive amendments are changes that align requirements or procedures across futures and swap markets. They consist of amendments to regulation 1.31 that harmonize some of the current part 1 recordkeeping requirements with some of those applicable to SDs and MSPs under part 23 regulations
To aid the public in understanding the numerous changes to different parts of the CFTC's regulations adopted by this release, the Commission will also publish on its Web site a “redline” of the affected regulations which will clearly reflect the additions and deletions.
Several commenters argued that the Proposal was premature because many other rules remained to be proposed and finalized,
The Commission believes it was appropriate to have published the Proposal when it did. The purpose of this rulemaking is to conform the Commission's regulations to the CEA as
The Commission believes it is appropriate to make these conforming changes at this time. In adopting this final rule, the Commission is incorporating any changes necessitated by other final Dodd-Frank Act rulemakings.
The Commission is revising regulation 1.3 so that its definitions, which are used throughout the Commission's regulations, incorporate relevant provisions of the DFA. For instance, amended regulation 1.3 updates current definitions to conform them to the Dodd-Frank Act's amendments of the same terms in the CEA's definitions section,
In response to the proposed conforming amendments to the definition of “introducing broker,” Financial Services Roundtable (“FSR”) commented that a small commercial lender facilitating a swap transaction between a borrower and a third party, solely in connection with the lender's loan origination or syndication, should not have to register as an introducing broker (“IB”), but could possibly be required to do so under the amended definition. FSR commented further that such a result would be inconsistent with a 2004 staff no-action letter,
The Commission declines to further define the term “introducing broker” as FSR requested, and is adopting the term as proposed. However, the Commission believes that in the situation described by FSR, the small commercial lender would not be required to register as an IB, as long as it did not receive compensation from the third party with whom the lender arranges the borrower's swap. This analysis is based solely on the facts as presented by FSR in its comment letter and is consistent with previously issued staff no-action or interpretative letters.
Additionally, the Proposal revised the definition of “self-regulatory organization” (“SRO”) (regulation 1.3(ee)) to include SEFs, a new category of regulated markets under the DFA, and derivatives clearing organizations (“DCOs”). The Commission did not receive any comments concerning its proposal to amend this definition. Today's final rulemaking amends the definition of SRO by including SEFs. However, it does not amend the definition of SRO to include DCOs. Upon further reflection, the Commission has determined that the part 1 regulations applicable to SROs need not apply to DCOs in light of recently finalized regulations in part 39 implementing the Act's Core Principles for DCOs.
The Commission is (1) simplifying or clarifying certain existing regulation 1.3 definitions, and (2) adding several new definitions to regulation 1.3, pursuant to amendments to the CEA by the Dodd-Frank Act, existing regulations, and other amendments in the Proposal.
The term “contract market,” for instance, is not defined under the CEA, and is currently defined under regulation 1.3(h) as “a board of trade designated by the Commission as a contract market under the Commodity Exchange Act or in accordance with the provisions of part 33 of this chapter.” In certain provisions throughout the Commission's regulations, contract markets are also referred to as “designated contract markets.” Because both terms are used interchangeably within the regulations, the Commission has decided to revise the definition to mean contract market and designated contract market (“DCM”). Proposed regulation 1.3(h) contained one definition identified by the title “Contract market; designated contract market.” The proposed definition also corrected an erroneous cross-reference to part 33 as the regulations applicable to DCMs, which the Commission is correcting by changing it to a reference to part 38 of the Commission's regulations. No commenters addressed these changes. The Commission is adopting the definition in regulation 1.3(h) as proposed with one modification to reflect the fact that the Commission designates a board of trade as a contract market “under the Act and in accordance with part 38” as opposed to “under the Act or in accordance with part 38.”
The Proposal contained a similar clarification regarding the definition of “customer.” It simplified the definition of “customer” by combining two existing definitions, “customer; commodity customer” in regulation 1.3(k) and “option customer” in regulation 1.3(jj), and by adding swaps to the proposed definition. Therefore, the proposed definition included swap customers, commodity customers, and option customers, referring to them all with the single term, “customer.” Furthermore, the Commission proposed to revise all references to “commodity customer” and “option customer” throughout the Commission's regulations, but particularly in part 1, to simply refer to “customer.”
ETA commented that counterparties to electricity swap contracts are not customers analogous to futures customers, and, therefore, by expanding the “customer” concept to include entities that execute swaps, the Commission would impose “significant and inappropriate obligations” on swap counterparties. The Commission has decided to finalize the definition of customer, as proposed. ETA is correct that counterparties to bilaterally-executed swaps are principals, which is unlike trading futures, where FCMs are agents of their customers. However, FCMs will execute and clear swap transactions, as agents, equivalently to the manner in which they currently execute and clear futures transactions.
The Commission proposed to define the term “confirmation” to reflect its differing use in various regulations depending on whether a transaction is executed by an FCM, IB or CTA on the one hand, or by an SD or MSP on the other hand. In the first case, the registrant is acting as an agent. In the second, it is acting as a principal.
The Commission proposed to add to regulation 1.3 a definition of the term “registered entity,” currently provided in CEA section 1a(40), as revised by the Dodd-Frank Act. The proposed definition of “registered entity” is identical to its CEA counterpart and would include DCOs, DCMs, SEFs, swap data repositories (“SDRs”) and certain electronic trading facilities. To correspond with this new definition, the Commission also proposed to replace the current “Member of a contract market” definition with a new definition of “Member,” in regulation 1.3(q), which would be nearly identical to the “Member of a registered entity” definition provided in CEA section 1a(34), also as revised by the Dodd-Frank Act.
The ETA commented that the Commission should wait to define “registered entity,” “organized exchange,” “electronic trading facility,” and “trading facility” until the Commission enters into an MOU with FERC and publishes rules defining the scope of its jurisdiction over nonfinancial energy commodity swaps. According to the ETA, a SEF should not be deemed a registered entity. In addition, the ETA does not believe SEF participants should fall within the Commission's proposed definition of “member,” suggesting that it is inappropriate or premature to require SEF participants to have the same recordkeeping requirements as DCM members under regulation 1.35.
The Commission disagrees with the ETA's comment that it should wait to define the terms “registered entity,” “organized exchange,” “electronic trading facility” and “trading facility” until the Commission enters into an MOU with FERC and publishes rules defining the scope of its jurisdiction
With respect to the ETA's assertion that SEFs should not be deemed “registered entities,” the Commission notes that SEFs are already deemed “registered entities” under section 1a(40) of the CEA. Lastly, the term “member,” as defined under the CEA, includes “with respect to a registered entity * * * an individual, association, partnership, corporation or trust * * * having trading privileges on the registered entity.”
The Commission also proposed to add a definition of the term “order.” This term had not previously been defined by Commission regulations, although it is used in several of them,
Because proposed amendments to regulation 1.31 incorporated the term “prudential regulator,” as added to the CEA by the Dodd-Frank Act, the Commission proposed to define the term in regulation 1.3.
The Commission also proposed to add the term “registrant” to regulation 1.3 so that certain regulations in part 1 could refer to various intermediaries (
The Commission also proposed, and is hereby adopting, a definition of the term “retail forex customer” in regulation 1.3 because it appears in several regulations in part 1 and currently is only defined in part 5. The definition is identical in all material respects to the definition of this term as it currently appears in regulation 5.1(k).
The Commission is also finalizing the revised definition of “strike price” (regulation 1.3(kk)) as proposed so that this definition encompasses swaps in addition to futures. The Commission received no comments about this proposal.
The Proposal changed the defined term from “open contract” to “open position” and added provisions for commodity option transactions and swaps. CME commented that it is unclear whether the proposed definition is intended to cover options on swaps. If so, then the word “commodity” should be deleted from the phrase, “commodity option transaction.” According to CME's comment letter to the Proposal, the Commission should also clarify whether, or which, options are covered by proposed paragraph (t)(3) (swaps). CME also argues that proposed paragraph (t)(3) does not adequately characterize open positions in cleared swaps. Proposed paragraph (t)(1)'s terminology, CME believes, more appropriately characterizes cleared swaps because, like futures, cleared swaps may be fulfilled by delivery or they may be offset.
The Commission has decided to finalize the definition with a few modifications. The final definition retains the original title of the term, “open contract.” It also narrows its applicability from all swaps to only Cleared Swaps, as regulation 22.1 defines that term.
The Commission notes that the option component of the definition (paragraph (t)(2)) covers all options:
Because the only references in the regulations to the term “open contracts” apply to cleared contracts,
In the Proposal, pursuant to the revision of the definition of “open contract” in regulation 1.3(t), the Commission proposed to change “open contract” to “open position” in regulations 1.33 (“Monthly and confirmation statements”) and 1.34 (“Monthly record, `point balance' ”). The Commission did not receive comments about these changes. In light of the fact that the Commission is retaining the title “open contract,” in the final revisions to regulation 1.3(t), the Commission is preserving those references to “open contract” in regulations 1.33 and 1.34.
As part of the Proposal, the Commission explained that current regulation 1.3(ll) defines “physical” as “any good, article, service, right or interest upon which a commodity option may be traded in accordance with the Act and these regulations.”
In the Proposal, the Commission also traced the history of the term “physical” in its regulations, noting that the definition of “physical” was first added to its regulations “to enable trading, on DCMs, in options to buy or sell an underlying commodity” and that the definition had not been substantively amended.
In light of (1) The overlapping definitions of “commodity” and “physical” in Commission regulation 1.3, (2) the fact that options now are written on a wide range of non-physical commodities, and (3) the Commission's desire that the term “physical” not be interpreted to permit cash settled transactions to rely on the forward exclusion from the swap definition (unless otherwise permitted by Commission interpretations with respect to such exclusion, such as those discussed in the Commission's rulemaking jointly (with the Securities and Exchange Commission) further defining “swap”), the Commission, in the Proposal, requested comment on various possible approaches to the definition of “physical” in regulation 1.3(ll). One possible approach on which the Commission requested comment was whether it should eliminate the definition, on the theory that its meaning is self-evident, and rely on the ability of interested parties to interpret the term “physical.” The Commission also requested comment on not amending the definition in reliance upon the introductory language in regulation 1.3, which applies the regulation 1.3(ll) definition of “physical” unless the context otherwise requires.
Three commenters addressed the definition of physical in regulation 1.3(ll). The ETA commented that the proposed definition of “physical” should be withdrawn because addressing it in terms of swaps is premature prior to the Commission publishing the further definition of “swap,” including, in particular, defining the term “nonfinancial commodity,” which the ETA characterized as a key component of the forward exclusion from the swap definition. The ETA stated that, in proposing such a substantive rule, the Commission must explain how defining “physical” would affect all of its regulations and requested that the Commission re-propose any revised definition of “physical” with a “comprehensive analysis of the way such word, whether used as an adjective or an adverb, interrelates with the Dodd-Frank statutory term `nonfinancial commodity,' as well as the concepts of `cash market,' `physical market channels' and the `bona fide hedging exemption'.”
The Environmental Markets Association (“EMA”) believes that the “very broad” definition of the word “physical” in current Commission regulations “certainly” encompasses environmental commodities, which the EMA states are subject to the forward exclusion from the definition of swap. The EMA requested that the CFTC issue a final rule clarifying that environmental commodities are not swaps even though intangible, that they are nonfinancial commodities that can rely on the forward exclusion, and that intangibility of a commodity does not prevent it from being “physically settled.” The Coalition for Emission Reduction Policy (“CERP”) similarly argued that environmental and other intangible commodity transactions that result in actual delivery of a commodity, intangible or not, as opposed to transactions that settle in cash, can be subject to the forward exclusion because such transactions can be physically settled. CERP also claimed that the Commission's proposed interpretation of forward contracts in nonfinancial commodities in the definition of “swap” supports its interpretation of “physically settled” in that forward sales of environmental commodities are commercial merchandising transactions because both buyer and seller ultimately need and intend the transfer of ownership of the emission allowances or offset credits.
EMA also expressed that the Commission's request for comment with regard to whether the definition of “physical” should rely on the “common sense meaning” of the word was unclear. In particular, EMA argued that environmental commodities traded in the spot or forward markets are physically delivered via a registry or an exchange of paperwork and eventually consumed through retirement. Further, according to EMA, environmental commodities are goods because Uniform Commercial Code (“UCC”) section 2105(1) defines “good” as “anything that can be moved other than money.”
The Commission is removing from regulation 1.3(ll) the definition of “physical,” which term will therefore have the meaning dictated by the context of the individual Commission regulations in which it appears. In addition, the Commission is adopting conforming changes to other regulations to address the deletion of the definition. The Commission is adopting these changes for ease of reference for market participants and to reduce confusion in interpreting the Commission's regulations, consistent with the spirit of Executive Order 13563, which seeks, among other goals, to eliminate agency regulations that have outlived their usefulness.
When the Commission added the definition of “physical” to regulation 1.3 in 1982, the intent was to distinguish between options on futures contracts and other options subject to the Commission's jurisdiction; the Commission termed such other options “options on physicals.” The Commission added the “physical” definition because, while the 1982 rulemaking including provisions applicable both to DCM-listed options on futures and DCM-listed options on commodities, it also contained regulations applicable solely to options on futures. Thus, the purpose of the definition was “principally to enable the Commission to differentiate, where necessary, between references to options on physicals and options on futures contracts.”
The Commission did not intend, when it promulgated the definition in regulation 1.3(ll), to apply it to circumstances such as the definition of “physically” settled. Given the intent of the definition of the term “physical” (to distinguish options on futures from other options) and the introductory language in regulation 1.3 regarding contextual interpretations of the defined terms therein, in regulations where it is not necessary to distinguish between different types of options, the definition of “physical” in Commission regulation 1.3(ll) is not useful and can be overbroad. For example, the definition of “physical” is not useful with respect to the term “physical safeguards” in regulation 160.30, which pertains to procedures to safeguard customer records and information. Because the scope of the definition of “physical” essentially includes options on any commodity, which would include non-physical commodities such as temperatures and interest rates, effectively, the restriction that “physical” in regulation 1.3(ll) is limited to any goods, article, service, right or interest upon which a commodity may be traded in accordance with the CEA and the Commission's regulations is not much of a restriction at all.
The Commission also notes that it recently promulgated final and interim final rules amending parts 32 and 33 of the Commission's regulations.
In light of these considerations, the Commission believes that deleting the definition of physical will reduce the potential for confusion on the part of market participants, as the appropriate definition of that term will be based on the context of the individual rules in which the term is utilized. These amendments will also serve the goals of Executive Order 13563 by amending the Commission's regulations because they no longer are “effective[] in achieving the objectives for which they were adopted.”
Further, various Commission regulations relating to options also refer to a “physical” when discussing an option on a commodity. In order to conform those regulations with the adapting changes discussed above, the Commission is adopting a number of non-substantive changes including, but not limited to, replacing certain references to “physical” with references to “commodity.” Where appropriate, the Commission is also replacing references to “underlying physical” with references to “underlying commodity.”
For the reasons discussed above, these conforming amendments will not result in substantive changes. Therefore, the Commission is amending the following regulations as described above: Regulations 1.3(kk); 1.3(ll); 1.17(c)(1)(iii), (c)(5)(ii)(A), and (c)(5)(xiii)(C); 1.33; 1.34(b); 1.35(b)(2)(iii), (b)(3), (d) and (e); 1.39(a) and (a)(3); 1.46(a)(1)(iii) and (iv); 4.23(a) and (b); 4.33(b)(1); 15.00(p)(1)(ii); 16.00(a); and 16.01(a)(1)(ii) and (iv), and (b)(1)(ii) and (iv). The Commission is leaving unchanged other references to “physical” in its existing definitions because, given the context in which the term is used in those rules, such
The Commission is replacing the word “physical” in regulations 1.17(c)(1)(iii) and 1.17(c)(5)(xi) with the word “commodity,” and is replacing the word “physical” in regulation 1.17(c)(5)(ii)(A) with the term “physical commodity.” In so doing, the Commission does not intend to change the meaning of any of these paragraphs. Thus, final regulations 1.17(c)(1)(iii) and 1.17(c)(5)(xi) will continue to apply to options that overly any commodity, not just a tangible commodity. By contrast, final regulation 1.17(c)(5)(ii)(A) will continue to apply to the options described therein, which cover tangible commodities only.
While some commenters requested that the Commission interpret “physical” for purposes of the term “physically settled” within the forward exclusion for swaps, or generally address the definition of “physical” as it relates to other terms, the Commission declines to do so for purposes of this release. The conforming amendments to the definition of physical are non-substantive changes that are designed to increase clarity for market participants. As noted above, rather than have a definition of physical that applies unless the context “otherwise requires,” the Commission will apply the definition based on the particular context of the applicable regulation. Because the current definition already applies in this manner, the modifications addressed herein do not amount to a substantive change in the regulations.
The Commission proposed to amend the definition of foreign board of trade to mean “any board of trade, exchange or market located outside the United States, its territories or possessions, whether incorporated or unincorporated where foreign futures, foreign options, or foreign swap transactions are entered into.” The Commission received no comments regarding the proposed definition of “foreign board of trade” and is modifying the proposed definition to make it consistent with the definition provided in the final rulemaking for Registration of Foreign Boards of Trade.
The Commission proposed adding “swap” to the definition of “commodity interest” in regulation 1.3(yy).
The Dodd-Frank Act added a definition of the term “swap” to the CEA.
In their comment letter, the ETA objected to the Proposal's addition of the term “swap” to the definition of commodity interest because, as discussed on page 6, above, the ETA objected to the manner in which the Proposal analogized swaps to futures. The Commission believes it is appropriate to add “swap” to the definition of commodity interest because the Dodd-Frank Act amended various intermediary definitions in section 1a of the Act (the Dodd-Frank Act updated the definitions of CPO, CTA, FCM, IB, Floor Trader and Floor Broker) to include their use of swaps. For example, the Act's present definition of FCM, as amended by the Dodd-Frank Act, authorizes this intermediary to accept customer orders for “swaps” in addition to accepting customer orders for “the purchase or sale of any commodity for future delivery.” If the Commission did not update the definition of “commodity interest” to include swaps, then various regulations applicable to intermediaries using the term “commodity interest” would not apply to intermediaries' swap activities. The Commission has reviewed all uses of the term “commodity interest” throughout the regulations and believes they appropriately refer to both futures and swaps.
Thus, the Commission has decided to finalize a revised definition of “commodity interest” by adding paragraph (yy)(4) to include swaps. The final version adopted today makes only minor changes to the proposed paragraph. Whereas the proposed paragraph referenced “any swap as defined in the Act, the Commission's regulations, a Commission order or interpretation, or a joint interpretation or order issued by the Commission and the [SEC],” amended regulation 1.3(yy)(4) now states “any swap as defined in the Act, by the Commission, or jointly by the Commission and the Securities and Exchange Commission.” The Commission is making this change because, for the purposes of the definition of “commodity interest,” it does not matter whether the Commission defines a swap pursuant to an order, interpretation, or joint interpretation.
The Proposal made technical amendments to this definition by omitting references to regulations 1.47 and 1.48 because the proposed rule on Position Limits deleted those regulations
The ETA requested that the Commission, the SEC, and prudential regulators agree on a definition of “end-user” because the DFA does not define this term and regulators have used the term inconsistently. The Proposal did not add a definition of “end-user” to regulation 1.3 because the DFA did not add a definition of that term to CEA section 1a. The Proposal's intention was to conform the Commission's regulations to the DFA's revisions to the CEA.
The Commission has decided not to add a definition of “end-user.” The Commission has no reason to define “end-user” because the Commission's regulations do not use this term, and even the recently adopted Commission regulations implementing the CEA's end-user exception to clearing do not define it.
The Commission proposed to revise regulation 1.4 to extend the benefit of electronic signatures and other electronic actions to SDs and MSPs. Section 731 of the Dodd-Frank Act amended the CEA by adding new section 4s(i)(1), requiring SDs and MSPs 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,”
Pursuant to the foregoing authority, the Commission has adopted new regulation 23.501(a)(1), which requires “[e]ach swap dealer and major swap participant entering into a swap transaction with a counterparty that is a swap dealer or major swap participant [to] execute a confirmation for the swap transaction,” according to a specified schedule.
Regulation 1.4 currently provides that an FCM, IB, CPO and CTA receiving an electronically signed document is in compliance with Commission regulations requiring signed documents, provided that such entity generally accepts electronic signatures.
a. Record Retention Period and Inspection
To conform the existing recordkeeping requirements under regulation 1.31 to the recordkeeping requirements under proposed regulation 23.203(b) for SDs and MSPs relating to their swap transactions, the Commission proposed to amend regulation 1.31 to require that records of a swap transaction or related cash or forward transaction, including records of oral communications, be kept until the termination, maturity, expiration, transfer, assignment, or novation date of the transaction and for five years after such date.
CME suggested that conversations should only have to be retained for six months after the execution of a transaction. FIA commented that the Commission failed to provide a justification for requiring that a swap record be maintained for the life of the swap plus five years. Encana requested clarification that regulation 1.31 does not apply to a non-financial end-user who enters into swaps, but is not an FCM, IB, or member of a DCM or SEF. Encana also made a general request that the Commission specify in its final rules which recordkeeping and reporting rules apply to non-financial end-users.
In contrast to other commenters, Mr. Chris Barnard asserted that all records should be kept indefinitely and scanned after two years, arguing that there is no technological or practical reason to limit the record retention period. Mr. Barnard specifically commented that records of voice communications also should be
The Commission also proposed to amend regulation 1.31 to conform to the proposed regulation 23.203(b)(2) requirement for SDs and MSPs and their swap transactions by proposing to require that all records kept pursuant to the Act or the Commission's regulations be made available for inspection to any applicable prudential regulator, as that term is defined in section 1a(39) of the Act, or, in connection with security-based swap agreements described in section 1a(47)(A)(v) of the Act, the SEC. By contrast, existing regulation 1.31, which pertains to “all books and records required to be kept by the Act or by these regulations,” requires that records be kept for five years and be made available only to the Commission and the Department of Justice.
The Commission has determined to adopt the proposed revision to regulation 1.31 regarding record retention periods with two modifications. First, in final regulation 1.31, the retention period for records of oral communications leading to the execution of a swap or related cash or forward transaction, as required of SDs and MSPs under regulation 23.202(a)(1) and (b)1), respectively, will be one year (rather than five years after the termination, maturity, expiration, transfer, assignment, or novation date of the transaction, as proposed). This modification is consistent with the final provision for an SD's or MSP's oral communications under new regulation 23.203(b)(2) in the Reporting, Recordkeeping, and Daily Trading Record Requirements final rulemaking.
With respect to Encana's request for clarification concerning the applicability of regulation 1.31 to commercial end-users, regulation 1.31 applies to all records required to be kept by the Act or the Commission's regulations, for example, records required to be kept under regulations 1.35, 18.05 and 23.202. If these rules require end-users to keep records (
In response to CME's comment that although the Commission suggests that the retention period for swaps applies only to SDs and MSPs, as addressed in proposed regulation 23.203(b), the proposed amendment to regulation 1.31 is ambiguous in that it could be read to apply to all entities, the Commission clarifies that the final provision in regulation 1.31 regarding the retention period for records of swap transactions is triggered by the type of record and not the entity that is required to keep the record. Therefore, although regulation 23.203(b) only applies to SDs and MSPs with regard to their swap transactions, the final corresponding provision in regulation 1.31 applies to anyone who is required by the Act or by these regulations to keep records of, among other things, swap transactions.
Second, the Commission also has determined not to adopt the proposed revisions to regulation 1.31(a)(1), (b)(2)(ii), (b)(2)(v)(B), (b)(3)(i), (b)(3)(ii)(C), (b)(3)(iii)(A), and (b)(4)(i) regarding the parties to whom documents must be made available for inspection. The proposed revisions were intended to require only SDs and MSPs to make the records that the CEA or the Commission's regulations require them to maintain available for inspection to, in addition to the Commission and DOJ, any applicable prudential regulator (and, in the case of security-based swap agreement records, to the SEC). However, as drafted, the proposed regulation text would have applied to all persons covered by regulation 1.31, not just to SDs and MSPs. The Commission's final swap recordkeeping rules require SDs and MSPs to make the records that the CEA or the Commission's regulations require them to maintain available for inspection to, in addition to the Commission and DOJ, any applicable prudential regulator or, in the case of security-based swap agreements, to the SEC, capturing the intent of the proposed revisions to regulation 1.31(a)(1), (b)(2)(ii), (b)(2)(v)(B), (b)(3)(i), (b)(3)(ii)(C), (b)(3)(iii)(A), and (b)(4)(i).
The Commission also proposed revising regulation 1.31(a)(1), (a)(2), and (b) to require that: all books and records required to be kept by the Act or by the Commission's regulations be kept in their original form (for paper records) or native file format (for electronic records); and production of such records be made in a form specified by the Commission.
CME believes that the native file format requirement should not require the retention of raw, unprocessed data generated or transmitted by an electronic trading or clearing system. Otherwise, CME argued, DCOs and DCMs would have to change the way they retain records. CME stated that its recommendation is not intended to alter the type or format of data that DCOs and DCMs currently capture and store for both business and regulatory purposes. Rather, it asked the Commission to clarify that the “native file format” provision does not impose a new or additional recordkeeping requirement on DCOs and DCMs as it relates to their electronic trading or clearing systems.
CME commented that the original form requirement is confusing and superfluous in light of current regulation 1.31(b), which permits the storage of paper records on microfilm, microfiche, or a similar medium, and that it is not clear what the Commission means by “native file format.” Similarly, NFA requested clarification that regulation 1.31(b) would continue to permit firms to retain paper records on micrographic or electronic storage media in lieu of maintaining paper records in their original format. NFA commented that the proposed revisions fail to provide a reason for requiring that electronic records be kept in their native file format.
FIA and NFA believe that existing regulation 1.31 complies with Federal Rule of Civil Procedure 34. Therefore, they asserted, there is no reason for the Commission to require that records be kept in their original form for paper records and native file format for electronic records. FIA and NFA further asserted that there is no reason for the Commission to depart from a rule that was designed, in 1999, to harmonize with the SEC's recordkeeping rules. Similarly, ACSA commented that requiring paper records to be maintained in their original form for five years and be readily accessible for the first two would conflict with SEC rules. FIA commented that firms currently rely on regulation 1.31(b) to transfer electronic records from their original format to new forms of electronic media. CME similarly commented that electronic files often must be migrated, upgraded or converted in order to meet ever-evolving technology standards. Therefore, CME argued that, because some swaps could exist for 30 to 50 years, the technology used to generate or store electronic records related to such swap transactions may become outdated or obsolete in a much shorter period of time. Therefore, CME recommended that the Commission eliminate the requirement to retain swap records in their native file format for the life of the swap.
CME argued that the Commission should re-propose other rules referencing regulation 1.31 (
Having considered these comments, the Commission is adopting the revisions to regulation 1.31 regarding the form in which records must be kept as proposed. In 1999, as commenters highlighted, the Commission adopted amendments to the recordkeeping obligations established in regulation 1.31 by, among other things, allowing most categories of records to be stored on either micrographic or electronic storage media for the full five-year maintenance period.
Accordingly, for records that include data stored in a database, the “native file format” is the format in which the data is maintained in that database, not a format reduced to paper or imaged format, which is essentially the equivalent of paper. This is true regardless of the imaged format, such as portable document format (“PDF”), whether machine-readable through optical character recognition (“OCR”) or any other process. Thus, the underlying financial data from which an FCM creates PDF versions of customer account statements must be kept in its “native file format” because, if and when the Commission requests those financial records, it will not be sufficient for the recordkeeper to produce the paper and/or PDF statements. Where the data is used to generate a paper document (including, but not limited to a PDF), such as a customer account statement, the paper document must be maintained in its original form, while the data must be maintained in its native file format.
Specifically regarding records of swap transactions, the Commission has decided to keep the requirement that these records be maintained in their native file format for the life of the swap plus five years. In response to CME's specific concerns about the need to migrate, update or convert electronic files over the potentially long life of a swap to meet evolving technology standards, the Commission confirms that maintaining data in native file format (
In the proposed changes to regulation 1.31, the Commission proposed to amend regulation 1.31(b)(3)(i) by replacing “approved machine-readable media as defined in regulation 15.00(l)” with “compatible data processing media as defined in regulation 15.00(d).” The proposed change was intended to update this paragraph of regulation 1.31 to reflect that regulation 15.00(l) no longer exists and, when it existed, was a definition of “compatible data processing media” and not “machine-readable media.”
In response to CME's request for clarification of the scope of “native file format,” the Commission confirms that the definition of “native file format” excludes raw, unprocessed data generated or transmitted by an electronic trading or clearing system.
Regulation 1.33 requires FCMs to maintain certain records and to regularly furnish monthly and confirmation statements to customers regarding commodity futures and option transactions they have entered into on behalf of customers. The DFA amended the definition of FCM in section 1a of the CEA to authorize an FCM to solicit or accept orders for swaps in addition to commodity futures and option transactions.
The Commission has decided to replace a reference to “open positions” in the existing paragraph (a) introductory text with “open contracts.” This amendment makes the regulation 1.33(a) introductory text consistent with the Commission's revised definition of “open contracts” in regulation 1.3(t).
In finalizing paragraphs (a)(3) and (b)(2), the Commission is replacing proposed references to “swaps” with “Cleared Swaps,” as regulation 22.1 defines that term. Since the publication of the Proposal, the Commission has finalized part 22 concerning the segregation of “Cleared Swaps Customer Collateral.”
Finally, in paragraph (a)(3) of regulation 1.33, the Commission is replacing the phrase “caused to be executed by” with “carried by.” The reason is that an FCM might not provide a trade execution function for every swap that it clears.
As part of the ministerial amendments contained in this release, the Commission is renumbering portions of regulation 1.35 so that paragraphs currently numbered 1.35(a-1) and 1.35(a-2) will be renumbered 1.35(b) and 1.35(c), respectively. As a result, paragraphs currently numbered 1.35(b), (c), (d) and (e) have been renumbered as 1.35(d), (e), (f) and (g), respectively.
Because amended regulation 1.35 extends recordkeeping obligations to swaps, the Commission has created special language for swaps, where appropriate. In regulation 1.35(d)(2) (formerly (b)(2)) (records of futures, commodity options, and retail forex exchange transactions for each account), the Commission has added paragraph (iv), as proposed. The Commission did not receive comments about this amendment and is adopting it as proposed. Amended regulation 1.35(d)(2)(iv) requires FCMs, IBs, and any clearing members clearing swaps executed on a DCM or SEF to maintain records describing the date, price, quantity, market, commodity, and, if cleared, DCO of each swap.
The Commission recognizes that investment managers currently execute bunched swap orders on behalf of clients and allocate the trades to individual clients post-execution. The Commission believes that the bunched order procedures currently applicable to futures can be adapted for use in swap trading. Therefore, the Commission proposed amending regulation 1.35(a-1)(5) (redesignated as (b)(5) pursuant to this rulemaking), addressing post-execution allocation of bunched orders.
In its final rulemaking concerning Customer Clearing Documentation, Time of Acceptance for Clearing, and Clearing Member Risk Management, the Commission adopted the Proposal's
In this rulemaking, the Commission is adding FCMs and IBs to the list of eligible account managers in regulation 1.35(a-1)(5) (redesignated as (b)(5)), as proposed, in order to have a single standard for all intermediaries that might have discretion over customer accounts. Unlike other account managers, however, under regulations 155.3 and 155.4, FCMs and IBs are prohibited from including proprietary trades in a bunched order with customer trades. Accordingly, as proposed, the Commission has added a cross-reference in regulation 1.35(a-1)(5) (re-designated herein as (b)(5)) to those regulations. The Commission did not receive comments to this segment of the Proposal.
The Commission is further amending regulation 1.35(a-1) (redesignated herein as (b)) in order to provide that specific customer account identifiers need not be included in confirmations or acknowledgments provided pursuant to regulation 23.501(a), if the requirements of regulation 1.35(a-1)(5) (redesignated herein as (b)(5)) are met. This will enable account managers to bunch orders for trades executed bilaterally with SDs or MSPs. This will require that, similar to the current procedure for futures, the allocation be completed by the end of the day of execution and provided to the counterparty. The Commission is making this revision as proposed; it did not receive comments to this revision.
Also as proposed, the Commission is deleting appendix C to part 1, which predated regulation 1.35(a-1)(5) (re-designated herein as (b)(5)) and also addresses bunched orders. Appendix C consists of a Commission Interpretation regarding certain account identification requirements pertaining to the practice of combining orders for different accounts into a single order book, referred to as bunched orders. The procedures for bunched orders are set forth in regulation 1.35(a-1)(5) (re-designated herein as (b)(5)). Accordingly, the procedures under appendix C to part 1 are duplicative and no longer necessary. The Commission received no comments concerning its proposal to delete appendix C to part 1 and is hereby deleting that appendix.
The Commission has deleted paragraphs (f)-(l) of regulation 1.35, as proposed. To implement the CFMA, regulation 38.2 required DCMs to comply with an enumerated list of Commission regulations, and exempted them from all remaining Commission regulations that were no longer applicable post-CFMA.
As part of the ministerial amendments contained in this rulemaking, the Commission has eliminated from the Commission's regulations any provisions that have been inapplicable to DCMs since the passage of the CFMA, and that remain inapplicable after the passage of the DFA. Paragraphs (f)-(l) of regulation 1.35 are among those provisions. Pursuant to the deletion paragraph (j) of regulation 1.35, the Commission has copied most of that provision into new subsection (d)(7)(i) (formerly (b)(7)(i)). The Commission made these changes as proposed; it did not receive any comments on these provisions.
Also as part of the ministerial amendments contained in this rulemaking, the Commission proposed to eliminate regulations 1.35(a-1)(3)(ii) and 1.35(a-2)(3). However, regulation 38.2, as revised by the DCM Core Principles final rule, no longer exempts DCMs from these provisions. Accordingly, these provisions will not be eliminated in this rulemaking, and they are redesignated as regulations 1.35(b)(3)(ii) and 1.35(c)(3), respectively.
Regulation 1.35, as revised by this rulemaking, no longer agrees with regulation 38.2. As this rulemaking eliminates the provisions of regulation 1.35 that remain inapplicable to DCMs, the Commission is revising regulation 38.2 to remove references to those provisions of regulation 1.35 with which DCMs are not required to comply. The Commission considers this revision to regulation 38.2 technical in nature as it merely cleans up the discrepancy created by the revisions to regulation 1.35.
Finally, the Commission has made a technical correction to regulation 1.35(b)(3)(v) (redesignated herein as (d)(3)(v)) so that the final sentence references “commodity futures, retail forex, commodity option, or swap books and records” instead of “commodity retail forex or commodity option books and records.” The Commission has made this change as proposed; it did not receive any comments on this provision.
Dodd-Frank Act section 723(a)(3) added a new section 2(h)(8) to the CEA to require, among other things, that swaps subject to the clearing requirement of CEA section 2(h)(1) be executed either on a DCM or on a SEF. The DFA established SEFs as a new category of regulated markets for the purpose of trading and executing swaps. Because SEFs are now regulated markets under the CEA, many of the Commission's existing regulatory provisions that currently are applicable to DCMs also will become applicable to SEFs.
Accordingly, the Commission, as proposed, has amended paragraphs (c) and (d) of regulation 1.37, pertaining to recording foreign traders' and guarantors' names, addresses, and business information. Currently, these provisions apply to DCMs and futures and options contracts executed on those facilities. This revision amends the provisions to also include SEFs and swap transactions. Additionally, the Commission is amending the title and remaining text of regulation 1.37 to reflect the removal of the term “option customer.”
Like regulation 1.37, the Commission is amending regulation 1.39 to apply it to SEFs and swaps. Regulation 1.39, which has applied to members of contract markets, governs the simultaneous execution of buy and sell orders of different principals for the same commodity for future delivery by a member and permits the execution of such orders between such principals on a contract market. The Commission is amending this provision to include members of SEFs, and to include swap transactions. The Commission is also amending paragraph (c) to eliminate the reference to “cross trades,” as they are
Regulation 1.40 requires FCMs, RFEDs, IBs and members of contract markets to furnish to the Commission certain information they publish or circulate concerning crop or market information affecting prices of commodities. The Commission is amending regulation 1.40 to apply it to trading on a SEF, to the extent that persons have trading privileges on the SEF. Persons without trading privileges on a SEF will not be subject to regulation 1.40. The amendments also update the forms of communication covered by the regulation by replacing the word “telegram” with “telecommunication.” The Commission is making these revisions as proposed; the Commission received no comments on these provisions.
The Commission proposed to amend regulation 1.59 to include SEFs and swaps. The Commission also proposed to amend regulation 1.59(b) to correct certain cross-references to the Act and Commission regulations. Regulation 1.59(c) has been revised to apply only to registered futures associations, as the prohibitions contained therein applicable to the other SROs already are addressed in proposed regulation 40.9.
The Commission proposed to amend regulation 1.63 to correct certain cross-references to the Act and its regulations. The Commission also proposed to amend paragraph (d) to incorporate the posting of notices required under that paragraph on each SRO's Web site. The Commission received no comments regarding the proposed amendments to regulation 1.63 and is adopting the amendments without modification.
Regulation 1.67 requires contract markets, upon taking any final disciplinary action involving a member causing financial harm to a non-member, to provide notice to the FCM that cleared the transaction. FCMs and other registrants on SEFs should also be notified of any disciplinary action involving transactions on a SEF they executed for ECPs. Accordingly, the Commission proposed to amend regulation 1.67 to include SEFs, registrants and ECPs on such facilities. The Commission received no comments regarding proposed regulation 1.67 and is adopting the rule without modification.
The Commission is hereby removing and reserving regulation 1.68. Regulation 1.68 had permitted a customer of an FCM to allow the FCM to not separately account for and segregate such customer's funds if, among other things, such funds are being carried by the FCM to trade on or through the facilities of a DTEF. No DTEF has ever registered with the Commission. Furthermore, section 734 of the Dodd-Frank Act repealed the DTEF provisions in the CEA, effective July 15, 2011. Therefore, because the statutory provisions underpinning regulation 1.68 have been repealed, the Commission is removing it from the Commission's regulations.
The CFMA adopted core principles for DCMs.
On February 7, 2012, the Commission finalized regulations in part 22 regarding the Protection of Cleared Swaps Customer Contracts and Collateral (“Cleared Swaps Customer Final Rule”).
The Cleared Swaps Customer Final Rule carefully established the basic architecture for protecting Cleared Swaps Customer Collateral. Both the Cleared Swaps Customer Final Rule and
For the reasons stated above, the Commission is hereby making the following technical corrections:
In regulation 1.3, the Commission has added a definition of “futures customer funds” to reference only those funds used to margin futures contracts or commodity option transactions on or subject to the rules of a contract market, or DCO, as the case may be. This definition matches the existing definition of customer funds (regulation 1.3(gg)). The Commission is also adding a definition of “Cleared Swaps Customer Collateral,” which cross-references regulation 22.1's definition of this term. Regulation 1.3(gg)(“customer funds”) applies to both “futures customer funds” and “Cleared Swaps Customer Collateral.” The Proposal's definition in regulation 1.3(gg) had already applied to customer funds used to margin both futures and swaps.
Relatedly, the Commission is adding a definition of “futures customer” to regulation 1.3 and a definition of “Cleared Swaps Customer,” which cross-references regulation 22.1's definition of that term. As discussed above in section II.A.1.b. of this preamble, the definition of “customer” in regulation 1.3(k) will be finalized as proposed, to reference “any person who uses a futures commission merchant, introducing broker, commodity trading advisor, or commodity pool operator as an agent in connection with trading in any commodity interest.”
The Proposal included an amendment to the definition of “futures account” in regulation 1.3(vv) to reference a related futures segregation provision of section 4 of the Act, as amended by the Dodd-Frank Act,
The Commission is making a technical correction to paragraph (c)(5)(xiii)(C) of regulation 1.17 (“Minimum financial requirements for futures commission merchants and introducing brokers”) to restrict a provision pertaining to a foreign broker granted relief pursuant to regulation 30.10 to “the foreign futures or foreign options secured amount, as § 1.3(rr) of this part defines such term.” This provision has always referenced the foreign futures or foreign options secured amount. Thus, because “customer funds” includes both “futures customer funds” and “Cleared Swaps Customer Collateral,” the Commission is making a technical correction to replace the term “customer funds” in paragraph (c)(5)(xiii)(C) of regulation 1.17 with the term “foreign futures or foreign options secured amount.”
The Commission is making technical corrections to regulation 1.20 (“Customer funds to be segregated and separately accounted for”) by: changing the title to “Futures customer funds to be segregated and separately account for”; replacing references to “customer funds” and “customers” to “futures customer funds” and “futures customers”; and linking the regulation to those provisions of section 4d of the Act, as amended by the Dodd-Frank Act, pertaining to the segregation of futures customer funds (
The Commission is making technical corrections to regulation 1.21 (“Care of money and equities accruing to customers”) by changing the title to “Care of money and equities accruing to futures customer” and replacing references to “customer” with references to “futures customer.” The Cleared Swaps Customer Final Rule did not create a parallel regulation in part 22 on the grounds that such parallels were not necessary because: (1) Regulation 22.1 broadly includes “accruals” in the definition of Cleared Swaps Customer Collateral, and (2) regulation 22.2(e) permits an FCM to commingle the Cleared Swaps Customer Collateral of multiple Cleared Swaps Customers. Thus, although revised regulation 1.21 is limited to futures customers and there is no parallel regulation in part 22, part 22 captures the substance of regulation 1.21 with respect to Cleared Swaps Customers and Cleared Swaps Customer Collateral.
The Commission is making technical corrections to regulation 1.22 (“Use of customer funds restricted”) by changing the title to “Use of futures customer funds restricted” and replacing references to “customer funds” and “customer” with references to “futures customer funds” and “futures customer.” The Cleared Swaps Customer Final Rule incorporated these requirements into part 22 with respect to Cleared Swaps Customer Collateral and Cleared Swaps Customers.
The Commission is making technical corrections to regulation 1.23 (“Interest of futures commission merchant in funds; additions and withdrawals”) by changing the title to “Interest of futures commission merchant in segregated futures customer funds; additions and withdrawals;” replacing references to “customer funds” and “customer” with references to “futures customer funds” and “futures customer;” and linking the regulation to sections 4d(a) and (b) of the Act.
The Commission is making technical corrections to regulation 1.24 (“Segregated funds; exclusions therefrom”) by replacing a reference to “customers” with “futures customers.”
The Commission is making technical corrections to regulation 1.26 (“Deposit of instruments purchased with customer funds”) by: changing the title to “Deposit of instruments purchased with futures customer funds”; replacing references to “customer funds” and “customer” with references to “futures customer funds” and “futures customer;” and linking the regulation to sections 4d(a) and (b) of the Act.
The Commission is making technical corrections to regulation 1.32 (“Segregated account; daily computation and record”) by replacing references to “customer funds,” “customer,” and “customer account” with references to “futures customer funds,” “futures customer,” and “futures customer account.”
The Commission is making a technical correction to regulations 1.21, 1.23, 1.24, 1.26, 1.29, 140.735-2a, and 140.735-3 by replacing the term “clearing organization” or “clearinghouse” with “derivatives clearing organization.” Since Congress' enactment of the CFMA in 2000,
The Commission is making technical changes to subsection (1)(iii) of regulation 1.33 (“Monthly and Confirmation statements”) to specifically reference “futures customer funds” and the “foreign futures and foreign options secured amount.” This subsection presently refers to these classes of customer funds; the intention of this technical amendment is to clarify that meaning.
Proposed amended regulation 1.33(a)(3) described what “swap positions” information an FCM must provide in monthly statements to its customers. The Commission did not receive comments on this proposal and is publishing it as proposed, except for the following. In line with the aforementioned technical corrections, today's final version of regulation 1.33 replaces “swap position” with “Cleared Swaps Customer.” Today's final rulemaking also makes a technical correction to regulation 1.33 by combining subsections (a)(1)(iv), (a)(2)(v), and proposed (a)(3)(iv) into a new paragraph (a)(4).
Unlike the aforementioned Part 1 Segregation Regulations, Regulation 1.25 (“Investment of customer funds”), on the other hand, now properly applies to both futures customer funds and Cleared Swaps Customer Collateral. Thus, its title will continue to refer to “customer funds,” which, as defined by revised regulation 1.3(gg), includes both futures customer funds and Cleared Swaps Customer Collateral. However, the Commission is making technical corrections to regulation 1.25 as part of today's final rulemaking by adding references to regulation 22.5 (“Futures commission merchants and derivatives clearing organizations: Written acknowledgment”) alongside current references to regulation 1.26 (“Deposit of instruments purchased with customer funds”) (to be amended herein as “Deposit of instruments purchased with futures customer funds”). The Commission explains this reference to regulation 22.5 in a new provision at the end of paragraph (d)(13) of regulation 1.25.
The foregoing technical corrections to the Part 1 Segregation Regulations are designed to ensure that, when taken together with the Cleared Swaps Customer Final Rule, they do not create redundant, and potentially conflicting, duties for FCMs and DCOs. For similar reasons, the Commission is making certain equivalent technical corrections to part 22. As mentioned above, none of these technical changes alter the meaning of any regulation of part 22. First, the Commission is deleting the definition of “Customer” from regulation 22.1 (“Definitions”). Because of the aforementioned addition of the definition of “futures customer” in regulation 1.3, regulation 22.1's definition of “Customer” is no longer needed or correct. Consequently, in regulation 22.2 (“Futures Commission Merchants: Treatment of Cleared Swaps and Associated Cleared Swaps Customer Collateral”), the Commission is replacing references to “Customers” with references to “futures customers” or “foreign futures or foreign options customers,” as regulation 30.1(c) defines that term. For the same reason, in regulation 22.3(b)(2)(iii) (“Derivatives clearing organizations: Treatment of Cleared Swaps Customer Collateral”); paragraphs (a) and (b) of regulation 22.5 (“Futures commission merchants and derivatives clearing organizations: Written acknowledgement”); and paragraph (a) of regulation 22.9 (“Denomination of Cleared Swaps Customer Collateral and location of depositories”), the Commission is replacing references to funds belonging to “Customers” with references to “futures customer funds.”
In addition, since, as described above, regulation 1.25 (“Investment of customer funds”) applies to both futures customer funds and Cleared Swaps Customer Collateral, the Commission is making a technical correction to paragraph (e)(1) of regulation 22.2 and paragraph (d) of regulation 22.3 by omitting, “which section shall apply to such money, securities, or other property as if they comprised customer funds or customer money subject to segregation pursuant to section 4d(a) of the Act and the regulations thereunder.”
Similarly, the Commission is making a technical correction to regulation 22.9 (“Denomination of Cleared Swaps Customer Collateral and location of depositories”) by omitting a reference to Cleared Swaps Customer Collateral. Regulation 22.9 cross-references regulation 1.49 (“Denomination of customer funds and location of depositories”). Because the new revised definition of “customer funds” in regulation 1.3 references both futures customer funds and Cleared Swaps Customer Collateral, regulation 1.49 references to both classes of funds. Therefore, regulation 22.9 can reference regulation 1.49 without making a specific reference to Cleared Swaps Customer Collateral, which the Commission has always intended.
Moreover, as a result of the corrections to the definition described above, the Commission is making (1) a technical correction to regulation 22.10 (“Application of other regulatory provisions”) to avoid confusion as to the applicability of regulations 1.27, 1.28, 1.29, and 1.30 to Cleared Swaps, Cleared Swaps Customers, and Cleared Swaps Customer Collateral, and (2) technical corrections to regulations 22.13(a)(2) and 22.15 to incorporate the new “Futures Customer” and “Foreign Futures or Foreign Options Customer” terms.
The Commission is also making technical corrections to regulation 22.11, regulation 22.13(a)(1), the title of regulation 22.14, regulation 22.14(a)(2), regulation 22.14(c)(2), regulation 22.15, and the title of regulation of 22.16 by replacing references to “Customer” with
In addition, the Commission is making technical corrections to regulation 22.12 (“Information to be maintained regarding Cleared Swaps Customer Collateral”) by replacing the term “Cleared Swaps Customer Funds,” with the correct term, “Cleared Swaps Customer Collateral.”
The Commission notes that its regulations refer to “customer funds” in the following regulations: 3.10, 3.21, 5.5, 39.15, 39.16, and 170.5, as well as in Appendices to part 190. “Customer funds” also appears in the following regulations recently amended by the Commission's final rulemaking concerning Core Principles and Other Requirements for Designated Contract Markets:
The Commission proposed to rename part 7 of the Commission's regulations “Registered Entity Rules Altered or Supplemented by the Commission,” thus reflecting the language in section 8a(7) of the Act, as amended by the Dodd-Frank Act, which provides the basis for part 7. The Commission also proposed to make a similar change in regulation 7.1, replacing contract market rules with registered entity rules. Finally, the Commission proposed to remove and reserve subparts B (Chicago Mercantile Exchange Rules) and C (Board of Trade of the City of Chicago Rules) and their associated sections. The Commission received no comments regarding the proposed amendments to part 7 and is adopting these amendments as proposed.
The Commission proposed to remove part 8 of its regulations. Regulation 38.2 enumerates the provisions with which DCMs are not required to comply. The part 8 regulations are among those provisions.
The Commission also proposed to incorporate changes into parts 15, 18, 21, and 36 of its regulations to account for (1) the DFA's elimination of two categories of exempt markets, exempt commercial markets (“ECMs”) and electronic boards of trade (“EBOTs”); and (2) the DFA's grandfather relief provisions for such entities.
Section 723 of the DFA repealed CEA section 2(h), thus eliminating the ECM category. Section 734 of the DFA repealed CEA section 5d, thus eliminating the EBOT category. Section 734 also repealed CEA section 5a, thus eliminating the DTEF category of regulated markets effective July 15, 2011, as discussed above.
Both sections 723 and 734 of the Dodd-Frank Act contain grandfather provisions allowing ECMs and EBOTs to petition the Commission to continue to operate as ECMs and EBOTs. Pursuant to the grandfather provisions, in September 2010, the Commission issued orders regarding the treatment of such grandfather petitions (the “Grandfather Relief Orders”).
Pursuant to the DFA and the Grandfather Relief Orders, the Commission proposed to remove from parts 15, 18, 21 and 36
The Commission also proposed to incorporate changes into its regulations to account for other new categories of registered entities and to include new products now subject to Commission jurisdiction. Section 733 of the Dodd-Frank Act added new section 5h to the CEA and created SEFs. Section 728 of the Dodd-Frank Act added new section 21 to the CEA and created SDRs. SEFs will allow for the trading of swap transactions between ECPs, as that term is defined in CEA section 1a(18).
The proposed changes throughout parts 140 (Organization, Functions and Procedures of the Commission) and 145 (Commission Records and Information) reflect the need to incorporate SEFs and SDRs into the Commission's regulations dealing with the rights and obligations of other registered entities. The Commission proposed amending regulation 140.72 to provide the Commission with the authority to disclose confidential information to SEFs and SDRs. This provision allows the Commission, or specifically identified Commission personnel, to disclose information necessary to effectuate the purposes of the CEA, including such matters as transactions or market operations. The Commission proposed amending regulation 140.96 to authorize the Commission to publish in the
The Commission proposed amending regulation 140.735-2 by adding swap and retail forex transactions, as regulation 5.1(m) defines the latter term, to those agreements, contracts or transactions Commission staff may not trade. The Commission proposed amending regulation 140.735-3 to add SEFs and SDRs to the list of entities from which Commission members and employees may not accept employment or compensation.
The Commission received no comments about these proposed amendments to part 140 and is adopting them as proposed, except for two technical corrections to regulation 140.735-2. The Proposal added “swap transaction” to the text of paragraph (c) but inadvertently omitted updating a cross-reference to paragraph (b) that references “swaps.” Today's final rulemaking updates that cross-reference accordingly. Similarly, the Proposal added “swap transaction” to one sentence of paragraph (c)'s footnote three but, inadvertently, did not add “swap transaction” to another sentence of that paragraph. Thus, today's rulemaking makes a technical correction by adding “swap transaction” to that other sentence.
The Commission proposed amending regulation 145.9 to expand the definition of “submitter” by adding SEFs and SDRs to the list of registered entities to which a person's confidential information has been submitted, and which, in turn, submit that information to the Commission. This amendment allows individuals who have submitted information to a SEF or SDR to request confidential treatment under regulation 145.9. The Commission received no comments about this proposed amendment and is adopting it as proposed.
Appendix A to Part 145 discusses those portions of Commission records made available to the public. Section (b) discusses information made available in the public reading area of the Commission's Office of the Secretariat. The Proposal amended subsection (b)(13) by adding “application form” to the list of publicly available portions of applications for becoming a registered entity. One month following the publication of the Proposal,
The Commission is removing the references to regulation 1.41 within regulation 155.2 because the Commission removed and reserved regulation 1.41 in 2001
The Commission is removing references to “option customer” in these two regulations pursuant to this final rulemaking's deletion of that term from regulation 1.3, described above. The Commission did not receive comments about this change following publication of the Proposal and is amending regulations 155.3 and 155.4 as proposed.
The Commission is revising this regulation by incorporating the revised definition of “commodity interest” (regulation 1.3(yy)), discussed above. The Commission believes that paragraph (a) of regulation 166.2 should refer to futures, options, or swaps and that paragraph (b) should refer only to futures or options. The Commission did not receive comments about these changes and is adopting them as proposed.
The Commission is revising this regulation by deleting a reference to “option customer” because, as described above, today's rulemaking deletes that term from regulation 1.3. The Commission is also making a conforming, technical change to regulation 166.5, described in section G.2., below.
The Commission is removing references to DTEFs and regulations pertaining to DTEFs in parts 1, 5, 15, 36,
The Commission is also making changes to various parts of its regulations to update cross-references to CEA provisions, now renumbered after the passage of the DFA. An example of one such change is amended regulation 166.5, in which the Commission has updated the reference to the statutory definition of the term “eligible contract participant,” to reflect the Dodd-Frank Act's renumbering of CEA section 1a. Additionally, where typographical errors or other minor inconsistencies were discovered while reviewing CFTC regulations, this rulemaking includes instructions and amended regulations to correct them.
Sections 1.31, 1.33, 1.35, 1.37, and 1.39 of the Commission's regulations are being amended to provide that records of swap transactions be kept in a similar manner to records of futures transactions. These amended provisions impose new information recordkeeping requirements that constitute the collection of information within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).
With respect to all of the Commission's collections, 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 Act strictly prohibits the Commission, unless specifically authorized by the Act, 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 also is required to protect certain information contained in a government system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.
Regulation 1.31 describes the manner in which “all books and records required to be kept by the Act” must be maintained. Most of the requirements of regulation 1.31 are applicable to FCMs, IBs, RFEDs, CTAs, CPOs, and members of DCMs and SEFs in conjunction with other part 1 regulations, and the PRA burdens either have been or will be covered by the OMB control numbers associated with the other part 1 regulations. Examples of these other part 1 regulations are regulation 1.33, which requires certain registrants to produce monthly confirmation statements, and regulation 1.35, which requires the maintenance of records of cash commodity, futures, and option transactions (as finalized, Records of commodity interest and cash commodity transactions). Regulation 1.31 is applicable to SDs and MSPs by way of the part 23 regulations.
Regulation 1.31 additionally contains discrete stand-alone collections for which a control number must be sought. Subsection (b)(3)(ii) requires persons keeping records using electronic storage media to “develop and maintain written operational procedures and controls (an `audit system') designed to provide accountability over [the entry of records into the electronic storage media].” This provision is already applicable to FCMs, RFEDs, IBs, CTAs, CPOs, and members of DCMs, and would be applicable to SDs and MSPs pursuant to the part 23 regulations. As members of SEFs will be newly subject to the part 1 regulations, the Commission must estimate the burden of subsection (b)(3)(ii) on these entities and seek OMB approval for this new application of the subsection.
The Commission anticipates that members of SEFs may incur certain one-time start-up costs in connection with establishing the audit system. This will include drafting and adopting procedures and controls and may include updates to existing recordkeeping systems. The Commission estimates the burden hours associated with these one-time start-up costs to be 100 hours per SEF member.
As there are not any SEFs operating at the present, in light of the fact that the Commission has not yet finalized regulations concerning SEF Core Principles, it is not possible for the Commission to estimate with precision how many SEF members there will be or how many of those SEF members will be FCMs, SDs, or MSPs that are being covered by already pending existing information collections. Nonetheless, the Commission has estimated that 35 SEFs will register with it after the Dodd-Frank Act becomes effective, and now is estimating that there may be on average 100 members of a SEF that will not fall under one of the other collections. Accordingly, the aggregate new burden of subsection (b)(3)(ii) is estimated to be 100 one-time burden hours to approximately 3,500 SEF members.
The Commission expects that compliance and operations managers will be employed in the establishment of the written procedures and controls under subsection (b)(3)(ii). According to recent Bureau of Labor Statistics, the mean hourly wage of an employee under occupation code 11-3031, “Financial Managers,” that is employed by the “Securities and Commodity Contracts Intermediation and Brokerage” industry is $80.90.
Members of SEFs will also have to comply with regulation 1.31(c), which requires persons employing an
According to recent Bureau of Labor Statistics, the mean hourly wage of an employee under occupation code 11-3031, “Financial Managers,” (which includes operations managers) that is employed by the “Securities and Commodity Contracts Intermediation and Brokerage” industry is $80.90.
The Commission did not receive any comments concerning the cost for SEF members to comply with the recordkeeping requirements contained in regulation 1.31.
The Commission is amending regulation 1.33 by requiring FCMs to include in their monthly and confirmation statements sent to customers certain specified information related to a customer's Cleared Swap positions. The information required to be summarized in respect of swap transactions will be analogous to information currently required to be kept in respect of futures and commodity option transactions. The Commission estimates the burden of complying with regulation 1.33 in respect of swap transactions to be 1 hour for each Cleared Swap confirmation and 1 hour for each monthly statement.
According to recent Bureau of Labor Statistics, the mean hourly wage of an employee under occupation code 11-3031, “Financial Managers,” (which includes operations managers) that is employed by the “Securities and Commodity Contracts Intermediation and Brokerage” industry is $80.90.
The Commission did not receive any comments concerning the cost for FCMs to comply with the recordkeeping requirements contained in regulation 1.33 with respect to their swap transactions.
The amendments will require members of SEFs to comply with the regulation 1.35 recordkeeping requirements that are currently followed by FCMs, IBs, RFEDs, and members of DCMs. The Commission anticipates that members of SEFs will spend approximately eight hours per trading day (or 2,016 hours per year based on 252 trading days) compiling and maintaining transaction records.
According to recent Bureau of Labor Statistics, the mean hourly wage of an employee under occupation code 11-3031, “Financial Managers,” (which includes operations managers) that is employed by the “Securities and Commodity Contracts Intermediation and Brokerage” industry is $80.90.
The amendments to regulation 1.35 will also require FCMs, RFEDs, IBs, and members of DCMs to comply with the regulation 1.35 recordkeeping requirements for any swap transactions into which they enter. Because the proposed recordkeeping requirements for swaps would be equivalent to the recordkeeping requirements they must currently follow in respect of futures and commodity option transactions, the additional burden for any swap transaction would be the same for any additional futures and commodity option transaction for which they keep records pursuant to regulation 1.35 in its current form. The Commission estimates that the recordkeeping burden associated with each swap transaction would be 0.5 hours, for a total burden of $50 per transaction.
The Commission did not receive any comments concerning the excepted cost of complying with the aforementioned revisions to regulation 1.35.
The Commission is amending regulation 1.37(a) by requiring each FCM, IB, and member of a DCM to keep the same kind of record (showing the customer's name, address, occupation or business, and name of any other person guaranteeing the account or exercising any trading control over it) for any swap transactions it “carries or introduces” for another person. The Commission estimates that it will take each of these entities an average of 0.4 hours to gather the information and file it or key it into the entity's customer recordkeeping programs.
The Commission also is amending regulation 1.37(b) by requiring each FCM carrying an omnibus account for another FCM, a foreign broker, a member of a DCM or any other person to maintain a daily record for such account of the total open long contracts and the total open short contracts in each swap. FCMs presently have an equivalent obligation with respect to futures and commodity option transactions. These daily records typically are maintained in electronic form. Therefore, once a position is entered into the entity's systems, the daily record will be automatically available. The Commission estimates that entering the position into the system, commencing with the placement of an order and ending with execution will take each of these entities an average of 0.4 hours.
The Commission additionally is amending regulation 1.37(c) by requiring SEFs to comply with a provision that DCMs must currently follow: Keep a record showing the true name, address, and principal occupation or business of any foreign trader executing transactions on the
The Commission estimates that it would take a SEF a total of 0.4 hours to prepare each record in accordance with regulation 1.37(c). According to the Bureau of Labor Statistics, the mean hourly wage of an employee under occupation code 43-9021, “Data Entry Keyer,” is $13.95.
The Commission did not receive any comments concerning the extension of regulation 1.37 to swap transactions executed by FCMs, IBs, and other DCM members.
The Commission is amending regulation 1.39, which currently applies to DCMs, by enabling members of SEFs to execute simultaneous buying and selling orders of different principals pursuant to rules of the SEF if certain conditions are met. Among those conditions, a SEF would have to record these transactions in a manner that “shows all transaction details required to be captured by the Act, Commission rule, or regulation.” The Commission anticipates that the data to be captured would already exist in the SEF's trading system. The Commission estimates that it will take the SEF an average of 0.1 hours to capture this data, and storage costs of less than $1 per record.
According to the recent Bureau of Labor Statistics, the mean hourly wage of computer programmers under occupation code 15-1131 and computer software developers under program codes 15-1132 are between $36.54 and $44.27.
The Commission did not receive any comments concerning the extension of regulation 1.39 to transactions executed on a SEF.
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.
Additionally, the Commission is applying certain of those books and records regulations to members of SEFs, mirroring obligations that apply to members of DCMs.
Accordingly, the Commission is hereby determining that most of the entities affected by this rulemaking will not be significantly economically impacted by the conforming and technical rules being adopted. As discussed below, the Commission is also determining that most of the entities that will be subject to compliance with this rulemaking are not small entities for the purposes of the RFA. Therefore, pursuant to 5 U.S.C. 605(b), the Chairman, on behalf of the Commission, certifies by category of market participant below that the final rules will not have a significant economic effect on a substantial number of small entities.
The Commission has previously determined that registered FCMs, RFEDs, DCMs, ECPs, SEFs and large traders are not small entities for purposes of the RFA.
As discussed above, most of the provisions of this rulemaking are technical and conforming in nature, and overlap with substantive rulemakings in which the Commission has conducted RFA analyses to the extent such are required.
The Commission provided an initial regulatory flexibility analysis for IBs in the its proposing release, as required by 5 U.S.C. 603, because the oral recordkeeping requirement under regulation 1.35(a), as proposed, may have had a significant economic impact on a significant number of small IBs.
Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders. Section 15(a) further specifies that the costs and benefits shall be evaluated in light of the following five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission considers the costs and benefits resulting from its discretionary determinations with respect to the section 15(a) factors.
In July 2010, Congress passed the Dodd-Frank Act which, among other things, establishes a comprehensive regime for the regulation of swaps. The Dodd-Frank Act brings swaps under the Commission's jurisdiction and obligates the Commission to adopt new regulations related to registration and regulation of SDs and MSPs, trade execution and clearing requirements, and swap data recordkeeping and real time reporting. In section 721 of the Dodd-Frank Act, Congress added CEA section 1a(47) to add a definition of the term “swap.”
In response to Congress's act of placing swaps under the Commission's authority, the Commission is exercising its discretion to amend its regulations to ensure that SDs, MSPs, SEFs, and swaps are subject to the Commission's comprehensive regulatory regime, and in June 2011, proposed to amend parts 1, 5, 7, 8, 15, 18, 21, 36, 41, 140, 145, 155, and 166 to update its regulations accordingly.
As described in the Background, above (section I. of this preamble), some of the amendments contained in this release are technical in nature; for example, they amend various definitions in regulation 1.3 to track the DFA's amendments to the CEA's definitions of the same term, such as futures commission merchants. Another example of a technical change is the deletion of references to derivatives transaction execution facilities, a category of exchange that the DFA eliminated. Other revisions contained in this rulemaking amend recordkeeping and reporting requirements, which presently apply to futures, so that they cover swap transactions as well. An example of this type of change is the revision to parts 15, 18, 21, and 36 to implement DFA's grandfathering and phase-out of exempt boards of trade and exempt commercial markets. Certain amendments in this release are designed to harmonize recordkeeping requirements for various registered entities transacting in swaps. For example, the amendments to §§ 1.31 harmonize part 1 recordkeeping requirements with those applicable to SDs and MSPs under part 23 regulations. Lastly, this rulemaking amends procedures pertaining to the post-execution allocation of bunched orders so that they can be used in respect of swap transactions similarly to how they are currently used for futures transactions.
The benefits and costs that the Commission considers below are those attributable to its amendments of the rules discussed compared to a scenario in which these rules were not amended.
Prior to the amendments made in this final rule, § 1.31 specified the conditions under which records required by the Act of any applicable entity shall be maintained. The section stated that these records shall be kept for a period of five years from the transaction date, must be “readily accessible” for the first two years, and stipulated a number of further conditions pertaining to the auditing of record storage systems, storing duplicate copies of records, and other items. As described above in II.A.3, the amendments in this final rule specify that: (1) Required books and records must be kept in their original form (for paper records) or in their native file formats (for electronic records); (2) when books and records are requested by the Commission, they must be produced in a form and on any media specified by the Commission; (3) required records of any swap or related cash or forward transaction must be kept until the “termination, maturity, expiration, transfer, assignment, or novation date of the transaction” and then for an additional five-year period; and (4) records of oral communications required to be maintained pursuant to regulation 23.202(a)(1) and (b)(1) must be kept until the “termination, maturity, expiration, transfer, assignment, or novation date of the transaction” and then for an additional one-year period.
The public and the financial integrity of the markets benefit from this amendment because it promotes retention of metadata (
In addition, if entities are not required to store data in its native file format, some entities may choose to store some of their data on paper records or in electronic image formats (such as PDF) which cannot be easily converted into a form that allows it to be read by programs that the Commission sometimes uses for purposes of investigation and analysis. For example, market participants have sometimes submitted large amounts of financial data to the Commission on printed pages arguing that OCR technology makes such pages “machine readable” and therefore is compliant with the existing requirements under § 1.31(b)(3)(i). While OCR technology is useful in converting printed text into an electronic form, it has not been similarly helpful in converting financial data provided to the Commission. When market participants have submitted large data sets to the Commission on printed pages, it has been problematic, forcing the Commission to either enter extraordinary amounts of data into its systems manually, an expensive process that introduces the possibility of data entry errors, or to abandon the use of programs that are often helpful in the
Requiring all entities subject to regulation 1.31 to retain data in its native file format mitigates the potential that market participants could discard records in an effort to thwart Commission investigations, or that they could do so unintentionally but with similar effect and increases the likelihood that the data will exist in a form that can be converted to meet the Commission's needs. The requirement that entities present that data to the Commission in a format and on a medium requested by the Commission will help to ensure that the Commission is able to obtain data from market participants in a form that it can use effectively for detecting and prosecuting prohibited market activities. And by improving the efficiency and effectiveness of the Commission's enforcement efforts, these requirements help deter fraud and manipulation, and promote the integrity of the markets subject to the jurisdiction of the Commission.
By providing that required written records pertaining to swaps and related cash or forward transactions must be retained for the life of the swap plus five years, the Commission will have the ability to create a sufficient audit trail from which to ascertain and, if necessary recreate, the facts and circumstances giving rise to the transaction, even if the need to do so arises several months or even a few years after the relevant transactions occurred.
The amended requirement to store electronic records in their native format will likely create additional data storage costs for market participants. The incremental cost of storage depends on whether or not the entity in question was previously storing data in its native format and the number and size of records that must be stored in their native format. The Commission requested but received no data from commenters quantifying such costs. In order to quantify these costs the Commission would need data sufficient to estimate the number of entities that do not store data in its native file format, and the amount of additional data that they would, on average, have to retain in order to store it in its native file format. The Commission does not have that information.
In addition, market participants will have additional storage costs because the rule provides that required swap and related cash and forward transaction data must be retained for the life of the swap plus five years. These costs will depend on the number and tenor of swaps and related cash and forward transactions that an entity enters into. These factors are likely to vary widely among market participants. The Commission does not have adequate information to estimate how many firms are currently storing data in its native format, the number of swap transactions that will be affected by the timelines implemented here, or to estimate their tenor and the storage space required to store related data. Therefore it is not possible to estimate the additional storage space or cost of additional storage.
The requirement that entities submit information to the Commission in a format and on a medium determined by the Commission will create some costs for market participants. Entities that keep data in proprietary systems or in formats that are not read by programs that the Commission uses to aid in its investigations would need to adapt their systems in order to develop this capability. And when requested to do so by the Commission, such entities would have to convert their data into the format requested by the Commission, which creates some incremental costs as well. The Commission cannot estimate these additional costs because it does not have adequate information to estimate the number of entities that would need to adapt their systems in order to allow for data conversion that meets the Commission's needs. Moreover, it does not have information regarding the number of inquiries that will require data conversion, or the amount of time that entities would need to spend converting data when necessary. The latter is likely to vary widely, depending on the data formats currently used by market participants and the presence or absence of standard data conversion software that might assist with such needs.
The rules provides that required swap and related cash and forward transaction data must be retained for the life of the swap plus five years also creates some data migration costs. Entities engaging in long-dated swaps will likely upgrade their recordkeeping systems during the period of time that they are required to keep data related to those swaps and related cash or forward transactions. Such entities will have to implement backward-compatible systems, or will have to reformat older data so that it can be retained and retrieved using newer systems. Either of these approaches will create some cost, however, it is not possible to determine which approach entities are likely to take or the cost that would likely result in either case. Therefore, the Commission is not able to estimate the cost at this time.
Some commenters noted costs that would result from not being allowed to convert paper records to electronic media for storage.
The amendments to the requirements for keeping and inspection of records, mandated in this section, create certain costs. It is likely that some SEF members will not have not been subject to regulation 1.31 previously and therefore will need to design written procedures and controls for maintaining their recordkeeping system.
This estimate assumes 20-40 hours of a compliance attorney's time, 20-40 hours of an intermediate compliance specialist's time, 5-15 hours of a senior database administrator's time, and 5-15 hours of an office manager's time in order to design and implement the written procedures and controls. The average cost for a compliance attorney is $351.24/hour [($131,303 per year)/(2000 hours per year) * 5.35 = $351.24 per hour]. The average cost for an intermediate compliance specialist is $351.24/hour [($58,303 per year)/(2000 hours per year) * 5.35 = $351.24 per hour]. The average cost for a senior database administrator's time is $280.22/hour [($104,755 per year)/(2000 hours per year) * 5.35 = $280.22 per hour]. The average cost for an office manager's time is $229.72/hour [($85,875 per year)/(2000 hours per year) * 5.35 = $229.72 per hour].
In addition, the members of SEFs that have not previously been subject to regulation 1.31 will have to provide a representation to the Commission prior to their initial use of the system.
One commenter suggested that the Commission require records to be kept indefinitely.
The Proposal would have required oral records to be retained by SDs and MSPs until the swap has been terminated, novated, etc., and for five years thereafter, whereas the final rule requires these entities to retain such records until the swap has been terminated, novated, etc., and for a period of one year thereafter. This may create some cost by limiting the Commission's ability to obtain from SDs and MSPs recordings related to events that occurred more than one year ago, which could reduce the Commission's effectiveness in identifying and prosecuting certain violations. However, the Commission anticipates that in most cases, the one year requirementafter the life of the swap, will be sufficient, and notes that the reduced retention requirement reduces storage costs to market participants.
Prior to this amendment, § 1.35 specified which parties are required to keep records related to commodity futures, commodity options, and cash commodities. The requirements of § 1.35 applied to FCMs, RFEDs, IBs, and members of contract markets. The amendments to regulation 1.35 extend these recordkeeping requirements to swap transactions and to members of SEFs.
As described above in II.A.5, the amended rule also applies the bunched order procedures for futures transactions to swaps, and adds FCMs and IBs to the list of eligible account managers for orders executed on a DCM or SEF, and also adds CTAs, FCMs, and IBs as eligible account managers for orders executed bilaterally.
As it explained when adopting similar transactional level recordkeeping requirements for SDs and MSPs, the Commission believes these recordkeeping requirements for swap transactions will contribute to important, though unquantifiable, benefits.
• Provides a basis for efficiently resolving transactional disputes.
• Facilitates a firm's ability to recognize and manage its risk, thereby enhancing the risk management of the market as a whole.
• Acts as a disincentive to engage in unduly risky, injurious, or illegal conduct in that the conduct will be traceable.
• And, in the event such conduct does occur, provides a mechanism for policing such conduct, both internally as part of a firm's compliance efforts and externally by regulators enforcing applicable laws and regulations.
The rule also applies the procedures for handling bunched orders of futures, to swaps, which enables account managers to reduce transaction costs to customers by executing a single, large transaction on behalf of multiple customers at the same time, and then allocating the positions that were component parts of that transaction to specific customers after the transaction has been executed. In addition, bunched orders provide additional protection to customers against favoritism. In the absence of bunched orders, when an account manager has several customers that each need to take out positions in the same swap, the manager would place several sequential orders for that swap. The series of orders may move the price for that swap, in which case the last customer order would receive a less favorable price than the first customer order. By combining the orders, the manager is more likely to find a single counterparty and a single price for the orders, in which case the account manager can distribute the appropriate number of shares to each account at a constant price per share. No customer is favored over another in such a distribution. This promotes customer protection and the integrity of the financial markets.
In addition, by adding FCMs and IBs to the list of eligible account managers for orders executed on a DCM or SEF, and also adding CTAs, FCMs, and IBs as eligible account managers for orders executed bilaterally, the rule promotes competition among entities that are permitted to execute bunched orders, which in turn, promotes competitive pricing for account managers who want to execute bunched orders. And by promoting competitive pricing, the amendment promotes market efficiency. In addition, by permitting FCMs, IBs, and CTAs to engage in bunched order transactions, the amendment creates benefits for those entities because it allows them to provide an additional service to clients, giving them an additional source of revenue.
Amendments in this final rule will require SEF members to comply with regulation 1.35, and it is likely that some of those members will not have been subject to § 1.35 previously. The Commission estimates that SEF members that are newly subject to § 1.35 will spend additional time each day compiling and maintaining transaction records. The Commission estimates that the cost of that additional time is
Also, the amendments in this final rule will require FCMs, RFEDs, IBs, and members of DCMs to comply with the regulation § 1.35 recordkeeping requirements for any swap transactions into which they enter. The Commission estimates that such entities will spend an additional 0.5 hours per swap capturing and maintaining the records required under § 1.35, and therefore estimates that the per-swap cost will be $83.00.
As discussed in II.A.1, the Commission is amending and adding several definitions in order to incorporate swaps within the Commission's regulatory framework. Included among them are definitions for “customer,” “futures commission merchant,” “member,” “net deficit,” “proprietary account,” “commodity trading advisor,” “commodity pool operator,” “designated self-regulatory organization,” “customer funds,” “strike price,” “introducing broker,” “registered entity,” “registrant,” “open contract,” “physical,” and “commodity interest.”
As discussed throughout this release, Congress amended the CEA to address swaps. The amendments to regulation 1.3 (“Definitions”) help effectuate that mandate and do not, in and of themselves, implicate any costs or benefits. Any costs and benefits are associated with substantive regulations that rely upon the revised definitions contained in regulation 1.3.
In its original form, § 1.4 allowed a customer of an FCM or IB, a retail forex customer of an RFED or FCM, and a pool participant or a client of a CTA to use an electronic signature to provide any required signatures under the CEA, as long as the FCM, RFED, IB, CPO, or CTA elects generally to accept electronic signatures for such purposes and “reasonable safeguards” are in place. The amended rule published as part of today's final rulemaking extends the benefit of electronic signatures by including SDs, MSPs, and counterparties of SDs and MSPs in the list of entities that may use electronic signatures for acknowledgement of swap transactions.
With respect to the protection of market participants and the public, permitting FCMs, IBs, CPOs, CTAs, SDs, and MSPs to utilize electronic signatures when executing swap transactions enables more rapid processing of steps in the transaction process that requires signatures than would be possible if using faxed copies or hard copies for such purposes. This, in turn, reduces costs to market participants by reducing the amount of time they spend handling paperwork and enhances market efficiency by allowing transactions to be confirmed more rapidly. In addition, this facilitates straight through processing of swaps, which provides numerous efficiency and risk reduction benefits.
The amendment to § 1.4 is permissive, allowing SDs, MSPs, and their counterparties to use electronic signatures if they choose, and also allowing FCM's, IBs, CPOs, and CTAs to use electronic signatures when engaging in swap transactions. The rule does not create any affirmative obligations for market participants, and therefore does not create direct costs to entities subject to § 1.4. Costs to other market participants and the public would only occur if electronic signatures were somehow more susceptible to be falsified or corrupted than non-electronic signatures. The Commission is not aware of any such risk, and believes that it is unlikely, given that electronic signatures are already widely used among market participants, including other registered entities.
These amended regulations require FCMs, IBs, RFEDs, SEFs, DCMs and members of DCMs to comply with the same recordkeeping functions for swaps that they currently adhere to with respect to futures and commodity option transactions. Regulation 1.33 deals with monthly confirmation statements, and regulation 1.37 deals with customers' names and addresses as well as daily records showing total open long and short contracts.
By incorporating swaps into FCM, IB, RFED, DCM, and DCM members' reporting requirements, the rule extends the benefits of such reporting requirements to a new range of transactions, and to additional customers of such entities. The benefits are likely to be increased awareness among market participants of any losses or gains due to their swap transactions, which may contribute to sound risk management. Moreover, the monthly statements and the confirmation statements required by § 1.33 provide customers with additional opportunities to identify potential mistakes made over the course of their transaction that could result in an undesirable outcome, providing further protection to customers of such entities that are clearing swaps. Participants would also be able to view a list of fees charged to their accounts and verify that all are valid charges and would thus be better protected against accidental or fraudulent fees and charges.
The requirements of § 1.37 will ensure that proper records are maintained to identify the rightful owners of customer funds, and that are kept on an omnibus basis, as well as to identify parties who own, guarantee, or exercise control over any customer cleared swap accounts. Proper records regarding the name of individuals or entities that own customer funds, and daily reconciliation of balances in the omnibus account, promote protection of customer funds held by entities that place customer funds in such accounts. Furthermore, by requiring each FCM carrying an omnibus account for any other person to maintain a daily record of the total open long contracts and total open short contracts in each swap, the final rule provides protection for the customers that hold funds in such accounts. The daily records may be used by the FCM to reconcile the omnibus accounts to their individual customer obligations, thus helping to ensure that the omnibus accounts have sufficient funds to meet their customer obligations.
Costs of this proposal include the cost of compliance on the part of FCMs to compile and deliver monthly statements and confirmations after every transaction. FCMs will bear a one-time cost to design the confirmation statements, swap section of the monthly reports, and to set up automated systems to produce them. The amendment is not likely to necessitate new technology since FCMs can use the systems that produce existing monthly
Adding the requirement that certain entities maintain records of the name, address, and occupation of customers that have deposited funds with them will not create any set-up costs. The Commission assumes that entities subject to § 1.37 already have systems that incorporate such information.
As described above in II.A.7, regulation 1.39 permits the member of a contract market to execute simultaneous buy and sell orders for the same contract on behalf of different principals if the orders are executed on the exchange and subject to certain procedures. The amendments to this rule incorporate SEFs and swaps.
The amendments also delete language barring cross trades; such trades are no longer defined under 4c(a) as amended by DFA. This latter amendment is made pursuant to the DFA without the exercise of Commission discretion and therefore is beyond the scope of consideration in this section.
Under CEA Section 5(d)(9), DCMs have an obligation to provide a competitive, open, and efficient market. If a member were to match two orders of its own customers without first making it available to the broader market through the steps required in regulation 1.39, the trade would be neither open nor competitive. The trade would, thus, be open to the risk of non-competitive pricing, which could harm one of the two customers involved in the trade and would, at least minimally, detract from price discovery. By requiring that bids or offers related to the member's customer positions are made available to other parties, the rule ensures that they are open and that a member only matches one customer against another in a trade if the terms of that trade are competitive. This protects each customer and also promotes effective price discovery. Incorporating SEFs into regulation § 1.39 extends the same benefits to SEF members, providing improved price discovery, protection for SEF members' customers, and promoting integrity of the financial markets.
In order to comply with the rules, a SEF member will be required to take certain steps before executing one customer's order against another customer's order. Those additional steps include first offering its customers' bid and offer to the other members of the SEF through open outcry or submission to an electronic platform. Whether its customers' orders are filled against others in the market or against one another, by offering the trade through the exchange the member will be subject to some fees imposed by the exchange that they would not have otherwise experienced. The fees vary significantly based on the market and product. In addition, the requirement that a SEF record these transactions in a manner that “shows all transaction details required to be captured by the Act, Commission rule, or regulation” will create additional data capture costs for the SEF. The Commission estimates that the cost will be approximately $17.00 per transaction and storage costs of less than $1 per record.
As described above in II.A.8, the changes to § 1.40 incorporate members of a SEF into the requirement that such entities provide to the Commission copies of any circular, telecommunication, or report that they publish or circulate through other entities concerning crop conditions, or market conditions that would tend to affect the price of any commodity.
Regulation 1.40 addresses the need for the Commission to have access to any published or circulated information about market-affecting commodity prices for the prevention and/or identification of manipulative behavior such as false reporting. The benefit of extending regulation 1.40 to members of a SEF is that it will give the Commission the same ability to prevent and/or identify similar manipulative activities in connection with any commodity prices underlying the swap transactions that will be executed on a SEF.
The requirement will create
Regulation 1.59 imposes restrictions on employees and governing board members of SROs that prevent them from disclosing or trading in any contracts traded or cleared by the employing contract market, or in any related commodity interest. Moreover, it prevents such persons from trading on the basis of material non-public information. As discussed above in II.A.9, the Commission is amending regulation 1.59 to include SEFs and swaps.
By preventing employees and governing board members from trading in contracts traded or cleared by their employing exchange or other related commodity interests, the rule helps to prevent conflicts of interest that might otherwise incent employees of an exchange to perform their duties in a way that benefits their own investments rather than benefiting the members of the exchange and the public more generally. In doing so, the rule promotes the integrity of financial markets. Moreover, the rule prevents employees and governing board members from trading to their own advantage, using material non-public information. In doing so, the rule protects other market participants that would be on the opposite side of such trades, and would be disadvantaged by not having access to the same material non-public information.
The amendments adding SEFs and swaps to the entities and instruments referenced in this rule will, as stated above, prevent employees and governing board members of SROs from investing in certain instruments. There will, therefore, be opportunity costs to those employees. The Commission cannot quantify those opportunity costs because it does not have data adequate to determine what investments employees might have made without such restrictions, what return they would expect on those investments compared to their existing investments, or the amount of money such employees have invested. However, the Commission believes that guarding against conflicts of interest at the SROs is an important step to maintaining integrity in the financial markets.
Prior to the amendments adopted in this rule, regulation 1.63 required SROs to maintain a schedule listing all rule violations which constitute disciplinary offences, to submit that schedule to the Commission and to post it in a public place. This final rule amends the rule to specify that the public place in which the SROs must post the schedule is the SRO's Web site.
The amendments to regulation 1.63 promote integrity in the financial markets by ensuring that the information contained in the schedule is posted in a public place that fulfills the intent of the obligation, namely, that the SRO can provide notice to members and the general public.
Many SROs likely already post the schedules on their Web sites. To the extent that SROs were not previously posting the schedule to their Web sites, they will bear the costs associated with posting schedules on their Web sites. However, this cost will be offset by eliminating the need to post the schedule in whatever alternative public place the SRO was previously using. The Commission estimates that the incremental cost is between $18.00 and $220.00.
This rule adds that upon any final disciplinary action in which a SEF finds that a member has committed a rule violation, which involved a transaction for a customer that resulted in financial harm to the customer, a SEF, like a DCM, must provide written notice to such member of the disciplinary action taken against that member. This rule additionally requires members of SEFs, like members of DCMs, to provide written notice of the disciplinary action to the customer upon receipt of such notice from the SEF.
By requiring members of a SEF to communicate disciplinary actions taken against them to the customers that were impacted by the activities leading to such disciplinary action, the rule promotes integrity in the financial markets. Customers harmed by a member's actions will, if they choose, have an opportunity to bring legal action against the member that has caused financial harm to them and may also choose to take their business to another member. Both consequences are enabled by the rule, and both serve as an incentive to SEF members to avoid any activity that would harm their customers.
This amendment is an extension of previously existing regulations that now apply to SEFs as well as DCMs. The costs to SEFs will likely be on par with those to DCMs and will be minimal, covering only the cost of communicating disciplinary actions to members. The Commission estimates
As described in II.A.15.D, DFA eliminated ECMs and EBOTs and provided a grandfather relief provision for such entities. The amendments here remove references to the sections of the CEA that were deleted by DFA and insert reference to the Grandfather Relief Orders issued by the Commission.
ECMs and EBOTs are allowed to continue operating as such during the period provided by the Grandfather Relief Orders, creating benefits for those entities that intend to register with the Commission as SEFs, and that wish to continue operating as ECMs or EBOTs until they are able to make such registration. However, those benefits are conferred by the Act and the Grandfather Relief Order. The changes here are merely technical edits to ensure that the regulations reflect the changes to the CEA that were made by DFA. Therefore, there are no costs or benefits associated with these changes.
As discussed above in II.A.15.E, the changes to parts 140 and 145 incorporate SEFs and SDRs into existing Commission regulations. The proposed changes would: (1) Facilitate the disclosure of confidential information to SEFs and SDRs in order to effectuate the purposes of the CEA; (2) facilitate publication of information in the
The amendments described above create the following benefits: (1) By facilitating disclosure of confidential information to SEFs and SDRs, they assist the Commission in performing its regulatory role with respect to swaps, thus providing additional protection to swap market participants, promoting the integrity of financial markets, and promoting protection for the public. (2) Facilitating publication of information in the
(4) Adding SEFs and SDRs to the list of registered entities from which Commission members and employees may not accept employment or compensation prevents conflicts of interest and in so doing promotes the Commission's ability to protect market participants and the public as well as to promote the integrity of the financial markets. (5) The changes ensure that personal information submitted to SEFs and SDRs is subject to the same protections under the Commission's regulations as personal information submitted to other registered entities.
SEFs and SDRs may bear some cost due to their obligation to submit personal information that they receive to the Commission. Such submissions will likely be automated and therefore the SEFs and SDRs will bear an initial cost that is necessary to modify their systems to submit the required information, and an ongoing cost to submit it when required. The Commission estimates that the initial cost is between $2,100 and $10,000,
The other amendments do not impose affirmative obligations on market participants and therefore do not create costs for them or the public.
Agricultural commodity, Agriculture, Brokers, Committees, Commodity futures, Conflicts of interest, Consumer protection, Definitions, Designated contract markets, Directors, Major swap participants, Minimum financial requirements for intermediaries, Reporting and recordkeeping requirements, Swap dealers, Swaps.
Advertising, Brokers, Commodity futures, Commodity pool operators, Commodity trading advisors, Consumer protection, Reporting and recordkeeping requirements, Swaps.
Bulk transfers, Commodity pool operators, Commodity trading advisors, Consumer protection, Customer's money, Securities and property, Definitions, Foreign exchange, Minimum financial and reporting requirements, Prohibited transactions in retail foreign exchange, Recordkeeping requirements, Retail foreign exchange dealers, Risk assessment, Special calls, Trading practices.
Commodity futures, Consumer protection, Registered entity.
Commodity futures, Reporting and recordkeeping requirements.
Brokers, Commodity futures, Reporting and recordkeeping requirements, Electronic trading facility.
Commodity futures, Reporting and recordkeeping requirements.
Commodity futures, Reporting and recordkeeping requirements, Grandfather relief order.
Brokers, Commodity futures, Reporting and recordkeeping requirements, Grandfather relief order.
Brokers, Clearing, Consumer protection, Reporting and recordkeeping requirements, Swaps.
Commodity futures, Electronic trading facility, Eligible commercial entities, Eligible contract participants, Federal financial regulatory authority, Principal-to-principal, Special calls, Systemic market event.
Commodity futures, Reporting and recordkeeping requirements.
Brokers, Reporting and recordkeeping requirements, Security futures products.
Authority delegations (Government agencies), Conflict of interests, Organizations and functions (Government agencies).
Confidential business information, Freedom of information.
Brokers, Commodity futures, Consumer protection, Reporting and recordkeeping requirements, Swaps.
Brokers, Commodity futures, Consumer protection, Reporting and recordkeeping requirements, Swaps.
For the reasons stated in the preamble, under the authority of 7 U.S.C. 1
7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
(a)
(b)
(e)
(g)
(h)
(k)
(n)
(1) Who, in or surrounding any pit, ring, post or other place provided by a contract market for the meeting of persons similarly engaged, shall purchase or sell for any other person—
(i) Any commodity for future delivery, security futures product, or swap; or
(ii) Any commodity option authorized under section 4c of the Act; or
(2) Who is registered with the Commission as a floor broker.
(p)
(1) Any individual, association, partnership, corporation, or trust—
(i) Who is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery; a security futures product; a swap; any agreement, contract, or transaction described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; a commodity option authorized under section 4c of the Act; a leverage transaction authorized under section 19 of the Act; or acting as a counterparty in any agreement, contract or transaction described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; and
(ii) Who, in connection with any of these activities accepts any money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom; and
(2) Any person that is registered as a futures commission merchant.
(q)
(1) An individual, association, partnership, corporation, or trust—
(i) Owning or holding membership in, or admitted to membership representation on, a registered entity; or
(ii) Having trading privileges on a registered entity.
(2) A participant in an alternative trading system that is designated as a contract market pursuant to section 5f of the Act is deemed a member of the contract market for purposes of transactions in security futures products through the contract market.
(r)
(2) For swap positions other than commodity option positions, this term means the credit balance which would be obtained by combining the margin balance of any person with the net profit or loss, if any, accruing on the open swap positions of such person.
(s)
(2) For swap positions other than commodity option positions, this term means the debit balance which would be obtained by combining the margin balance of any person with the net profit or loss, if any, accruing on the open swap positions of such person.
(t)
(1) Positions in contracts of purchase or sale of any commodity made by or for any person on or subject to the rules of a board of trade for future delivery during a specified month or delivery period that have neither been fulfilled by delivery nor been offset by other contracts of purchase or sale in the same commodity and delivery month;
(2) Positions in commodity option transactions that have not expired, been exercised, or offset; and
(3) Positions in Cleared Swaps, as § 22.1 of this chapter defines that term, that have not been fulfilled by delivery; not been offset; not expired; and not been terminated.
(x)
(1) Who, in or surrounding any pit, ring, post or other place provided by a contract market for the meeting of persons similarly engaged, purchases, or sells solely for such person's own account—
(i) Any commodity for future delivery, security futures product, or swap; or
(ii) Any commodity option authorized under section 4c of the Act; or
(2) Who is registered with the Commission as a floor trader.
(y)
(1) For one of the following persons, or
(2) Of which ten percent or more is owned by one of the following persons, or an aggregate of ten percent or more of which is owned by more than one of the following persons:
(iii) * * *
(B) The handling of the trades of customers or customer funds of such partnership,
(C) The keeping of records pertaining to the trades of customers or customer funds of such partnership, or
(v) * * *
(B) The handling of the trades of customers or customer funds of such individual, partnership, corporation or association,
(C) The keeping of records pertaining to the trades of customers or customer funds of such individual, partnership, corporation or association, or
(vii) A business affiliate that directly or indirectly controls such individual, partnership, corporation or association; or
(viii) A business affiliate that, directly or indirectly is controlled by or is under common control with, such individual, partnership, corporation or association.
(aa) * * *
(1) * * *
(i) The solicitation or acceptance of customers' orders (other than in a clerical capacity) or
(2) * * *
(i) The solicitation or acceptance of customers' orders (other than in a clerical capacity) or
(5) A leverage transaction merchant as a partner, officer, employee, consultant, or agent (or any natural person occupying a similar status or performing similar functions), in any capacity which involves:
(i) The solicitation or acceptance of leverage customers' orders (other than in a clerical capacity) for leverage transactions as defined in § 31.4(x) of this chapter, or
(ii) The supervision of any person or persons so engaged.
(bb)(1)
(i) Any bank or trust company or any person acting as an employee thereof;
(ii) Any news reporter, news columnist, or news editor of the print or electronic media or any lawyer, accountant, or teacher;
(iii) Any floor broker or futures commission merchant;
(iv) The publisher or producer of any print or electronic data of general and regular dissemination, including its employees;
(v) The named fiduciary, or trustee, of any defined benefit plan which is subject to the provisions of the Employee Retirement Income Security Act of 1974, or any fiduciary whose sole business is to advise that plan;
(vi) Any contract market; and
(vii) Such other persons not within the intent of this definition as the Commission may specify by rule, regulation or order:
(2)
(i) To whom a commodity trading advisor provides advice, for compensation or profit, either directly or through publications, writings, or electronic media, as to the value of, or the advisability of trading in, any contract of sale of a commodity for future delivery, security futures product or swap; any agreement, contract or transaction described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option authorized under section 4c of the Act; any leverage transaction authorized under section 19 of the Act; or
(ii) To whom, for compensation or profit, and as part of a regular business, the commodity trading advisor issues or promulgates analyses or reports concerning any of the activities referred to in paragraph (bb)(2)(i) of this section. The term “client” includes, without limitation, any subscriber of a commodity trading advisor.
(cc)
(ee)
(ff)
(1) Self-regulatory organization of which a futures commission merchant, an introducing broker, a leverage transaction merchant, a retail foreign exchange dealer, a swap dealer, or a major swap participant is a member; or
(2) If a Commission registrant other than a leverage transaction merchant is a member of more than one self-regulatory organization and such registrant is the subject of an approved plan under § 1.52, then a self-regulatory organization delegated the responsibility by such a plan for monitoring and auditing such registrant for compliance with the minimum financial and related reporting requirements of the self-regulatory organizations of which the registrant is a member, and for receiving the financial reports necessitated by such minimum financial and related reporting requirements from such registrant; or
(3) If a leverage transaction merchant is a member of more than one self-regulatory organization and such leverage transaction merchant is the subject of an approved plan under § 31.28 of this chapter, then a self-regulatory organization delegated the responsibility by such a plan for monitoring and auditing such leverage transaction merchant for compliance with the minimum financial, cover, segregation and sales practice, and related reporting requirements of the self-regulatory organizations of which the leverage transaction merchant is a member, and for receiving the reports necessitated by such minimum financial, cover, segregation and sales practice, and related reporting requirements from such leverage transaction merchant.
(gg)
(ii)
(jj) [Reserved]
(kk)
(ll) [Reserved]
(mm) * * *
(1) Any person who, for compensation or profit, whether direct or indirect:
(i) Is engaged in soliciting or in accepting orders (other than in a clerical capacity) for the purchase or sale of any commodity for future delivery, security futures product, or swap; any agreement, contract or transaction described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option transaction authorized under section 4c; or any leverage transaction authorized under section 19; or who is registered with the Commission as an introducing broker; and
(ii) Does not accept any money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom.
(2) The term introducing broker shall not include:
(i) Any futures commission merchant, floor broker, associated person, or associated person of a swap dealer or major swap participant acting in its capacity as such, regardless of whether that futures commission merchant, floor broker, or associated person is registered or exempt from registration in such capacity;
(nn)
(oo)
(pp)
(rr) * * *
(2) In the case of foreign options customers in connection with open foreign options transactions, money, securities and property representing premiums paid or received, plus any other funds required to guarantee or secure open transactions plus or minus any unrealized gain or loss on such transactions.
(ss)
(tt)
(uu) [Reserved]
(vv)
(xx)
(yy)
(1) Any contract for the purchase or sale of a commodity for future delivery;
(2) Any contract, agreement or transaction subject to a Commission regulation under section 4c or 19 of the Act;
(3) Any contract, agreement or transaction subject to Commission jurisdiction under section 2(c)(2) of the Act; and
(4) Any swap as defined in the Act, by the Commission, or jointly by the Commission and the Securities and Exchange Commission.
(cccc)
(dddd)
(eeee)
(ffff)
(gggg)
(hhhh)
(1) Operates by means of an electronic or telecommunications network; and
(2) Maintains an automated audit trail of bids, offers, and the matching of orders or the execution of transactions on the facility.
(iiii)
(jjjj)
(1) To margin, guarantee, or secure contracts for future delivery on or subject to the rules of a contract market or derivatives clearing organization, as the case may be, and all money accruing to such futures customers as the result of such contracts; and
(2) In connection with a commodity option transaction on or subject to the rules of a contract market, or derivatives clearing organization, as the case may be:
(i) To be used as a premium for the purchase of a commodity option transaction for a futures customer;
(ii) As a premium payable to a futures customer;
(iii) To guarantee or secure performance of a commodity option by a futures customer; or
(iv) Representing accruals (including, for purchasers of a commodity option for which the full premium has been paid, the market value of such commodity option) to a futures customer.
(3) Notwithstanding paragraphs (1) and (2) of this definition, the term “futures customer funds” shall exclude money, securities or property held to margin, guarantee or secure security futures products held in a securities account, and all money accruing as the result of such security futures products.
(kkkk)
(llll)
(1) Permits trading—
(i) By or on behalf of a person that is not an eligible contract participant; or
(ii) By persons other than on a principal-to-principal basis; or
(2) Has adopted (directly or through another nongovernmental entity) rules that—
(i) Govern the conduct of participants, other than rules that govern the submission of orders or execution of transactions on the trading facility; and
(ii) Include disciplinary sanctions other than the exclusion of participants from trading.
(mmmm)
(nnnn)
(1) A board of trade designated as a contract market under section 5 of the Act;
(2) A derivatives clearing organization registered under section 5b of the Act;
(3) A board of trade designated as a contract market under section 5f of the Act;
(4) A swap execution facility registered under section 5h of the Act;
(5) A swap data repository registered under section 21 of the Act; and
(6) With respect to a contract that the Commission determines is a significant price discovery contract, any electronic trading facility on which the contract is executed or traded.
(oooo)
(pppp)
(qqqq)
(rrrr)
(1) Facilitates the execution of swaps between persons; and
(2) Is not a designated contract market.
(ssss)
For purposes of complying with any provision in the Commodity Exchange Act or the rules or regulations in this Chapter I that requires a swap transaction to be acknowledged by a swap dealer or major swap participant or a document to be signed or verified by a customer of a futures commission merchant or introducing broker, a retail forex customer of a retail foreign exchange dealer or futures commission merchant, a pool participant or a client of a commodity trading advisor, or a counterparty of a swap dealer or major swap participant, an electronic signature executed by the customer, retail forex customer, participant, client, counterparty, swap dealer, or major swap participant will be sufficient, if the futures commission merchant, retail foreign exchange dealer, introducing broker, commodity pool operator, commodity trading advisor, swap dealer, or major swap participant elects generally to accept electronic signatures, acknowledgments or verifications or another Commission rule permits the use of electronic signatures for the purposes listed above;
(a) * * *
(4)
The revisions read as follows:
(a)(1)(i) * * *
(ii) [Reserved]
(c) * * *
(5) * * *
(ii) * * *
(A) Inventory which is currently registered as deliverable on a contract market and covered by an open futures contract or by a commodity option on a physical commodity—No charge.
(xiii) * * *
(C) A foreign broker that has been granted comparability relief pursuant to § 30.10 of this chapter,
(a) All futures customer funds shall be separately accounted for and segregated as belonging to futures customers. Such futures customer funds when deposited with any bank, trust company, derivatives clearing organization or another futures commission merchant shall be deposited under an account name which clearly identifies them as
(b) All futures customer funds received by a derivatives clearing organization from a member of the derivatives clearing organization to purchase, margin, guarantee, secure or settle the trades, contracts or commodity options of the clearing member's futures customers and all money accruing to such futures customers as the result of trades, contracts or commodity options so carried shall be separately accounted for and segregated as belonging to such futures customers, and a derivatives clearing organization shall not hold, use or dispose of such futures customer funds except as belonging to such futures customers. Such futures customer funds when deposited in a bank or trust company shall be deposited under an account name which clearly shows that they are the futures customer funds of the futures customers of clearing members, segregated as required by sections 4d(a) and 4d(b) of the Act and these regulations. The derivatives clearing organization shall obtain and retain in its files for the period provided by § 1.31 an acknowledgment from such bank or trust company that it was informed that the futures customer funds deposited therein are those of futures customers of its clearing members and are being held in accordance with the provisions of the Act and these regulations.
(c) Each futures commission merchant shall treat and deal with the futures customer funds of a futures customer as belonging to such futures customer. All futures customer funds shall be separately accounted for, and shall not be commingled with the money, securities or property of a futures commission merchant or of any other person, or be used to secure or guarantee the trades, contracts or commodity options, or to secure or extend the credit, of any person other than the one for whom the same are held:
All money received directly or indirectly by, and all money and equities accruing to, a futures commission merchant from any derivatives clearing organization or from any clearing member or from any member of a contract market incident to or resulting from any trade, contract or commodity option made by or through such futures commission merchant on behalf of any futures customer shall be considered as accruing to such futures customer within the meaning of the Act and these regulations. Such money and equities shall be treated and dealt with as belonging to such futures customer in accordance with the provisions of the Act and these regulations. Money and equities accruing in connection with futures customers' open trades, contracts, or commodity options need not be separately credited to individual accounts but may be treated and dealt with as belonging undivided to all futures customers having open trades, contracts, or commodity option positions which if closed would result in a credit to such futures customers.
No futures commission merchant shall use, or permit the use of, the futures customer funds of one futures customer to purchase, margin, or settle the trades, contracts, or commodity options of, or to secure or extend the credit of, any person other than such futures customer. Futures customer funds shall not be used to carry trades or positions of the same futures customer other than in commodities or commodity options traded through the facilities of a contract market.
The provisions in section 4d(a) and 4d(b) of the Act and the provision in § 1.20(c), which prohibit the commingling of futures customer funds with the funds of a futures commission merchant, shall not be construed to prevent a futures commission merchant from having a residual financial interest in the futures customer funds, segregated as required by the Act and the rules in this part and set apart for the benefit of futures customers; nor shall such provisions be construed to prevent a futures commission merchant from adding to such segregated futures customer funds such amount or amounts of money, from its own funds or unencumbered securities from its own inventory, of the type set forth in § 1.25, as it may deem necessary to ensure any and all futures customers' accounts from becoming undersegregated at any time. The books and records of a futures commission merchant shall at all times accurately reflect its interest in the segregated funds. A futures commission merchant may draw upon such segregated funds to its own order, to the extent of its actual interest therein, including the
Money held in a segregated account by a futures commission merchant shall not include: (a) Money invested in obligations or stocks of any derivatives clearing organization or in memberships in or obligations of any contract market; or
(b) Money held by any derivatives clearing organization which it may use for any purpose other than to purchase, margin, guarantee, secure, transfer, adjust, or settle the contracts, trades, or commodity options of the futures customers of such futures commission merchant.
(c) * * *
(3) A futures commission merchant or derivatives clearing organization shall maintain the confirmation relating to the purchase in its records in accordance with § 1.31 and note the ownership of fund shares (by book-entry or otherwise) in a custody account of the futures commission merchant or derivatives clearing organization in accordance with §§ 1.26 and 22.5 of this chapter. The futures commission merchant or the derivatives clearing organization shall obtain the acknowledgment letter required by §§ 1.26 and 22.5 of this chapter from an entity that has substantial control over the fund shares purchased with customer funds and has the knowledge and authority to facilitate redemption and payment or transfer of the customer funds. Such entity may include the fund sponsor or depository acting as custodian for fund shares.
(e)
(a) Each futures commission merchant who invests futures customer funds in instruments described in § 1.25 shall separately account for such instruments and segregate such instruments as belonging to such futures customers. Such instruments, when deposited with a bank, trust company, derivatives clearing organization or another futures commission merchant, shall be deposited under an account name which clearly shows that they belong to futures customers and are segregated as required by the Act and this part. Each futures commission merchant upon opening such an account shall obtain and retain in its files an acknowledgment from such bank, trust company, derivatives clearing organization or other futures commission merchant that it was informed that the instruments belong to futures customers and are being held in accordance with the provisions of the Act and this part.
(b) Each derivatives clearing organization which invests money belonging or accruing to futures customers of its clearing members in instruments described in § 1.25 shall separately account for such instruments and segregate such instruments as belonging to such futures customers. Such instruments, when deposited with a bank or trust company, shall be deposited under an account name which will clearly show that they belong to futures customers and are segregated as required by the Act and this part. Each derivatives clearing organization upon opening such an account shall obtain and retain in its files a written acknowledgment from such bank or trust company that it was informed that the instruments belong to futures customers of clearing members and are being held in accordance with the provisions of the Act and this part. Such acknowledgment shall be retained in accordance with § 1.31. Such bank or trust company shall allow inspection of such instruments at any reasonable time by representatives of the Commission.
(a) Each futures commission merchant which invests customer funds, and each derivatives clearing organization which invests customer funds of its clearing members' customers, shall keep a record showing the following:
(6) The date on which such investments were liquidated or otherwise disposed of and the amount of money or current market value of securities received on such disposition, if any; and
The investment of customer funds in instruments described in § 1.25 shall not
Nothing in the regulations in this chapter shall prevent a futures commission merchant from lending its own funds to customers on securities and property pledged by such customers, or from repledging or selling such securities and property pursuant to specific written agreement with such customers. The proceeds of such loans used to purchase, margin, guarantee, or secure the trades, contracts, or commodity options of customers shall be treated and dealt with by a futures commission merchant as belonging to such customers, in accordance with and subject to the provisions of the Act and these regulations.
(a)(1) All books and records required to be kept by the Act or by these regulations shall be kept in their original form (for paper records) or native file format (for electronic records) for a period of five years from the date thereof and shall be readily accessible during the first 2 years of the 5-year period;
(2) Persons required to keep books and records by the Act or by these regulations shall produce such records in a form specified by any representative of the Commission. Such production shall be made, at the expense of the person required to keep the book or record, to a Commission representative upon the representative's request. Instead of furnishing a copy, such person may provide the original book or record for reproduction, which the representative may temporarily remove from such person's premises for this purpose. All copies or originals shall be provided promptly. Upon request, the Commission representative shall issue a receipt provided by such person for any copy or original book or record received. At the request of the Commission representative, such person shall, upon the return thereof, issue a receipt for any copy or original book or record returned by the representative.
(b) Except as provided in paragraph (d) of this section, books and records required to be kept by the Act or by these regulations may be stored on either “micrographic media” (as defined in paragraph (b)(1)(i) of this section) or “electronic storage media” (as defined in paragraph (b)(1)(ii) of this section) for the required time period under the conditions set forth in this paragraph (b);
(2) * * *
(iii) Keep only Commission-required records on the individual medium employed (
(3) * * *
(i) Be ready at all times to provide, and immediately provide at the expense of the person required to keep such records, copies of such records on such compatible data processing media as defined in § 15.00(d) of this chapter which any representative of the Commission or the Department of Justice may request. Records must use a format and coding structure specified in the request.
(a) * * *
(1) The total amount of futures customer funds on deposit in segregated accounts on behalf of futures customers;
(2) The amount of such futures customer funds required by the Act and these regulations to be on deposit in segregated accounts on behalf of such futures customers; and
(3) The amount of the futures commission merchant's residual interest in such futures customer funds.
(b) In computing the amount of futures customer funds required to be in segregated accounts, a futures commission merchant may offset any net deficit in a particular futures customer's account against the current market value of readily marketable securities, less applicable percentage deductions (
The revisions and additions read as follows:
(a)
(1) For each commodity futures customer and foreign futures or foreign options customer position—
(iii) Any futures customer funds or foreign futures or foreign options secured amount, as defined by § 1.3(rr), carried with the futures commission merchant.
(2) For each commodity option position and foreign option position—
(i) All commodity options and foreign options purchased, sold, exercised, or expired during the monthly reporting period, identified by underlying futures contract or underlying commodity, strike price, transaction date, and expiration date;
(ii) The open commodity option and foreign option positions carried for such customer or foreign futures or foreign options customer as of the end of the monthly reporting period, identified by underlying futures contract or underlying commodity, strike price, transaction date, and expiration date;
(iv) Any related customer funds carried in such customer's account(s) or any related foreign futures or foreign options secured amount carried in the account(s) of a foreign futures or foreign options customer.
(3) For each Cleared Swaps Customer position—
(i) The Cleared Swaps, as § 22.1 of this chapter defines that term, carried by the futures commission merchant for the Cleared Swaps Customer;
(ii) The net unrealized profits or losses in all Cleared Swaps marked to the market;
(iii) Any Cleared Swaps Customer Collateral carried with the futures commission merchant; and
(4) A detailed accounting of all financial charges and credits to customers and foreign futures or foreign options customers, during the monthly reporting period, including all customer funds and any foreign futures or foreign options secured amount, received from or disbursed to customers or foreign futures or foreign options customers, as well as realized profits and losses.
(b)
(1) A written confirmation of each commodity futures transaction caused to be executed by it for the customer.
(2) A written confirmation of each Cleared Swap carried by the futures commission merchant, containing at least the following information:
(i) The unique swap identifier, as required by § 45.4(a) of this chapter, for each Cleared Swap and the date each Cleared Swap was executed;
(ii) The product name of each Cleared Swap;
(iii) The price at which the Cleared Swap was executed;
(iv) The date of maturity for each Cleared Swap; and
(v) The derivatives clearing organization through which it is cleared.
(3) A written confirmation of each commodity option transaction, containing at least the following information:
(i) The customer's account identification number;
(iv) The underlying futures contract or underlying commodity;
(4) Upon the expiration or exercise of any commodity option, a written confirmation statement thereof, which statement shall include the date of such occurrence, a description of the option involved, and, in the case of exercise, the details of the futures or physical position which resulted therefrom including, if applicable, the final trading date of the contract for future delivery underlying the option.
(5) Notwithstanding the provisions of paragraphs (b)(1) through (b)(4) of this section, a commodity interest transaction that is caused to be executed for a commodity pool need be confirmed only to the operator of the commodity pool.
(d)
(a) With respect to commodity futures transactions, each futures commission merchant shall prepare, and retain in accordance with the requirements of § 1.31, a statement commonly known as a “point balance,” which accrues or brings to the official closing price, or settlement price fixed by the clearing organization, all open contracts of customers as of the last business day of each month or of any regular monthly date selected:
(b) With respect to commodity option transactions, each futures commission merchant shall prepare, and retain in accordance with the requirements of § 1.31, a listing in which all open commodity option positions carried for customers are marked to the market. Such listing shall be prepared as of the last business day of each month, or as of any regular monthly date selected, and shall be by put or by call, by underlying contract for future delivery (by delivery month) or underlying commodity (by option expiration date), and by strike price.
(a)
(b)
(2)(i) Each member of a designated contract market who on the floor of such designated contract market receives a customer's order which is not in the form of a written record including the account identification, order number, and the date and time, to the nearest minute, the order was transmitted or received on the floor of such designated contract market, shall immediately upon receipt thereof prepare a written record of the order in non-erasable ink, including the account identification, except as provided in paragraph (b)(5) of this section, and order number and shall record thereon, by timestamp or other timing device, the date and time, to the nearest minute, the order is received.
(ii) Except as provided in paragraph (b)(3) of this section:
(A) Each member of a designated contract market who on the floor of such designated contract market receives an order from another member present on the floor which is not in the form of a written record shall, immediately upon receipt of such order, prepare a written record of the order or obtain from the member who placed the order a written record of the order, in non-erasable ink including the account identification and order number and shall record thereon, by time-stamp or other timing device, the date and time, to the nearest minute, the order is received; or
(B) When a member of a designated contract market present on the floor places an order, which is not in the form of a written record, for his own account or an account over which he has control, with another member of such designated contract market for execution:
(
(
(
(3)(i) The requirements of paragraph (b)(2)(ii) of this section will not apply if a designated contract market maintains in effect rules which provide for an exemption where:
(A) A member of a designated contract market places with another member of such designated contract market an order that is part of a spread transaction;
(B) The member placing the order personally executes one or more legs of the spread; and
(C) The member receiving and executing such order immediately upon execution of the order records the time of execution to the nearest minute on his trading card or other record maintained in accordance with the requirements of paragraph (f) of this section.
(ii) Each contract market shall, as part of its trade practice surveillance program, conduct surveillance for compliance with the recordkeeping and other requirements under paragraphs (b)(2) and (3) of this section, and for trading abuses related to the execution of orders for members present on the floor of the contract market.
(4) Each member of a designated contract market reporting the execution from the floor of the designated contract market of a customer's order or the order of another member of the designated contract market received in accordance with paragraphs (b)(2)(i) or (b)(2)(ii)(A) of this section, shall record on a written record of the order, including the account identification, except as provided in paragraph (b)(5) of this section, and order number, by time-stamp or other timing device, the date and time to the nearest minute such report of execution is made. Each member of a designated contract market shall submit the written records of customer orders or orders from other designated contract market members to designated contract market personnel or to the clearing member responsible for the collection of orders prepared pursuant to this paragraph. The execution price and other information reported on the order tickets must be written in non-erasable ink.
(5)
(i)
(A) A commodity trading advisor registered with the Commission pursuant to the Act or excluded or exempt from registration under the Act or the Commission's rules, except for entities exempt under § 4.14(a)(3) of this chapter;
(B) An investment adviser registered with the Securities and Exchange Commission pursuant to the Investment Advisers Act of 1940 or with a state pursuant to applicable state law or excluded or exempt from registration under such Act or applicable state law or rule;
(C) A bank, insurance company, trust company, or savings and loan association subject to federal or state regulation;
(D) A foreign adviser that exercises discretionary trading authority solely over the accounts of non-U.S. persons, as defined in § 4.7(a)(1)(iv) of this chapter;
(E) A futures commission merchant registered with the Commission pursuant to the Act; or
(F) An introducing broker registered with the Commission pursuant to the Act.
(ii)
(A) A commodity trading advisor registered with the Commission pursuant to the Act or excluded or exempt from registration under the Act or the Commission's rules, except for entities exempt under § 4.14(a)(3) of this chapter;
(B) A futures commission merchant registered with the Commission pursuant to the Act; or
(C) An introducing broker registered with the Commission pursuant to the Act.
(iii)
(A) The general nature of the allocation methodology the account manager will use;
(B) Whether accounts in which the account manager may have any interest may be included with customer accounts in bunched orders eligible for post-execution allocation; and
(C) Summary or composite data sufficient for that customer to compare its results with those of other comparable customers and, if applicable and consistent with § 155.3(a)(1) and § 155.4(a)(1) of this chapter, any account in which the account manager has an interest.
(iv)
(A) Allocations must be made as soon as practicable after the entire transaction is executed, but in any event no later than the following times: For cleared trades, account managers must provide allocation information to futures commission merchants no later than a time sufficiently before the end of the day the order is executed to ensure that clearing records identify the ultimate customer for each trade. For uncleared trades, account managers must provide allocation information to the counterparty no later than the end of the calendar day that the swap was executed.
(B) Allocations must be fair and equitable. No account or group of accounts may receive consistently favorable or unfavorable treatment.
(C) The allocation methodology must be sufficiently objective and specific to permit independent verification of the fairness of the allocations using that methodology by appropriate regulatory and self-regulatory authorities and by outside auditors.
(v)
(B) Eligible account managers shall keep and must make available upon request of any representative of the Commission, the United States Department of Justice, or other appropriate regulatory agency, records sufficient to demonstrate that all allocations meet the standards of paragraph (b)(5)(iv) of this section and to permit the reconstruction of the handling of the order from the time of placement by the account manager to the allocation to individual accounts.
(C) Futures commission merchants, introducing brokers, or commodity trading advisors that execute orders or that carry accounts eligible for post-execution allocation, and members of designated contract markets or swap execution facilities that execute such orders, must maintain records that, as applicable, identify each order subject to post-execution allocation and the accounts to which contracts executed for such order are allocated.
(D) In addition to any other remedies that may be available under the Act or otherwise, if the Commission has reason to believe that an account manager has failed to provide information requested pursuant to paragraph (b)(5)(v)(A) or (b)(5)(v)(B) of this section, the Commission may inform in writing any designated contract market, swap execution facility, swap dealer, or major swap participant, and that designated contract market, swap execution facility, swap dealer, or major swap participant shall prohibit the account manager from submitting orders for execution except for liquidation of open positions and no futures commission merchant shall accept orders for execution on any designated contract market, swap execution facility, or bilaterally from the account manager except for liquidation of open positions.
(E) Any account manager that believes he or she is or may be adversely affected or aggrieved by action taken by the Commission under paragraph (b)(5)(v)(D) of this section shall have the opportunity for a prompt hearing in accordance with the provisions of § 21.03(g) of this chapter.
(c)(1)
(2)
(3)
(4)
(d)
(1) A financial ledger record which will show separately for each customer all charges against and credits to such customer's account, including but not limited to customer funds deposited, withdrawn, or transferred, and charges or credits resulting from losses or gains on closed transactions;
(2) A record of transactions which will show separately for each account (including proprietary accounts):
(i) All commodity futures transactions executed for such account, including the date, price, quantity, market, commodity and future;
(ii) All retail forex transactions executed for such account, including the date, price, quantity, and currency;
(iii) All commodity option transactions executed for such account, including the date, whether the transaction involved a put or call, expiration date, quantity, underlying contract for future delivery or underlying commodity, strike price, and details of the purchase price of the option, including premium, mark-up, commission and fees; and
(iv) All swap transactions executed for such account, including the date, price, quantity, market, commodity, swap, and, if cleared, the derivatives clearing organization; and
(3) A record or journal which will separately show for each business day complete details of:
(i) All commodity futures transactions executed on that day, including the date, price, quantity, market, commodity, future and the person for whom such transaction was made;
(ii) All retail forex transactions executed on that day for such account, including the date, price, quantity, currency and the person who whom such transaction was made;
(iii) All commodity option transactions executed on that day, including the date, whether the transaction involved a put or call, the expiration date, quantity, underlying contract for future delivery or underlying commodity, strike price, details of the purchase price of the option, including premium, mark-up, commission and fees, and the person for whom the transaction was made;
(iv) All swap transactions executed on that day, including the date, price, quantity, market, commodity, swap, the person for whom such transaction was made, and, if cleared, the derivatives clearing organization; and
(v) In the case of an introducing broker, the record or journal required by this paragraph (d)(3) shall also include the futures commission merchant or retail foreign exchange dealer carrying the account for which each commodity futures, retail forex, commodity option, and swap transaction was executed on that day.
(e)
(f)
(2) Each member of a designated contract market recording purchases and sales on trading cards must record such purchases and sales in exact chronological order of execution on sequential lines of the trading card without skipping lines between trades;
(3) Each member of a designated contract market must identify on his or her trading cards the purchases and sales executed during the opening and closing periods designated by the designated contract market.
(4) Trading cards prepared by a member of a designated contract market must contain:
(i) Pre-printed member identification or other unique identifying information which would permit the trading cards of one member to be distinguished from those of all other members;
(ii) Pre-printed sequence numbers to permit the intra-day sequencing of the cards; and
(iii) Unique and pre-printed identifying information which would distinguish each of the trading cards prepared by the member from other such trading cards for no less than a one-week period.
(5) Trading cards prepared by a member of a designated contract market and submitted pursuant to paragraph (f)(7)(i) of this section must be time-stamped promptly to the nearest minute upon collection by either the designated contract market or the relevant clearing member.
(6) Each member of a designated contract market shall be accountable for all trading cards prepared in exact numerical sequence, whether or not such trading cards are relied on as original source documents.
(7) Trading records prepared by a member of a designated contract market must:
(i) Be submitted to designated contract market personnel or the clearing member within 15 minutes of designated intervals not to exceed 30
(ii) Be completed in non-erasable ink. A member may correct any errors by crossing out erroneous information without obliterating or otherwise making illegible any of the originally recorded information. With regard to trading cards only, a member may correct erroneous information by rewriting the trading card;
(8) Each member of a designated contract market must use a new trading card at the beginning of each designated 30-minute interval (or such lesser interval as may be determined appropriate) or as may be required pursuant hereto.
(g)
(i) Was trading for his or her own account, or an account for which he or she has discretion;
(ii) Was trading for his or her clearing member's house account;
(iii) Was trading for another member present on the exchange floor, or an account controlled by such other member; or
(iv) Was trading for any other type of customer.
(2) The record required by this paragraph (g) shall also show, by appropriate and uniform symbols, any transaction which is made non-competitively in accordance with the provisions of subpart J of part 38 of this chapter, and trades cleared on dates other than the date of execution. Except as otherwise approved by the Commission for good cause shown, the record required by this paragraph (g) shall be maintained in a format and coding structure approved by the Commission—
(i) In hard copy or on microfilm as specified in § 1.31, and
(ii) For 60 days in computer-readable form on compatible magnetic tapes or discs.
(a) Each futures commission merchant and each retail foreign exchange dealer shall maintain, as provided in § 1.31, a record of all securities and property received from customers or retail forex customers in lieu of money to margin, purchase, guarantee, or secure the commodity interests of such customers or retail forex customers. Such record shall show separately for each customer or retail forex customer: A description of the securities or property received; the name and address of such customer or retail forex customer; the dates when the securities or property were received; the identity of the depositories or other places where such securities or property are segregated or held; the dates of deposits and withdrawals from such depositories; and the dates of return of such securities or property to such customer or retail forex customer, or other disposition thereof, together with the facts and circumstances of such other disposition. In the event any futures commission merchant deposits with a derivatives clearing organization, directly or with a bank or trust company acting as custodian for such derivatives clearing organization, securities and/or property which belong to a particular customer, such futures commission merchant shall obtain written acknowledgment from such derivatives clearing organization that it was informed that such securities or property belong to customers of the futures commission merchant making the deposit. Such acknowledgment shall be retained as provided in § 1.31.
(b) Each derivatives clearing organization which receives from members securities or property belonging to particular customers of such members in lieu of money to margin, purchase, guarantee, or secure the commodity interests of such customers, or receives notice that any such securities or property have been received by a bank or trust company acting as custodian for such derivatives clearing organization, shall maintain, as provided in § 1.31, a record which will show separately for each member, the dates when such securities or property were received, the identity of the depositories or other places where such securities or property are segregated, the dates such securities or property were returned to the member, or otherwise disposed of, together with the facts and circumstances of such other disposition including the authorization therefor.
(a) Each futures commission merchant, retail foreign exchange dealer, introducing broker, and member of a contract market shall keep a record in permanent form which shall show for each commodity interest account carried or introduced by it the true name and address of the person for whom such account is carried or introduced and the principal occupation or business of such person as well as the name of any other person guaranteeing such account or exercising any trading control with respect to such account. For each such commodity option account, the records kept by such futures commission merchant, introducing broker, and member of a contract market must also show the name of the person who has solicited and is responsible for each customer's account or assign account numbers in such a manner to identify that person.
(b) As of the close of the market each day, each futures commission merchant which carries an account for another futures commission merchant, foreign broker (as defined in § 15.00 of this chapter), member of a contract market, or other person, on an omnibus basis shall maintain a daily record for each such omnibus account of the total open long contracts and the total open short contracts in each future and in each swap and, for commodity option transactions, the total open put options purchased, the total open put options granted, the total open call options purchased, and the total open call options granted for each commodity option expiration date.
(c) Each designated contract market and swap execution facility shall keep a record in permanent form, which shall show the true name, address, and
(d) Paragraph (c) of this section shall not apply to a designated contract market or swap execution facility on which transactions in futures, swaps or options (other than swaps) contracts of foreign traders are executed through, or the resulting transactions are maintained in, accounts carried by a registered futures commission merchant or introduced by a registered introducing broker subject to the provisions of paragraph (a) of this section.
(a)
(1) * * *
(ii) When in non-pit trading in swaps or contracts of sale for future delivery, bids and offers are posted on a board, such member:
(A) Pursuant to such buying order posts a bid on the board and, incident to the execution of such selling order, accepts such bid and all other bids posted at equal to or higher than the bid posted by him; or
(B) Pursuant to such selling order posts an offer on the board and, incident to the execution of such buying order, accepts such offer and all other offers posted at prices equal to or lower than the offer posted by him;
(2) Such member executes such orders in the presence of an official representative of such contract market or swap execution facility designated to observe such transactions and, by appropriate descriptive words or symbol, clearly identifies all such transactions on his trading card or other record, made at the time of execution, and notes thereon the exact time of execution and promptly presents or makes available said record to such official representative for verification and initialing, as appropriate;
(3) Such swap execution facility or contract market keeps a record in permanent form of each such transaction showing all transaction details required to be captured by the Act, Commission rule or regulation; and
(4) Neither the futures commission merchant, other registrant receiving nor the member executing such orders has any interest therein, directly or indirectly, except as a fiduciary.
(b)
(i) An explanation of why the proposed large order execution rules do not comply with paragraph (a) of this section; and
(ii) A description of a special surveillance program that would be followed by the contract market or swap execution facility in monitoring the large order execution procedures.
(2) The Commission may, in its discretion and upon such terms and conditions as it deems appropriate, grant such petition for exemption if it finds that the exemption is not contrary to the public interest and the purpose of the provision from which explanation is sought. The petition shall be considered concurrently with the proposed large order execution rules.
(c)
Each futures commission merchant, each retail foreign exchange dealer, each introducing broker, and each member of a contract market or a swap execution facility shall, upon request, furnish or cause to be furnished to the Commission a true copy of any letter, circular, telecommunication, or report published or given general circulation by such futures commission merchant, retail foreign exchange dealer, introducing broker, member or eligible contract participant which concerns crop or market information or conditions that affect or tend to affect the price of any commodity, including any exchange rate, and the true source of or authority for the information contained therein.
(a)
(iii) Purchases a put or call option for the account of any customer when the account of such customer at the time of such purchase has a short put or call option position with the same underlying futures contract or same underlying commodity, strike price, expiration date and contract market as that purchased; or
(iv) Sells a put or call option for the account of any customer when the account of such customer at the time of such sale has a long put or call option position with the same underlying futures contract or same underlying commodity, strike price, expiration date and contract market as that sold—shall on the same day apply such purchase or sale against such previously held short or long futures or option position, as the case may be, and shall, for futures transactions, promptly furnish such
(2) * * *
(iii) Purchases a put or call option involving foreign currency for the account of any customer when the account of such customer at the time of such purchase has a short put or call option position with the same underlying currency, strike price, and expiration date as that purchased; or
(iv) Sells a put or call option involving foreign currency for the account of any customer when the account of such customer at the time of such sale has a long put or call option position with the same underlying currency, strike price, and expiration date as that sold—shall immediately apply such purchase or sale against such previously held opposite transaction, and shall promptly furnish such retail forex customer a statement showing the financial result of the transactions involved and, if applicable, that the account was introduced to the futures commission merchant or retail foreign exchange dealer by an introducing broker and the names of the futures commission merchant or retail foreign exchange dealer, and the introducing broker.
(b)
(b) * * *
(1) * * *
(iii) In a currency in which funds have accrued to the customer as a result of trading conducted on a designated contract market, to the extent of such accruals.
(a) * * *
(1) Open and carry each customer's account with a carrying futures commission merchant on a fully-disclosed basis:
(2) Transmit promptly for execution all customer orders to:
(ii) A floor broker, if the introducing broker identifies its carrying futures commission merchant and that carrying futures commission merchant is also the clearing member with respect to the customer's order.
(c) An introducing broker may not accept any money, securities or property (or extend credit in lieu thereof) to margin, guarantee or secure any trades or contracts of customers, or any money, securities or property accruing as a result of such trades or contracts:
(1) The futures commission merchant carrying the customer's account authorizes the introducing broker, in writing, to receive a check in the name of the futures commission merchant, and the introducing broker retains such written authorization in its files in accordance with § 1.31;
(2) The check is payable to the futures commission merchant carrying the customer's account;
(4) * * *
(i) Which is maintained in an account name which clearly identifies the funds therein as belonging to customers of the futures commission merchant carrying the customer's account;
(iv) For which the bank or trust company provides the futures commission merchant carrying the customer's account with a written acknowledgment, which the futures commission merchant must retain in its files in accordance with § 1.31, that it was informed that the funds deposited therein are those of customers and are being held in accordance with the provisions of the Act and the regulations in this chapter.
(a) * * *
(1)
(4) * * *
(i) Any governing board member compensated by a self-regulatory organization solely for governing board activities; or
(5)
(7)
(i) Any board of trade, exchange or market outside the United States, its territories or possessions, which has an agreement with a contract market or swap execution facility in the United States that permits positions in a commodity interest which have been established on one of the two markets to be liquidated on the other market;
(ii) Any board of trade, exchange or market outside the United States, its territories or possessions, the products of which are listed on a United States contract market, swap execution facility, or a trading facility thereof;
(iii) Any securities exchange, the products of which are held as margin in a commodity account or cleared by a securities clearing organization pursuant to a cross-margining arrangement with a futures clearing organization; or
(iv) Any clearing organization which clears the products of any of the foregoing markets.
(8)
(9)
(10)
(b)
(i) * * *
(A) Trading, directly or indirectly, in any commodity interest traded on or cleared by the employing contract market, swap execution facility, or clearing organization;
(C) Trading, directly or indirectly, in a commodity interest traded on contract markets or swap execution facilities or cleared by derivatives clearing organizations other than the employing self-regulatory organization if the employee has access to material, non-public information concerning such commodity interest;
(c)
(a) * * *
(1)
(b) Each self-regulatory organization must maintain in effect rules which have been submitted to the Commission pursuant to section 5c(c) of the Act and part 40 of this chapter or, in the case of a registered futures association, pursuant to section 17(j) of the Act, that render a person ineligible to serve on its disciplinary committees, arbitration panels, oversight panels or governing board who:
(d) Each self-regulatory organization shall submit to the Commission a schedule listing all those rule violations which constitute disciplinary offenses as defined in paragraph (a)(6)(i) of this section and to the extent necessary to reflect revisions shall submit an amended schedule within thirty days of the end of each calendar year. Each self-regulatory organization must maintain and keep current the schedule required by this section, and post the schedule on the self-regulatory organization's Web site so that it is in a public place designed to provide notice to members and otherwise ensure its availability to the general public.
(a)
(b) Upon any final disciplinary action in which a contract market or swap
(1)(i) The contract market or swap execution facility shall promptly provide written notice of the disciplinary action to the futures commission merchant or other registrant; and
(ii) A futures commission merchant or other registrant that receives a notice, under paragraph (b)(1)(i) of this section shall promptly provide written notice of the disciplinary action to the customer as disclosed on its books and records. If the customer is another futures commission merchant or other registrant, such futures commission merchant or other registrant shall promptly provide notice to the customer.
(2) A written notice required by paragraph (b)(1) of this section must include the principal facts of the disciplinary action and a statement that the contract market or swap execution facility has found that the member has committed a rule violation that involved a transaction for the customer, whether executed or not, and that resulted in financial harm to the customer. For the purposes of this paragraph, a notice which includes the information listed in § 9.11(b) of this chapter shall be deemed to include the principal facts of the disciplinary action thereof.
(b) The Commission determines fees charged to exchanges based upon a formula that considers both actual costs and trading volume.
7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6
7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6
(k)
(m)
7 U.S.C. 7a-2(c) and 12a(7), as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
This part sets forth registered entity rules altered or supplemented by the Commission pursuant to section 8a(7) of the Act.
7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 9, 12a, 19, and 21, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
(p) * * *
(1) * * *
(ii) Long or short put or call options that exercise into the same future of any commodity, or other long or short put or call commodity options that have identical expirations and exercise into the same commodity, on any one reporting market.
(a) For purposes of this section, the term “futures contract” means any contract for the purchase or sale of any commodity for future delivery, or a contract identified under § 36.3(c)(1)(i) traded on an electronic trading facility operating in reliance on the exemption set forth in § 36.3 of this chapter, traded or executed on or subject to the rules of any designated contract market, or for the purposes of paragraph (i) of this section, a reporting market (including all agreements, contracts and transactions that are treated by a clearing organization as fungible with such contracts); the term “option contract” means any contract for the purchase or sale of a commodity option, or as applicable, any other instrument subject to the Act, traded or executed on or subject to the rules of any designated contract market, or for the purposes of paragraph (i) of this section, a reporting market (including all agreements, contracts and transactions that are treated by a clearing organization as fungible with such contracts); the term
(e) Any designated contract market that permits a foreign broker to intermediate contracts, agreements or transactions, or permits a foreign trader to effect contracts, agreements or transactions on the facility or exchange, shall be deemed to be the agent of the foreign broker and any of its customers for whom the transactions were executed, or the foreign trader, for purposes of accepting delivery and service of any communication issued by or on behalf of the Commission to the foreign broker, any of its customers or the foreign trader with respect to any contracts, agreements or transactions executed by the foreign broker or the foreign trader on the designated contract market. Service or delivery of any communication issued by or on behalf of the Commission to a designated contract market shall constitute valid and effective service upon the foreign broker, any of its customers, or the foreign trader. A designated contract market which has been served with, or to which there has been delivered, a communication issued by or on behalf of the Commission to a foreign broker, any of its customers, or a foreign trader shall transmit the communication promptly and in a manner which is reasonable under the circumstances, or in a manner specified by the Commission in the communication, to the foreign broker, any of its customers or the foreign trader.
(f) It shall be unlawful for any designated contract market to permit a foreign broker, any of its customers or a foreign trader to effect contracts, agreements or transactions on the facility unless the designated contract market prior thereto informs the foreign broker, any of its customers or the foreign trader, in any reasonable manner the facility deems to be appropriate, of the requirements of this section.
(g) The requirements of paragraphs (e) and (f) of this section shall not apply to any contracts, transactions or agreements traded on any designated contract market if the foreign broker, any of its customers or the foreign trader has duly executed and maintains in effect a written agency agreement in compliance with this paragraph with a person domiciled in the United States and has provided a copy of the agreement to the designated contract market prior to effecting any contract, agreement or transaction on the facility. This agreement must authorize the person domiciled in the United States to serve as the agent of the foreign broker, any of its customers or the foreign trader for purposes of accepting delivery and service of all communications issued by or on behalf of the Commission to the foreign broker, any of its customers or the foreign trader and must provide an address in the United States where the agent will accept delivery and service of communications from the Commission. This agreement must be filed with the Commission by the designated contract market prior to permitting the foreign broker, any of its customers or the foreign trader to effect any transactions in futures or option contracts. Unless otherwise specified by the Commission, the agreements required to be filed with the Commission shall be filed with the Secretary of the Commission at Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. A foreign broker, any of its customers or a foreign trader shall notify the Commission immediately if the written agency agreement is terminated, revoked, or is otherwise no longer in effect. If the designated contract market knows or should know that the agreement has expired, been terminated, or is no longer in effect, the designated contract market shall notify the Secretary of the Commission immediately. If the written agency agreement expires, terminates, or is not in effect, the designated contract market and the foreign broker, any of its customers or the foreign trader are subject to the provisions of paragraphs (e) and (f) of this section.
(h) The provisions of paragraphs (e), (f) and (g) of this section shall not apply to a designated contract market on which all transactions of foreign brokers, their customers or foreign traders in futures or option contracts are executed through, or the resulting transactions are maintained in, accounts carried by a registered futures commission merchant or introduced by a registered introducing broker subject to the provisions of paragraphs (a), (b), (c) and (d) of this section.
7 U.S.C. 2, 6a, 6c, 6g, 6i, 7, 7a and 12a, as amended by Title XIII of the Food, Conservation and Energy Act of 2008, Pub. L. 110-246, 122 Stat. 1624 (June 18, 2008), unless otherwise noted.
(a)
(a) * * *
(1) * * *
(ii) For options, by underlying futures contracts for options on futures contracts or by underlying commodity for options on commodities, and by put, by call, by expiration date and by strike price;
(iv) For options on swaps or classes of options on swaps, by underlying swap contracts for options on swap contracts or by underlying commodity for options on swaps on commodities, and by put, by call, by expiration date and by strike price.
(b) * * *
(1) * * *
(ii) For options, by underlying futures contracts for options on futures contracts or by underlying commodity for options on commodities, and by put, by call, by expiration date and by strike price;
(iv) For options on swaps or classes of options on swaps, by underlying swap contracts for options on swap contracts or by underlying commodity for options on swaps on commodities, and by put, by call, by expiration date and by strike price.
7 U.S.C. 2, 4, 5, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a and 19, as amended by Title XIII of the Food, Conservation and Energy Act of 2008, Pub. L. 110-246, 122 Stat. 1624 (June 18, 2008); 5 U.S.C. 552 and 552(b), unless otherwise noted.
(a) * * *
(2) Executed over the counter or pursuant to part 35 of this chapter;
(3) On exempt commercial markets operating under a Commission grandfather relief order issued pursuant to Section 723(c)(2)(B) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1376 (2010));
(4) On exempt boards of trade operating under a Commission grandfather relief order issued pursuant to Section 734(c)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1376 (2010)); and
7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 7, 7a, 12a, 19 and 21, as amended by Pub. L. 111-203, 124 Stat. 1376; 5 U.S.C. 552 and 552(b), unless otherwise noted.
(b) It shall be unlawful for a futures commission merchant to open a futures or options account or to effect transactions in futures or options contracts for an existing account, or for an introducing broker to introduce such an account, for any customer for whom the futures commission merchant or introducing broker is required to provide the explanation provided for in § 15.05(c) of this chapter, or for a reporting market that is a registered entity under section 1a(40)(F) of the Act, to cause to open an account, or to cause transactions to be effected, in a contract traded in reliance on a Commission grandfather relief order issued pursuant to Section 723(c)(2)(B) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1376 (2010)), for an existing account for any person that is a foreign clearing member or foreign trader, until the futures commission merchant, introducing broker, clearing member or reporting market has explained fully to the customer, in any manner that such person deems appropriate, the provisions of this section.
7 U.S.C. 1a, 6d, 7a-1 as amended by Pub. L. 111-203, 124 Stat. 1376.
(c) * * *
(2) * * *
(ii) Other categories of funds belonging to Futures Customers (as § 1.3 of this chapter defines that term), or Foreign Futures or Foreign Options Customers (as § 30.1 of this chapter defines that term) of the futures commission merchant, including Futures Customer Funds (as § 1.3 of this chapter defines such term) or the foreign futures or foreign options secured amount (as § 1.3 of this chapter defines such term), except as expressly permitted by Commission rule, regulation, or order, or by a derivatives clearing organization rule approved in accordance with § 39.15(b)(2) of this chapter.
(e) * * *
(1)
(c) * * *
(2) * * *
(iii) Futures Customer Funds (as § 1.3 of this chapter defines such term) or the foreign futures or foreign options secured amount (as § 1.3 of this chapter defines such term), except as expressly permitted by Commission rule, regulation, or order, (or by a derivatives clearing organization rule approved in accordance with § 39.15(b)(2) of this chapter).
(d)
(a) Before depositing Cleared Swaps Customer Collateral, the futures commission merchant or derivatives clearing organization shall obtain and retain in its files a separate written acknowledgement letter from each depository in accordance with §§ 1.20 and 1.26 of this chapter, with all references to “Futures Customer Funds” modified to apply to Cleared Swaps Customer Collateral, and with all references to section 4d(a) or 4d(b) of the Act and the regulations thereunder modified to apply to section 4d(f) of the Act and the regulations thereunder.
(b) The futures commission merchant or derivatives clearing organization shall adhere to all requirements specified in §§ 1.20 and 1.26 of this chapter regarding retaining, permitting access to, filing, or amending the written acknowledgement letter, in all cases as if the Cleared Swaps Customer Collateral comprised Futures Customer Funds subject to segregation pursuant to section 4d(a) or 4d(b) of the Act and the regulations thereunder.
(a) Subject to paragraph (b) of this section, futures commission merchants and derivatives clearing organizations may hold Cleared Swaps Customer Collateral in the denominations, at the locations and depositories, and subject to the segregation requirements specified in § 1.49 of this chapter.
(b) Notwithstanding the requirements in § 1.49 of this chapter, a futures commission merchant's obligations to a Cleared Swaps Customer may be denominated in a currency in which funds have accrued to the Cleared
Sections 1.27, 1.28, 1.29, and 1.30 of this chapter shall apply to the Cleared Swaps Customer Collateral in accordance with the terms therein.
(a) * * *
(1) The first time that the Depositing Futures Commission Merchant intermediates a Cleared Swap for a Cleared Swaps Customer with a Collecting Futures Commission Merchant, provide information sufficient to identify such Cleared Swaps Customer to the relevant Collection Futures Commission Merchant; and
(2) At least once each business day thereafter, provide information to the relevant Collecting Futures Commission Merchant sufficient to identify, for each Cleared Swaps Customer, the portfolio of rights and obligations arising from the Cleared Swaps that the Depositing Futures Commission Merchant intermediates for such Cleared Swaps Customer.
(b) * * *
(2) The information that such entity must provide to its Collecting Futures Commission Merchant pursuant to paragraph (a)(2) of this section shall also include information sufficient to identify, for each Cleared Swaps Customer referenced in paragraph (b)(1) of this section, the portfolio of rights and obligations arising from the Cleared Swaps that such entity intermediates as a Collecting Futures Commission Merchant, on behalf of its Depositing Futures Commission Merchant, for such Cleared Swaps Customer.
(c) * * *
(1) The first time that such futures commission merchant intermediates a Cleared Swap for a Cleared Swaps Customer, provide information to the relevant derivatives clearing organization sufficient to identify such Cleared Swaps Customer; and
(2) At least once each business day thereafter, provide information to the relevant derivatives clearing organization sufficient to identify, for each Cleared Swaps Customer, the portfolio of rights and obligations arising from the Cleared Swaps that such futures commission merchant intermediates for such Cleared Swaps Customer.
(d) * * *
(2) The information that it must provide to the derivatives clearing organization pursuant to paragraph (c)(2) of this section shall also include information sufficient to identify, for each Cleared Swaps Customer referenced in paragraph (d)(1) of this section, the portfolio of rights and obligations arising from the Cleared Swaps that the Collecting Futures Commission Merchant intermediates, on behalf of the Depositing Futures Commission Merchant, for such Cleared Swaps Customer.
(a) Each Collecting Futures Commission Merchant receiving Cleared Swaps Customer Collateral from an entity serving as a Depositing Futures Commission Merchant shall, no less frequently than once each business day, calculate and record:
(c) Each derivatives clearing organization receiving Cleared Swaps Customer Collateral from a futures commission merchant shall, no less frequently than once each business day, calculate and record:
(a)(1) At the election of the derivatives clearing organization or Collecting Futures Commission Merchant, the collateral requirement referred to in § 22.12(a), (c), and (d) applicable to a particular Cleared Swaps Customer or group of Cleared Swaps Customers may be increased based on an evaluation of the credit risk posed by such Cleared Swaps Customer or group, in which case the derivatives clearing organization or Collecting Futures Commission Merchant shall collect and record such higher amount as provided in § 22.12.
(2) Nothing in paragraph (a)(1) of this section is intended to interfere with the right of a futures commission merchant to increase the collateral requirements at such futures commission merchant with respect to any of its Cleared Swaps Customers, Futures Customers (as § 1.3 of this chapter defines that term), or Foreign Futures or Foreign Options Customers (as § 30.1 of this chapter defines that term).
(a) * * *
(2) Advise the Collecting Futures Commission Merchant of the identity of each such Cleared Swaps Customer, and the amount transmitted on behalf of each such Cleared Swaps Customer.
(c) * * *
(2) Advise the derivatives clearing organization of the identity of each such Cleared Swaps Customer, and the amount transmitted on behalf of each such Cleared Swaps Customer.
Subject to § 22.3(d), each derivatives clearing organization and each Collecting Futures Commission Merchant receiving Cleared Swaps Customer Collateral from a futures commission merchant shall treat the value of collateral required with respect to the portfolio of rights and obligations arising out of the Cleared Swaps intermediated for each Cleared Swaps Customer, and collected from the futures commission merchant, as belonging to such Cleared Swaps Customer, and such amount shall not be used to margin, guarantee, or secure the Cleared Swaps or other obligations of the futures commission merchant, or of any other Cleared Swaps Customer, Futures Customer (as § 1.3 of this chapter defines that term), or Foreign Futures or Foreign Options Customer (as § 30.1 of this chapter defines that term). Nothing contained herein shall be construed to limit, in any way, the right of a derivatives clearing organization or Collecting Futures Commission Merchant to liquidate any or all positions in a Cleared Swaps Customer Account in the event of a default of a clearing member or Depositing Futures Commission Merchant.
7 U.S.C. 2, 2(h)(7), 6, 6c and 12a, as amended by Title XIII of the Food, Conservation and Energy Act of 2008, Pub. L. 110-246, 122 Stat. 1624 (June 18, 2008).
The provisions of this part apply to any board of trade or electronic trading facility that operates as:
(a) An exempt commercial market operating under:
(1) Until July 16, 2012, a grandfather relief order issued by the Commission pursuant to Section 723(c)(2)(B) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1376 (2010)), or
(2) Any other applicable relief granted by the Commission; or
(b) An exempt board of trade operating under:
(1) Until July 16, 2012, a grandfather relief order issued by the Commission pursuant to Section 734(c)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1376 (2010)), or
(2) Any other applicable relief granted by the Commission.
(a)
(2) * * *
(i) The commodities defined in section 1a(19) of the Act as “excluded commodities” (other than a security, including any group or index thereof or any interest in, or based on the value of, any security or group or index of securities); and
(3) Such contracts must be entered into only between persons that are eligible contract participants, as defined in section 1a(18) of the Act and as further defined by the Commission, at the time at which the persons entered into the contract.
(b)
(c)
(2)
(ii)
(iii)
(iv)
(3)
(i) A statement that it continues to operate under the exemption; and
(ii) A certification that the information contained in the previous Notification of Operation as an Exempt Board of Trade is still correct.
(a)
(1) Entered into on a principal-to-principal basis solely between persons that are eligible commercial entities, as that term is defined in section 1a(17) of the Act, at the time the persons enter into the agreement, contract or transaction; and
(2) Executed or traded on an electronic trading facility.
(b)
(c)
(i) Provide the Commission with the terms and conditions, as defined in § 40.1(i) of this chapter and product descriptions for each agreement, contract or transaction listed by the facility in reliance on the exemption set forth in this section, as well as trading conventions, mechanisms and practices;
(ii) Provide the Commission with information explaining how the facility meets the definition of “trading facility” contained in section 1a(51) of the Act and provide the Commission with access to the electronic trading facility's trading protocols, in a format specified by the Commission;
(iii) Demonstrate to the Commission that the facility requires, and will require, with respect to all current and future agreements, contracts and transactions, that each participant
(iv) At the request of the Commission, provide any other information that the Commission, in its discretion, deems relevant to its determination whether an agreement, contract, or transaction performs a significant price discovery function; and
(v) File with the Commission annually, no later than the end of each calendar year, a completed copy of CFTC Form 205—Exempt Commercial Market Annual Certification. The information submitted in Form 205 shall include:
(A) A statement indicating whether the electronic trading facility continues to operate under the exemption; and
(B) A certification that affirms the accuracy of and/or updates the information contained in the previous Notification of Operation as an Exempt Commercial Market.
(2)
(i) Identify to the Commission those agreements, contracts and transactions conducted on the electronic trading facility with respect to which it intends, in good faith, to rely on the exemption set forth in this section, and which averaged five trades per day or more over the most recent calendar quarter; and, with respect to such agreements, contracts and transactions, either:
(A) Submit to the Commission, in a form and manner acceptable to the Commission, a report for each business day. Each such report shall be electronically transmitted weekly, within such time period as is acceptable to the Commission after the end of the week to which the data applies, and shall show for each agreement, contract or transaction executed the following information:
(
(
(
(
(B) Provide to the Commission, in a form and manner acceptable to the Commission, electronic access to those transactions conducted on the electronic trading facility in reliance on the exemption set forth in this section, and meeting the average five trades per day or more threshold test of this section, which would allow the Commission to compile the information set forth in paragraph (c)(2)(i)(A) of this section and create a permanent record thereof.
(ii) Maintain a record of allegations or complaints received by the electronic trading facility concerning instances of suspected fraud or manipulation in trading activity conducted in reliance on the exemption set forth in this section. The record shall contain the name of the complainant, if provided, date of the complaint, market instrument, substance of the allegations, and name of the person at the electronic trading facility who received the complaint;
(iii) Provide to the Commission, in the form and manner prescribed by the Commission, a copy of the record of each complaint received pursuant to paragraph (c)(2)(ii) of this section that alleges, or relates to, facts that would constitute a violation of the Act or Commission regulations. Such copy shall be provided to the Commission no later than 30 calendar days after the complaint is received;
(iv) Provide to the Commission on a quarterly basis, within 15 calendar days of the close of each quarter, a list of each agreement, contract or transaction executed on the electronic trading facility in reliance on the exemption set forth in this section and indicate for each such agreement, contract or transaction the contract terms and conditions, the contract's average daily trading volume, and the most recent open interest figures.
(3)
(4)
(5)
(ii) Such information shall include information related to the facility's business as an exempt electronic trading facility in reliance on the exemption set forth in this section, including information relating to data entry and transaction details in respect of transactions entered into in reliance on the exemption, as the Commission may determine appropriate—
(A) To enforce the antifraud and anti-manipulation provisions in the Act and Commission regulations, and
(B) To evaluate a systemic market event; or
(C) To obtain information requested by a Federal financial regulatory authority in order to enable the regulator to fulfill its regulatory or supervisory responsibilities.
(iii) The Commission hereby delegates, until the Commission orders otherwise, the authority to make special calls to the Directors of the Division of Market Oversight, the Division of Clearing and Risk, the Division of Swap Dealer and Intermediary Oversight, and the Division of Enforcement to be exercised by each such Director or by such other employee or employees as
(6)
(7)
(d)
(i)
(ii)
(iii)
(iv)
(v)
(2)
(i) Averaged five trades per day or more over the most recent calendar quarter; and
(ii)(A) For which the exchange sells its price information regarding the contract to market participants or industry publications; or
(B) Whose daily closing or settlement prices on 95 percent or more of the days in the most recent quarter were within 2.5 percent of the contemporaneously determined closing, settlement or other daily price of another agreement, contract or transaction.
(3)
(4)
(A) A written certification that the significant price discovery contract(s) complies with the Act and regulations thereunder;
(B) A copy of the electronic trading facility's rules (as defined in § 40.1 of this chapter) and any technical manuals, other guides or instructions for users of, or participants in, the market, including minimum financial standards for members or market participants. Subsequent rule changes must be certified by the electronic trading facility pursuant to section 5c(c) of the Act and § 40.6 of this chapter. The electronic trading facility also may request Commission approval of any
(C) A description of the trading system, algorithm, security and access limitation procedures with a timeline for an order from input through settlement, and a copy of any system test procedures, tests conducted, test results and contingency or disaster recovery plans;
(D) A copy of any documents pertaining to or describing the electronic trading system's legal status and governance structure, including governance fitness information;
(E) An executed or executable copy of any agreements or contracts entered into or to be entered into by the electronic trading facility, including partnership or limited liability company, third-party regulatory service, or member or user agreements, that enable or empower the electronic trading facility to comply with a Core Principle;
(F) A copy of any manual or other document describing, with specificity, the manner in which the trading facility will conduct trade practice, market and financial surveillance;
(G) To the extent that any of the items in paragraphs (d)(4)(i)(A) through (F) of this section raise issues that are novel, or for which compliance with a Core Principle is not self-evident, an explanation of how that item satisfies the applicable Core Principle or Principles.
(ii) The electronic trading facility must identify with particularity information in the submission that will be subject to a request for confidential treatment pursuant to § 145.09 of this chapter. The electronic trading facility must follow the procedures specified in § 40.8 of this chapter with respect to any information in its submission for which confidential treatment is requested.
(5)
(6)
(7)
(i) A violation by the electronic trading facility of the provisions set forth in this section; or
(ii) Any Commission proceeding to alter or supplement a rule, term or condition under section 8a(7) of the Act, to declare an emergency under section 8a(9) of the Act, or any other proceeding the effect of which is to alter, supplement or require an electronic trading facility to adopt a specific term or condition, trading rule or procedure, or to take or refrain from taking a specific action.
(8)
(ii)
(iii)
(iv)
(e)
1. There are four factors that the Commission must consider, as appropriate, in making a determination that a contract is performing a significant price discovery function. The four factors prescribed by the statute are: Price Linkage; Arbitrage; Material Price Reference; and Material Liquidity.
2. In evaluating a contract's price discovery role as a directly referenced price source, the Commission will perform an analysis to determine whether cash market participants are quoting bid or offer prices or entering into transactions at prices that are set either explicitly or implicitly at a differential to prices established for the contract. Cash market prices are set explicitly at a differential to the contract being traded on the electronic trading facility when, for instance, they are quoted in dollars and cents above or below the reference contract's price. Cash market prices are set implicitly at a differential to a contract being traded on the electronic trading facility when, for instance, they are arrived at after adding to, or subtracting from the contract being traded on the electronic trading facility, but then quoted or reported at a flat price. The Commission will also consider whether cash market entities are quoting cash prices based on a contract being traded on the electronic trading facility on a frequent and recurring basis.
4. In applying this criterion, consideration will be given to whether prices established by a contract being traded on the electronic trading facility are reported in a widely distributed industry publication. In making this determination, the Commission will consider the reputation of the publication within the industry, how frequently it is published, and whether the information contained in the publication is routinely consulted by industry participants in pricing cash market transactions.
1. This Appendix provides guidance on complying with the core principles set forth in this part, both initially and on an ongoing basis. The guidance is provided in paragraph (a) following each core principle and can be used to demonstrate to the Commission core principle compliance under § 36.3(d)(4). The guidance for each core principle is illustrative only of the types of matters an electronic trading facility may address, as applicable, and is not intended to be used as a mandatory checklist. Addressing the issues and questions set forth in this guidance will help the Commission in its consideration of whether the electronic trading facility is in compliance with the core principles. A submission pursuant to § 36.3(d)(4) should include an explanation or other form of documentation demonstrating that the electronic trading facility complies with the core principles.
2. Acceptable practices meeting selected requirements of the core principles are set forth in paragraph (b) following each core principle. Electronic trading facilities on which significant price discovery contracts are traded or executed that follow the specific practices outlined under paragraph (b) for any core principle in this appendix will meet the selected requirements of the applicable core principle. Paragraph (b) is for illustrative purposes only, and does not state the exclusive means for satisfying a core principle.
(a)
(b)
(a)
(b)
(2)
(3)
(a)
(b)
(2) An acceptable audit trail should include the following: original source documents, transaction history, electronic analysis capability, and safe storage capability. An acceptable audit trail system would satisfy the following practices.
(i)
(ii)
(A) All the data that are input into the trade entry or matching system for the transaction to match and clear;
(B) Timing and sequencing data adequate to reconstruct trading; and
(C) The identification of each account to which fills are allocated.
(iii)
(iv)
(3) Arrangements and resources for the disclosure of the obtained information and documents to the Commission upon request. The electronic trading facility should maintain records of all information and documents related to each significant price discovery contract in a form and manner acceptable to the Commission. Where no acceptable manner of maintenance is specified, records should be maintained in accordance with the recordkeeping standards of § 1.31 of this chapter.
(4) The capacity to carry out appropriate information-sharing agreements as the Commission may require. Appropriate information-sharing agreements could be established with other markets or the Commission can act in conjunction with the electronic trading facility to carry out such information sharing.
(a)
(b)
(c)
(2)
(ii) For significant price discovery contracts that are traded on a cleared basis, the electronic trading facility should apply position limits to cleared transactions in the contract.
(3)
(i)
(ii)
(4)
(i)
(ii)
(iii)
(iv)
(5)
(6)
(7)
(i) An electronic trading facility with significant price discovery contracts should use an automated means of detecting traders' violations of speculative limits or exemptions, particularly if the significant price discovery contracts have large numbers of traders. An electronic trading facility should monitor the continuing appropriateness of approved exemptions by periodically reviewing each trader's basis for exemption or requiring a reapplication. An automated system also should be used to determine whether a trader has exceeded applicable non-spot individual month position accountability levels and all-months-combined position accountability levels.
(ii) An electronic trading facility should establish a program for effective enforcement of position limits for significant price discovery contracts. Electronic trading facilities should use a large trader reporting system to monitor and enforce daily compliance with position limit rules. The Commission notes that an electronic trading facility may allow traders to periodically apply to the electronic trading facility for an exemption and, if appropriate, be granted a position level higher than the applicable speculative limit. The electronic trading facility should establish a program to monitor approved exemptions from the limits. The position levels granted under such hedge exemptions generally should be based upon the trader's commercial activity in related markets including, but not limited to, positions held in related futures and options contracts listed for trading on designated contract markets, fungible agreements, contracts and transactions, as determined by a derivatives clearing organization. Electronic trading facilities may allow a brief grace period where a qualifying trader may exceed speculative limits or an existing exemption level pending the submission and approval of appropriate justification. An electronic trading facility should consider whether it wants to restrict exemptions during the last several days of trading in a delivery month. Acceptable procedures for obtaining and granting exemptions include a requirement that the electronic trading facility approve a specific maximum higher level.
(iii) An acceptable speculative limit program should have specific policies for taking regulatory action once a violation of a position limit or exemption is detected. The electronic trading facility policies should consider appropriate actions.
(8)
(a)
(b)
(a)
(b)
(a)
(2) An electronic trading facility on which significant price discovery contracts are executed or traded should have arrangements, resources and authority for effective rule enforcement. The Commission believes that this should include the authority and ability to discipline and limit or suspend the activities of a market participant as well as the authority and ability to terminate the activities of a market participant pursuant to clear and fair standards. The electronic trading facility can satisfy this criterion for market participants by expelling or denying such person's future access upon a determination that such a person has violated the electronic trading facility's rules.
(b)
(1) Maintenance of data reflecting the details of each transaction executed on the electronic trading facility;
(2) Electronic analysis of this data routinely to detect potential trading violations;
(3) Appropriate and thorough investigative analysis of these and other potential trading violations brought to the electronic trading facility's attention; and
(4) Prompt and effective disciplinary action for any violation that is found to have been committed. The Commission believes that the latter element should include the authority and ability to discipline and limit or suspend the activities of a market participant pursuant to clear and fair standards that are available to market participants.
(a)
(2) All electronic trading facilities on which significant price discovery contracts are traded bear special responsibility to regulate effectively, impartially, and with due consideration of the public interest, as provided in section 3 of the Act. Under Core Principle VIII, they are also required to minimize conflicts of interest in their decision-making processes. To comply with this core principle, electronic trading facilities on which significant price discovery contracts are traded should be particularly vigilant for such conflicts between and among any of their self-regulatory responsibilities, their commercial interests, and the several interests of their management, members, owners, market participants, other industry participants and other constituencies.
(b)
(a)
(b)
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 (2010).
A designated contract market, the designated contract market's operator and transactions traded on or through a designated contract market under section 5 of the Act shall comply with all applicable regulations under Title 17
Sections 206, 251 and 252, Pub. L. 106-554, 114 Stat. 2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).
(e)
A designated contract market that trades a security index or security futures product shall maintain in accordance with the requirements of § 1.31 of this chapter books and records of all activities related to the trading of such products, including: Records related to any determination under subpart B of this part whether or not a futures contract on a security index is a narrow-based security index or a broad-based security index.
(a)
(b) * * *
(1) For purposes of section 1a(35)(A) and (B) of the Act (7 U.S.C. 1a(35)(A) and (B)):
(2) For purposes of section 1a(35)(B)(III)(cc) of the Act (7 U.S.C. 1a(35)(B)(III)(cc)):
(c)
(d) * * *
(5)
(a) An index on which a contract of sale for future delivery is trading on a designated contract market or foreign board of trade is not a narrow-based security index under section 1a(35) of the Act (7 U.S.C. 1a(35)) for the first 30 days of trading, if:
When a contract of sale for future delivery on a security index is traded on or subject to the rules of a foreign board of trade, such index shall not be a narrow-based security index if it would not be a narrow-based security index if a futures contract on such index were traded on a designated contract market.
(a) * * *
(1) The underlying security is registered pursuant to section 12 of the Securities Exchange Act of 1934;
(3) The underlying security conforms with the listing standards for the security futures product that the designated contract market has filed with the SEC under section 19(b) of the Securities Exchange Act of 1934.
(b) * * *
(1) The index is a narrow-based security index as defined in section 1a(35) of the Act;
(2) The securities in the index are registered pursuant to section 12 of the Securities Exchange Act of 1934;
(4) The index conforms with the listing standards for the security futures product that the designated contract market has filed with the SEC under section 19(b) of the Securities Exchange Act of 1934.
It shall be unlawful for a designated contract market to list for trading or execution a security futures product unless the designated contract market has provided the Commission with a certification that the specific security futures product or products and the designated contract market meet, as applicable, the following criteria:
(e) If the board of trade is a designated contract market pursuant to section 5 of the Act, dual trading in these security futures products is restricted in accordance with § 41.27;
(a)
(5) If the board of trade is a designated contract market pursuant to section 5 of the Act, it includes a certification that the security futures product complies with the Act and rules thereunder; and
(b)
(b)
(a)
(2)
(3)
(i) * * *
(A) For security futures products where the average daily trading volume in the underlying security exceeds 20 million shares, or exceeds 15 million shares and there are more than 40 million shares of the underlying security outstanding, the designated contract market may adopt a net position limit no greater than 22,500 (100-share) contracts applicable to positions held during the last five trading days of an expiring contract month; or
(B) For security futures products where the average daily trading volume in the underlying security exceeds 20 million shares and there are more than 40 million shares of the underlying security outstanding, the designated contract market may adopt a position accountability rule. Upon request by the designated contract market, traders who hold net positions greater than 22,500 (100-share) contracts, or such lower level specified by exchange rules, must provide information to the exchange and consent to halt increasing their positions when so ordered by the exchange.
(iv) For purposes of this section, average daily trading volume shall be calculated monthly, using data for the most recent six-month period. If the data justify a higher or lower speculative limit for a security future, the designated contract market may raise or lower the position limit for that security future effective no earlier than the day after it has provided notification to the Commission and to the public under the submission requirements of § 41.24. If the data require imposition of a reduced position limit for a security future, the designated contract market may permit any trader holding a position in compliance with the previous position limit, but in excess of the reduced limit, to maintain such position through the expiration of the security futures contract;
(d) The Commission may exempt a designated contract market from the provisions of paragraphs (a)(2) and (b) of this section, either unconditionally or on specified terms and conditions, if the Commission determines that such exemption is consistent with the public interest and the protection of customers. An exemption granted pursuant to this paragraph shall not operate as an exemption from any Securities and Exchange Commission rules. Any exemption that may be required from such rules must be obtained separately from the Securities and Exchange Commission.
(a) * * *
(1) Trading session means hours during which a designated contract market is scheduled to trade continuously during a trading day, as set forth in its rules, including any related post settlement trading session. A designated contract market may have more than one trading session during a trading day.
(3) Broker association includes two or more designated contract market members with floor trading privileges of whom at least one is acting as a floor broker who:
(4) * * *
(v) An account for another member present on the floor of a designated contract market or an account controlled by such other member.
(5) Dual trading means the execution of customer orders by a floor broker through open outcry during the same trading session in which the floor broker executes directly or by initiating and passing to another member, either through open outcry or through a trading system that electronically matches bids and offers pursuant to a predetermined algorithm, a transaction for the same security futures product on the same designated contract market for an account described in paragraphs (a)(4)(i) through (v) of this section.
(b)
(2) A designated contract market operating an electronic market or electronic trading system that provides market participants with a time or place advantage or the ability to override a predetermined algorithm must submit an appropriate rule proposal to the Commission consistent with the procedures set forth in § 40.5. The proposed rule must prohibit electronic market participants with a time or place advantage or the ability to override a predetermined algorithm from trading a security futures product for accounts in which these same participants have any interest during the same trading session that they also trade the same security futures product for other accounts. This paragraph, however, is not applicable with respect to execution priorities or quantity guarantees granted to market makers who perform that function, or to market participants who receive execution priorities based on price improvement activity, in accordance with the rules governing the designated contract market.
(c) * * *
(2) [Reserved]
(d)
(1)
(4)
(e) * * *
(2) [Reserved]
(f)
(a) * * *
(4) * * *
(i) * * *
(B) If the instrument underlying such security future is a narrow-based security index, as defined in section 1a(35)(A) of the Act, the product of the daily settlement price of such security future as shown by any regularly published reporting or quotation service, and the applicable contract multiplier.
(30)
(b)
7 U.S.C. 2 and 12a.
(a) Pursuant to the authority granted under sections 2(a)(11), 8a(5) and 8a(6) of the Act, the Commission hereby delegates, until such time as the Commission orders otherwise, to the Executive Director, the Deputy Executive Director, the Special Assistant to the Executive Director, the Director of the Division of Clearing and Intermediary Oversight, each Deputy Director of the Division of Clearing and Intermediary Oversight, the Chief Accountant, the General Counsel, each Deputy General Counsel, the Director of the Division of Market Oversight, each Deputy Director of the Division of Market Oversight, the Deputy Director of the Market and Trade Practice Surveillance Branch, the Director of the Division of Enforcement, each Deputy Director of the Division of Enforcement, each Associate Director of the Division of Enforcement, the Chief Counsel of the Division of Enforcement, each Regional Counsel of the Division of Enforcement, each of the Regional Administrators, the Chief Economist of the Office of the Chief Economist, the Deputy Chief Economist of the Office of the Chief Economist, the Director of the Office of International Affairs, and the Deputy Director of the Office of International Affairs, the authority to disclose to an official of any contract market, swap execution facility, swap data repository, registered futures association, or self-regulatory organization as defined in section 3(a)(26) of the Securities Exchange Act of 1934, any information necessary or appropriate to effectuate the purposes of the Act, including, but not limited to, the full facts concerning any transaction or market operation, including the names of the parties thereto. This authority to disclose shall be based on a determination that the transaction or market operation disrupts or tends to disrupt any market or is otherwise harmful or against the best interests of producers, consumers, or investors or that disclosure is necessary or appropriate to effectuate the purposes of the Act. The authority to make such a determination is also delegated by the Commission to the Commission employees identified in this section. A Commission employee delegated authority under this section may exercise that authority on his or her own initiative or in response to a request by an official of a contract market, swap execution facility, swap data repository, registered futures association or self-regulatory organization.
(b) Disclosure under this section shall only be made to a contract market, swap execution facility, swap data repository, registered futures association or self-regulatory organization official who is named in a list filed with the Commission by the chief executive officer of the contract market, swap execution facility, swap data repository, registered futures association or self-regulatory organization, which sets forth the official's name, business address and telephone number. The chief executive officer shall thereafter notify the Commission of any deletions or additions to the list of officials authorized to receive disclosures under this section. The original list and any supplemental list required by this paragraph shall be filed with the Secretary of the Commission, and a
(d) For purposes of this section, the term “official” shall mean any officer or member of a committee of a contract market, swap execution facility, swap data repository, registered futures association or self-regulatory organization who is specifically charged with market surveillance or audit or investigative responsibilities, or their duly authorized representative or agent, who is named on the list filed pursuant to paragraph (b) of this section or any supplement thereto.
(f) Any contract market, swap execution facility, swap data repository, registered futures association or self-regulatory organization receiving information from the Commission under these provisions shall not disclose such information except that disclosure may be made in any self-regulatory action or proceeding.
(a) The Commodity Futures Trading Commission hereby delegates, until such time as the Commission orders otherwise, to the Director of the Division of Market Oversight or the Director's designees, the authority to determine that an application for contract market designation, swap execution facility registration, or swap data repository registration is materially incomplete under section 6 of the Commodity Exchange Act and to so notify the applicant.
(a) The Commodity Futures Trading Commission hereby delegates, until such time as the Commission orders otherwise, to the Director of the Division of Market Oversight or the Director's designee, with the concurrence of the General Counsel or the General Counsel's designee, the authority to publish in the
(b) The Commodity Futures Trading Commission hereby delegates, until such time as the Commission orders otherwise, to the Director of the Division of Market Oversight or the Director's designee, and to the Director of the Division of Clearing and Intermediary Oversight or the Director's designee, with the concurrence of the General Counsel or the General Counsel's designee, the authority to determine to publish, and to publish, in the
(d) * * *
(2) A request for a Letter relating to the provisions of the Act or the Commission's rules, regulations or orders governing designated contract markets, registered swap execution facilities, registered swap data repositories, exempt commercial markets, exempt boards of trade, the nature of particular transactions and whether they are exempt or excluded from being required to be traded on one of the foregoing entities, foreign trading terminals, hedging exemptions, and the reporting of market positions shall be filed with the Director, Division of Market Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. A request for a Letter relating to all other provisions of the Act or Commission rules shall be filed with the Director, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. The request must be submitted electronically using the email address
(b) * * *
(1) * * *
(i) In swaps;
(iii) In retail forex transactions, as that term is defined in § 5.1(m) of this chapter;
(2) Effect any purchase or sale of a commodity option, futures contract, or swap involving a security or group of securities;
(c)
(b) * * *
(1) Have a financial interest, through ownership of securities or otherwise, in any person
A Commission member or employee shall not accept employment or compensation from any person, exchange, swap execution facility, swap data repository or derivatives clearing organization subject to regulation by the Commission. For purposes of this section, a person subject to regulation by the Commission includes but is not limited to a contract market, swap execution facility, swap data repository or derivatives clearing organization or member thereof, a registered futures commission merchant, any person associated with a futures commission merchant or with any agent of a futures commission merchant, floor broker, commodity trading advisor, commodity pool operator or any person required to be registered in a fashion similar to any of the above or file reports under the Act or pursuant to any rule or regulation promulgated by the Commission.
Pub. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80 Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat. 1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389 (5 U.S.C. 4a(j)); unless otherwise noted.
(c) * * *
(1)
(d)
(vi) Would reveal investigatory records compiled for law enforcement purposes when disclosure would interfere with enforcement proceedings or disclose investigative techniques and procedures,
(a) * * *
(6) Rule enforcement and financial reviews (public version).
(8) Commission rules and regulations,
(b) * * *
(13) Publicly available portions of applications to become a registered entity including the transmittal letter, first page of the application cover sheet, proposed rules, proposed bylaws, corporate documents, any overview or similar summary provided by the applicant, any documents pertaining to the applicant's legal status and governance structure, including governance fitness information, and any other part of the application not covered by a request for confidential treatment.
7 U.S.C. 6b, 6c, 6g, 6j, and 12a, unless otherwise noted.
Each contract market shall adopt rules which shall, at a minimum, with respect to each member of the contract market acting as a floor broker:
(a) * * *
(1) Insure, to the extent possible, that each order received from a customer which is executable at or near the market price is transmitted to the floor of the appropriate contract market before any order in any future or in any commodity option in the same commodity for any proprietary account, any other account in which an affiliated person has an interest, or any account for which an affiliated person may originate orders without the prior specific consent of the account owner, if the affiliated person has gained knowledge of the customer's order prior to the transmission to the floor of the appropriate contract market of the order for a proprietary account, an account in which the affiliated person has an interest, or an account in which the affiliated person may originate orders without the prior specific consent of the account owner; and
(b) * * *
(2) * * *
(ii) In the case of a customer who does not qualify as an “institutional customer” as defined in § 1.3(g) of this chapter, a futures commission merchant must obtain the customer's prior consent through a signed acknowledgment, which may be accomplished in accordance with § 1.55(d) of this chapter.
(c) * * *
(1) Receives written authorization from a person designated by such other futures commission merchant or introducing broker with responsibility for the surveillance over such account pursuant to paragraph (a)(2) of this section or § 155.4(a)(2), respectively;
(a) * * *
(1) Insure, to the extent possible, that each order received from a customer which is executable at or near the market price is transmitted to the futures commission merchant carrying the account of the customer before any order in any future or in any commodity option in the same commodity for any proprietary account, any other account in which an affiliated person has an interest, or any account for which an affiliated person may originate orders without the prior specific consent of the account owner, if the affiliated person has gained knowledge of the customer's order prior to the transmission to the floor of the appropriate contract market of the order for a proprietary account, an account in which the affiliated person has an interest, or an account in which the affiliated person may originate orders without the prior specific consent of the account owner; and
(b) * * *
(2) * * *
(ii) In the case of a customer who does not qualify as an “institutional customer” as defined in § 1.3(g) of this chapter, an introducing broker must obtain the customer's prior consent through a signed acknowledgment, which may be accomplished in accordance with § 1.55(d) of this chapter.
(c) * * *
(2) Copies of all statements for such account and of all written records prepared by such futures commission merchant upon receipt of orders for such account pursuant to § 155.3(c)(2) are transmitted on a regular basis to the introducing broker with which such person is affiliated.
7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6
(a) With respect to a commodity interest as defined in any paragraph of the commodity interest definition in § 1.3(yy) of this chapter, specifically authorized the futures commission merchant, retail foreign exchange dealer, introducing broker or any of their associated persons to effect the transaction (a transaction is “specifically authorized” if the customer or person designated by the customer to control the account specifies—
(b) With respect to a commodity interest as defined in paragraph (1) or (2) of the commodity interest definition in § 1.3(yy) of this chapter, authorized in writing the futures commission merchant, introducing broker or any of their associated persons to effect transactions in commodity interests for the account without the customer's specific authorization;
(a) * * *
(2) The term
The following appendices will not appear in the Code of Federal Regulations.
On this matter, Chairman Gensler and Commissioners Sommers, Chilton, O'Malia and Wetjen voted in the affirmative; no Commissioner voted in the negative.
I support the final rule to amend and conform certain provisions of the Commodity Futures Trading Commission's (CFTC) regulations to incorporate swaps. These final conforming amendments are crucial to integrating the CFTC's regulations with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which expanded the scope of the Commodity Exchange Act to cover swaps.
Specifically, this final rule updates the CFTC's definitions of futures commission merchant (FCM) and introducing broker (IB) to fulfill the Dodd-Frank Act's requirement to permit these entities to trade swaps on behalf of their customers. This final rule also updates the definitions of commodity interest, customer, and customer funds to incorporate swaps. In addition, the final rule adds swap execution facilities (SEFs) to the list of CFTC-regulated trading venues.
The final rule amends existing recordkeeping requirements for FCMs and IBs to ensure that similar records are kept for swaps as are currently kept for futures. In addition, SEF members will be obligated to comply with the same recordkeeping duties as are required of designated contract market (DCM) members.
This notice shall be published in the