[Federal Register Volume 76, Number 143 (Tuesday, July 26, 2011)]
[Rules and Regulations]
[Pages 44464-44475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-18663]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 39 and 140

RIN 3038-AD00


Process for Review of Swaps for Mandatory Clearing

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is adopting regulations to implement certain provisions of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). 
These regulations establish the process by which the Commission will 
review swaps to determine whether the swaps are required to be cleared.

DATES: Effective September 26, 2011.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Special Counsel, 
202-418-5096, [email protected], Division of Clearing and Intermediary 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

    On November 2, 2010, the Commission published proposed regulations 
to implement certain provisions of the Dodd-Frank Act regarding the 
mandatory clearing of swaps.\1\ The Commission is hereby adopting 
Regulation 39.5 \2\ to establish procedures for: (1) Determining the 
eligibility of a DCO to clear swaps; (2) the submission of swaps by a 
DCO to the Commission for a mandatory clearing determination; (3) 
Commission-initiated reviews of swaps; and (4) staying a clearing 
requirement.
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    \1\ See 75 FR 67277 (Nov. 2, 2010).
    \2\ Commission regulations referred to herein are found at 17 
CFR Ch. 1.
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    Section 723(a)(3) of the Dodd-Frank Act provides that ``it shall be 
unlawful for any person to engage in a swap unless that person submits 
such swap

[[Page 44465]]

for clearing to a derivatives clearing organization [(DCO)] that is 
registered under [the CEA] or a [DCO] that is exempt from registration 
under [the CEA] if the swap is required to be cleared.'' \3\ The 
Commission's final regulations implement Section 723(a)(3), which also 
requires the Commission to adopt rules for the review of a swap, or 
group, category, type, or class of swaps (collectively, ``swaps'') to 
make a determination as to whether the swaps are required to be 
cleared. The final regulations also implement Section 745(b) of the 
Dodd-Frank Act, insofar as it directs the Commission to prescribe 
criteria, conditions, or rules under which the Commission will 
determine the initial eligibility or the continuing qualification of a 
DCO to clear swaps.\4\
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    \3\ See Section 2(h)(1)(A) of the CEA, 7 U.S.C. 2(h)(1)(A).
    \4\ See Section 5c(c)(5)(C)(iii) of the CEA, 7 U.S.C. 7a-
2(c)(5)(C)(iii).
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II. Comments on the Notice of Proposed Rulemaking

    The Commission received eighteen comments during the 60-day public 
comment period following publication of the notice of proposed 
rulemaking, and eight additional comments during the 30-day reopened 
public comment period that covered many of the Commission's rulemakings 
under the Dodd-Frank Act. The Commission considered each of these 
comments in formulating the final regulations.\5\
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    \5\ The Commission also reviewed the proposed rule of the 
Securities and Exchange Commission concerning the process for 
submissions for review of security-based swaps for mandatory 
clearing. See 75 FR 82490 (Dec. 30, 2010).
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A. Swaps Listed for Clearing by a DCO Prior to the Enactment of the 
Dodd-Frank Act

    Section 723(a)(3) of the Dodd-Frank Act provides that swaps listed 
for clearing by a DCO as of the date of enactment of the Dodd-Frank Act 
(referred to hereinafter as ``pre-enactment swaps'') shall be 
considered submitted to the Commission.\6\ Once a swap is submitted to 
the Commission, the Commission must review it within 90 days to 
determine whether it is required to be cleared. Accordingly, Section 
723(a)(3) required a Commission determination on pre-enactment swaps 
within 90 days after July 21, 2010, the date of enactment of the Dodd-
Frank Act. However, before the deadline was reached, each DCO that was 
clearing pre-enactment swaps agreed to an extension of the deadline 
until after the Commission had adopted the regulations discussed 
herein.
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    \6\ See Section 2(h)(2)(B)(ii) of the CEA, 7 U.S.C. 
2(h)(2)(B)(ii).
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    In its comment letter, the American Federation of State, County and 
Municipal Employees (AFSCME) recommended that the Commission provide 
for public notice and comment for pre-enactment swaps in a manner 
similar to that put forward in the proposed regulations for the swaps 
that DCOs will submit going forward. CME Group, Inc. (CME) recommended 
that a DCO not be required to make any submission to the Commission for 
pre-enactment swaps or for swaps that a DCO cleared before the 
effective date of the clearing requirement. Sungard Energy & 
Commodities (Sungard) inquired as to whether pre-enactment swaps being 
considered submitted means that the DCO is not required to submit the 
supporting information required in proposed Regulation 39.5(b)(3), that 
the DCO is automatically eligible to clear the swap, and that the DCO 
is permitted to continue clearing while the Commission conducts its 
review.
    In response to these comments, the Commission notes its intention 
to apply the final regulations to all swaps submitted or considered 
submitted to the Commission, including the pre-enactment swaps. Shortly 
after the enactment of the Dodd-Frank Act, Commission staff contacted 
those DCOs identified as clearing swaps and requested that they submit 
information similar to that which will be required under Regulation 
39.5(b)(3). After the final regulations take effect and the Commission 
has verified that the previously submitted information is accurate and 
complete, the Commission will post the submissions for public comment 
as required. The Commission confirms that a DCO that is clearing pre-
enactment swaps may continue to clear them and does not have to wait 
for a determination from the Commission as to whether the swaps are 
required to be cleared.

B. Eligibility of a DCO To Clear Swaps

    Under Regulation 39.5(a), a DCO would be presumed eligible to 
accept for clearing any swap that is within a group, category, type, or 
class of swaps that the DCO already clears. This presumption of 
eligibility would be subject to Commission review, and if the 
Commission determines that the swap is not within a group, category, 
type, or class of swaps that the DCO already clears, the DCO would be 
required to request a determination by the Commission of its 
eligibility to clear the swap. A DCO that plans to accept for clearing 
any swap that is not within a group, category, type, or class of swaps 
that the DCO already clears also would be required to request a 
determination by the Commission of its eligibility to clear the swap. A 
swap generally would be considered to be ``within a group, category, 
type, or class of swaps that the DCO already clears'' if the terms of 
the swap are substantially similar to the terms of a swap, group, 
category, type or class of swaps that the DCO already clears, and 
clearing the swap will not require any changes to the DCO's risk 
management framework.
    The Financial Services Roundtable (FSR) commented that a DCO's 
authority to clear swaps transactions should not be conditioned on its 
ability to clear the entire market volume of such swaps transactions, 
and therefore the reference to mandatory clearing should be deleted 
from Regulation 39.5(b)(3)(i). As proposed, Regulation 39.5 (b)(3)(i) 
required the DCO's submission to the Commission to include ``[a] 
statement that the [DCO] is eligible to accept the swap, or group, 
category, type or class of swaps for clearing and, if the Commission 
determines that the swap, or group, category, type, or class of swaps 
is required to be cleared, the [DCO] will be able to maintain 
compliance with section 5b(c)(2) of the Act.'' \7\ Therefore, as FSR 
noted, the DCO would be required to have the ability to clear the 
entire market volume for any swap, or group, category, type or class of 
swaps that it planned to accept for clearing. In the final regulation, 
the Commission is maintaining the reference to mandatory clearing but 
revising Regulation 39.5(b)(3)(i) as follows (added text in italics): 
``A statement that the [DCO] is eligible to accept the swap, or group, 
category, type or class of swaps for clearing and describes the extent 
to which, if the Commission were to determine that the swap, or group, 
category, type, or class of swaps is required to be cleared, the [DCO] 
will be able to maintain compliance with section 5b(c)(2) of the Act.'' 
The revised regulation would not require the Commission to find a DCO 
ineligible to clear a swap if the DCO is unable to clear the entire 
market volume of such swap transactions, but the Commission would take 
the DCO's inability to clear the entire market into consideration in 
determining whether the swap must be cleared.
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    \7\ Section 5b(c)(2) sets out the core principles with which a 
DCO must comply to maintain its registration with the Commission.
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    The International Swaps and Derivatives Association (ISDA) asked 
the Commission to confirm that it

[[Page 44466]]

intends for a DCO eligibility review to be separate from and precede a 
swap review, and that the intent is not to commence both reviews 
simultaneously. LCH.Clearnet Group (LCH) urged the Commission to de-
couple the determination that a DCO may clear a swap from the 
determination that a swap should be subject to a mandatory clearing 
obligation. Similarly, Sungard asked for clarification as to whether a 
DCO can begin accepting a new swap for clearing once eligibility for 
clearing is established, independent of the review for mandatory 
clearing.
    The Commission confirms that it intends for a DCO eligibility 
review to be separate from and precede a review of swaps that the DCO 
plans to accept for clearing. The Commission also confirms that a DCO 
may begin accepting a new swap for clearing once the DCO's eligibility 
for clearing is established and the submission requirements of 
Regulation 39.5(b) have been met, as discussed further below.
    Michael Greenberger recommended that a DCO be required to state 
with specificity in its written request the sufficiency of its 
financial resources and its ability to manage the risks associated with 
clearing the swap. Chris Barnard stated that sufficient evidence 
indicating that the DCO would be able to maintain compliance with the 
requirements of section 5b(c)(2) of the CEA, or a CFTC review to 
determine the DCO's ability, should be required for all DCOs planning 
to accept swaps for clearing.
    The Commission notes that it has proposed separate regulations that 
will impose new requirements on DCOs, including financial resources and 
risk management requirements, for maintaining compliance with the core 
principles applicable to DCOs set out in section 5b(c)(2).\8\ 
Therefore, even if a DCO is presumed eligible, or determined to be 
eligible, to accept swaps for clearing, the Commission will be 
monitoring the DCO's eligibility on an ongoing basis through the 
requirements of those regulations.
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    \8\ See 75 FR 63113 (Oct. 14, 2010) (financial resources); 75 FR 
63732 (Oct. 18, 2010) (conflicts of interest); 75 FR 77576 (Dec. 13, 
2010) (general regulations); 75 FR 78185 (Dec. 15, 2010) 
(information management); 76 FR 722 (Jan. 6, 2011) (governance); 76 
FR 3698 (Jan. 20, 2011) (risk management); and 76 FR 13101 (Mar. 10, 
2011) (participant and product eligibility).
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C. A DCO's Notice to Its Members of a Swap Submission

    Regulation 39.5(b)(3)(xi) requires a DCO's swap submission to 
include a ``description of the manner in which the [DCO] has provided 
notice of the submission to its members and a summary of any opposition 
to the submission expressed by the members.'' In the notice of proposed 
rulemaking, the Commission invited comment on whether the regulation 
should prescribe a specific manner in which a DCO must provide notice 
to its members, and whether the regulation should prescribe a specific 
period of time between the notice to members and the submission to the 
Commission to allow time for members to make their views on the 
submission known. Section 723(a)(3) of the Dodd-Frank Act only requires 
the DCO to provide notice to its members of the submission; it does not 
require the DCO to provide its members with the opportunity to comment.
    The Air Transport Association of America (ATA) requested that the 
Commission require a DCO to provide in its submission a description of 
how the DCO has notified market participants of the submission and of 
any opposition expressed by such market participants. Although the 
Commission will accept public comment on the DCO's submission, ATA 
believes by that time the DCO may have made important, and sometimes 
irreversible, decisions with regard to its proposed clearing offering.
    The Alternative Investment Management Association Limited (AIMA) 
stated that the Commission should require a DCO's members to pass on to 
their customers all details about a submission by the DCO to the 
Commission and encourage those customers to provide comments to the 
Commission.
    Better Markets, Inc. suggested requiring a DCO to provide notice to 
the Commission and the public when considering clearing a new class of 
swaps, rather than only providing notice when a decision to submit has 
been made. Better Markets also recommended that the Commission require 
a DCO to solicit input from customers and the public to enable a full 
and fair consideration of a submission and to include member comments 
in support of a submission in addition to comments in opposition. 
Additionally, Better Markets commented that a DCO should be required to 
provide notice to the Commission and the public of a decision not to 
submit a swap for clearing, including comments for and against 
submission.
    The FSR expressed the view that the DCO and its clearing members 
will be in the best position to determine appropriate notice and voting 
procedures with respect to these matters.
    Freddie Mac recommended that the Commission require DCOs to provide 
pre-submission notice of any clearing proposal and a meaningful 
opportunity to comment to all interested stakeholders, rather than 
merely to the DCO's own members.
    Mr. Greenberger suggested that it would be preferable for the 
regulations to prescribe a specific manner and timeline for notice, so 
that the notice is given with sufficient time and in the proper manner 
to gather all of the appropriate objections by DCO members.
    IntercontinentalExchange, Inc. (ICE) observed that the requirement 
that a DCO provide to the Commission a summary of any opposition to a 
swap submission expressed by its members has the effect of creating two 
comment periods (including the Commission's 30-day public comment 
period), thus extending the timeline for a DCO to submit swaps for 
mandatory clearing. ICE proposed that the Commission adopt a 30-day 
comment period as sufficient for input from all members and require the 
DCO to include only a statement of any opposition from the DCO's board 
as part of its submission.
    Mr. Barnard recommended that the Commission change the wording 
under Regulation 39.5(b)(3)(xi) and require the DCO to provide a 
summary of ``any comments on the submission expressed by the members'' 
rather than just ``any opposition to the submission expressed by the 
members,'' in order to promote fairness.
    In response to these comments, the Commission is replacing the 
words ``opposition to'' with the words ``views on,'' revising the text 
of Regulation 39.5(b)(3)(xi) to read as follows: ``A description of the 
manner in which the [DCO] has provided notice of the submission to its 
members and a summary of any views on the submission expressed by the 
members.'' Further, the Commission clarifies that the regulations do 
not require a DCO to solicit the views of its members or the public on 
the submission, because all interested parties will have the 
opportunity to comment during the Commission's 30-day public comment 
period. However, if the members do make their views known directly to 
the DCO, the DCO is required to share a summary of that information 
with the Commission under Regulation 39.5(b)(3)(xi).

D. Public Comment Process for Swap Submissions

    In the notice of proposed rulemaking, the Commission stated that, 
upon receiving a DCO's swap submission, the

[[Page 44467]]

Commission would begin its 90-day review by posting the submission on 
the Commission Web site for a 30-day public comment period, as required 
by the Dodd-Frank Act. The Commission invited comment regarding the 
appropriateness and sufficiency of providing notice of the submission 
on the Commission Web site as compared to publishing notice of the 
submission in the Federal Register.
    AFSCME, Americans for Financial Reform, Mr. Greenberger, and Mr. 
Barnard recommended that the Commission publish submissions both on the 
Commission Web site and in the Federal Register to provide the fullest 
disclosure possible. ATA supported the Commission's use of its Web site 
to provide notice of submissions but recommended that, at the time a 
submission is posted, the Commission send a notification to the same 
subscribers that receive notifications of Federal Register notices. The 
Commission is accepting the recommendation to publish submissions both 
on the Commission Web site and in the Federal Register. Accepting this 
recommendation does not require any changes to the text of proposed 
Regulation 39.5(b)(4), which states that the submission ``will be made 
available to the public and posted on the Commission website.'' 
Publication of the submission in the Federal Register will make the 
submission available to the public, and the Commission will have a link 
to the Federal Register notice on its Web site.
    In other comments on the public comment process for swap 
submissions, Freddie Mac recommended that the Commission extend the 
period for notice and comment beyond 30 days, and ISDA suggested that 
the Commission extend the public comment period to 45 days. The 
Commission has decided to keep the comment period at 30 days, the 
minimum required by the Dodd-Frank Act, because the Commission 
typically will have just 90 days to review the swap submission. The 
Commission is concerned that extending the comment period by regulation 
may not leave sufficient time for the Commission to carefully consider 
the comments received and conduct a thorough review. Nevertheless, the 
Commission expects that it will extend the comment period on a case-by-
case basis, because the Commission is allowed to extend the 90-day 
review period if the submitting DCO agrees to an extension.
    Finally, the National Milk Producers Federation (NMPF) commented 
that the regulations would invite DCOs to lay claim to swaps and 
categories of swaps, leaving all actual and potential future end users 
only 30 days to become aware of, and respond to, such claims. The 
Commission notes that all public comments received on a swap 
submission, not just the DCO's views, will be considered in making a 
mandatory clearing determination and, as discussed above, the 
Commission will allow more than 30 days for comments when possible on a 
case-by-case basis.

E. Contents of a DCO's Swap Submission

    Regulation 39.5(b) sets out the process for DCOs to follow when 
submitting a swap, or group, category, type or class of swaps to the 
Commission, including what information a DCO must include in the 
submission to assist the Commission in its review.
    In its comment letter, LCH encouraged the Commission to amend the 
supporting information requirements under Regulation 39.5(b)(3), such 
that a DCO is required to include in its submission only that 
information which is necessary for determining the suitability of a 
swap for clearing and the eligibility of a DCO to clear that swap. LCH 
believes that a DCO should not have to provide the information required 
to support the determination of whether a swap should be subject to a 
clearing requirement. LCH commented that the determination that a DCO 
may clear a swap should be separate from, and independent of, any 
determination that a swap should be subject to mandatory clearing. LCH 
recommended that certain words be deleted from the text of proposed 
Regulations 39.5(b)(3)(ii)(A),(C), and (D), and that proposed 
Regulation 39.5(b)(3)(viii) be deleted, because, in LCH's view, a DCO 
would not have access to the information required.
    Similarly, CME commented that the Commission should limit the 
breadth of the submission required by a DCO seeking approval to clear a 
swap to only addressing whether clearing the swap comports with the DCO 
core principles. CME stated that the Commission's proposed regulations 
would impose costs and obligations that would effectively undermine the 
purposes of the Dodd-Frank Act and that, in effect, the Commission is 
attempting to charge a DCO that wishes to list a new swap with the 
obligation to collect and analyze massive amounts of information so 
that the Commission can perform its statutory duty of determining 
whether the swap should be subject to the mandatory clearing 
requirement. In a second comment letter, CME expressed concern that the 
regulations conflate the ``voluntary clearing determination'' and the 
``mandatory clearing determination'' for swaps. CME also revised its 
earlier comments on the information required for the submission and 
recommended that the Commission delete proposed Regulations 
39.5(b)(3)(ii), (vii), (viii), and (x) in their entirety and proposed 
Regulation 39.5(b)(3)(vi) in part.
    In response to LCH and CME's comments, the Commission is deleting 
proposed Regulations 39.5(b)(3)(vii), (viii), and (x) in their entirety 
and proposed Regulation 39.5(b)(3)(vi) in part, and renumbering 
proposed Regulations 39.5(b)(3)(ix) and (xi) as Regulations 
39.5(b)(3)(vii) and (viii), respectively, due to the removal of the 
other provisions. As a result of this revision, a DCO will only be 
required to submit information to the Commission, such as product 
specifications and risk management procedures, which a DCO should have 
gathered and considered in making its own decision to accept a 
particular swap for clearing. The Commission is also adding Regulation 
39.5(b)(3)(ix), which would require a DCO to submit ``[a]ny additional 
information specifically requested by the Commission.'' This will allow 
the Commission to request any information not required by Regulation 
39.5(b) if needed on a case-by-case basis.
    The Commission is declining to delete Regulation 39.5(b)(3)(ii) or 
revise it in accordance with LCH's comments. Regulation 39.5(b)(3)(ii), 
as proposed, requires a DCO to submit to the Commission a ``statement 
that includes, but is not limited to, information regarding the swap, 
or group, category, type, or class of swaps that is-sufficient to 
provide the Commission a reasonable basis to make a quantitative and 
qualitative assessment of the following factors,'' and then lists the 
five factors set out in Section 723(a)(3) of the Dodd-Frank Act that 
the Commission is required to take into account in reviewing a swap 
submission. LCH had suggested editing these factors for purposes of the 
required statement. For example, LCH had suggested editing proposed 
Regulation 39.5(b)(3)(ii)(A), which reads ``[t]he existence of 
significant outstanding notional exposures, trading liquidity, and 
adequate pricing data,'' to read as ``[t]he existence of adequate 
pricing data.'' The Commission does not believe it is appropriate to 
change the wording that is used in the Dodd-Frank Act.
    Instead, in response to LCH's comments, the Commission is revising 
the introductory language of Regulation 39.5(b)(3)(ii) to read, in 
part: ``A statement that includes, but is not limited to, information 
that will assist

[[Page 44468]]

the Commission in making a quantitative and qualitative assessment of 
the following factors * * *.'' The Commission believes this change will 
require a DCO to address each of the five factors only to the extent 
that the DCO is reasonably able to do so. For example, with regard to 
the factor in Regulation 39.5(b)(3)(ii)(A) cited above, if LCH is only 
able to provide information regarding the existence of adequate pricing 
data, then that is the only information that LCH would be required to 
provide.
    Some DCOs believe that certain swaps that are accepted for clearing 
may be obviously unsuitable for mandatory clearing and therefore a DCO 
should only have to submit swaps to the Commission for review at the 
discretion of the DCO or the Commission. The Dodd-Frank Act, however, 
does not give either the DCO or the Commission such discretion. As 
previously noted, a DCO is required to submit to the Commission each 
swap, or any group, category, type, or class of swaps that it plans to 
accept for clearing, and the Commission is required to review each 
submission and determine whether clearing is required. Nevertheless, 
the Commission would encourage a DCO to use the statement required by 
Regulation 39.5(b)(3)(ii) to express its views as to whether the swaps 
being submitted should be subject to a clearing requirement.
    The Commission believes it is necessary to clarify that a 
``voluntary clearing determination'' is not required before a DCO may 
accept swaps for clearing. The Commission had expected that a DCO that 
wished to accept swaps for clearing would be permitted to do so after 
meeting the eligibility requirements of Regulation 39.5(a) and the 
submission requirements of Regulations 39.5(b) and 40.2,\9\ the latter 
of which applies to DCOs accepting products for clearing by 
certification. Under Regulation 40.2, if the Commission has received 
the submission required under that section by the open of business on 
the business day preceding the product's acceptance for clearing, then 
the DCO may begin clearing the product as planned. However, the 
Commission recognizes that it would be burdensome to require a DCO to 
comply with two different submission requirements before it could 
accept swaps for clearing. Accordingly, the Commission has decided to 
eliminate the provision in Regulation 40.2 concerning DCOs and only 
require compliance with Regulation 39.5. The Commission has also added 
paragraph (b)(4) to Regulation 39.5 to require, like Regulation 40.2, 
that a DCO's submission must be received by the Commission by the open 
of business on the business day preceding the acceptance of the swap, 
or group, category, type, or class of swaps for clearing. This change 
clarifies that a DCO, which must be eligible or presumed eligible to 
clear any swap or group, category, type, or class of swaps that it 
plans to accept for clearing, may begin clearing such swaps shortly 
after it has made its submission to the Commission and does not have to 
wait until the Commission has made a determination on mandatory 
clearing.
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    \9\ The Commission has proposed to amend Regulation 40.2 to 
implement certain provisions of the Dodd-Frank Act. See 75 FR 67282 
(Nov. 2, 2010).
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    In other comments regarding the DCO's swap submission, the American 
Benefits Council (ABC) recommended that the submission be required to 
include a specific analysis of the costs and burdens of clearing on 
market participants, and Better Markets proposed that the regulations 
clearly state that the additional statements and materials the DCO must 
include with its submission are not intended to increase the number of 
factors to be taken into account by the Commission in its review beyond 
the five factors set forth in the Dodd-Frank Act. The Commission 
believes a better approach to assessing the costs and burdens of 
clearing on market participants is by requesting public comment on the 
issue during its reviews of DCO swap submissions. The Commission also 
believes that the information that a DCO will be required to provide 
with its submission is clearly intended to aid the Commission in its 
assessment of the five factors set forth in the Dodd-Frank Act.

F. Group, Category, Type or Class of Swaps

    Regulation 39.5(b)(2) encourages a DCO to submit swaps to the 
Commission by ``group, category, type or class of swaps,'' language 
taken from Section 723(a)(3) of the Dodd-Frank Act. Several commenters 
expressed concern about how ``group, category, type or class of swaps'' 
will be defined. The Coalition for Derivatives End-Users expressed 
concern that these groups or categories could be defined too broadly, 
without due consideration of the important differences between swaps 
within these groups or categories. ABC stated its opposition to the 
Commission adopting any clearing requirement that covers a group, 
category, type or class of swaps unless the Commission reviews each 
swap within the group, category, type or class and determines that each 
swap should be cleared.
    How the Commission defines a particular group, category, type or 
class of swaps for purposes of a clearing requirement will be informed 
by: (1) How it is defined by the DCO in its submission (for those swaps 
submitted by a DCO); (2) the comments received by the Commission during 
the public comment period; (3) the five factors enumerated in the Dodd-
Frank Act that the Commission is required to take into account; and (4) 
the Commission's own analysis during its review. The Commission will 
review each swap within a group, category, type or class of swaps to 
the extent the Commission believes it is necessary to make the proper 
determination on mandatory clearing.

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

    Section 723(a)(3) of the Dodd-Frank Act requires the Commission, in 
reviewing a swap or swaps on its own initiative, or a swap submission, 
to take into account the following factors, also set out in Regulation 
39.5(b)(3)(ii): (1) The existence of significant outstanding notional 
exposures, trading liquidity, and adequate pricing data; (2) the 
availability of rule framework, capacity, operational expertise and 
resources, and credit support infrastructure to clear the contract on 
terms that are consistent with the material terms and trading 
conventions on which the contract is then traded; (3) the effect on the 
mitigation of systemic risk, taking into account the size of the market 
for such contract and the resources of the DCO available to clear the 
contract; (4) the effect on competition, including appropriate fees and 
charges applied to clearing; and (5) the existence of reasonable legal 
certainty in the event of the insolvency of the relevant DCO or one or 
more of its clearing members with regard to the treatment of customer 
and swap counterparty positions, funds, and property.
    In a comment letter, AIMA expressed its view that the third factor, 
the effect on the mitigation of systemic risk, should override other 
considerations. Better Markets proposed that the regulations make clear 
that a given level of contract-specific systemic risk avoided by 
mandatory clearing does not constitute a threshold for a determination 
by the Commission because the Dodd-Frank Act in no way suggests that 
only contract types that by themselves pose a risk to the financial 
system should be cleared.
    The Coalition for Derivatives End-Users urged the Commission to 
give significant weight to a swap's liquidity in assessing whether that 
swap should

[[Page 44469]]

be subject to mandatory clearing and to consider the link between the 
clearing requirement and the trading requirement. The FSR requested 
that the Commission consider the changes in the trading market 
structure being effected by the Dodd-Frank Act and related regulations 
in evaluating mandatory clearing decisions. The FSR is concerned that a 
trading system that limits participation will also reduce liquidity in 
the system because, due to the trading requirements for cleared swaps, 
counterparties will not have the option to complete trades off-exchange 
when on-exchange trading is unattractive or unavailable.
    ISDA provided detailed comments on each of the five factors and 
encouraged the Commission to interpret these criteria strictly. Sungard 
proposed that the Commission apply some form of concentration test in 
determining whether a swap should be mandated for clearing out of 
concern that if the market for a swap is too heavily concentrated in 
the hands of a few market makers on the supply side, or a handful of 
hedgers or speculators on the demand side, such concentration would 
hamper discovery of the market clearing price and impose liquidity risk 
on the DCO.
    CME commented that the proposed regulations do not state how the 
Commission will decide which swaps will be subject to a clearing 
requirement. CME believes that the Commission is required to make 
public how it will make this critical determination, because it would 
allow market participants to anticipate which swaps will be required to 
be cleared and may incentivize market participants to voluntarily 
submit those swaps for clearing in advance of any requirement that they 
be submitted for clearing.
    The National Corn Growers Association (NCGA) and Natural Gas Supply 
Association (NGSA) encouraged the Commission to acknowledge that swaps 
that are not liquid over their full terms should not be required to be 
cleared because such swaps do not meet the Dodd-Frank Act's requirement 
of trading liquidity for swaps to be subject to the mandatory clearing 
requirement. In particular, NCGA and NGSA suggested that the Commission 
acknowledge that it will not require illiquid long-term swaps to be 
split up into various components in order to extract one or more 
clearable components, since the Dodd-Frank Act provides no authority 
for such a requirement.
    As required by the Dodd-Frank Act, the Commission will take each of 
the five factors and the information submitted by the DCO into account 
when making a mandatory clearing determination, as well as these 
comments and any comments received during the public comment period 
that will be a part of each review. The Commission does not believe it 
would be appropriate to address these comments at this time, as they 
are beyond the scope of the regulations.

H. Commission-Initiated Reviews of Swaps

    Section 723(a)(3) of the Dodd-Frank Act and Regulation 39.5(c) 
require the Commission, on an ongoing basis, to review swaps that have 
not been accepted for clearing by a DCO to make a determination as to 
whether the swaps should be required to be cleared.
    AIMA suggested that it may be desirable to have a set frequency of 
reviews that the Commission must carry out, and that parties other than 
DCOs be allowed to request that the Commission initiates a review. AIMA 
recommended the Commission use the same criteria to assess a swap under 
a Commission-initiated review as it would for a DCO-submitted review. 
Finally, AIMA opined that there should be no prohibitions placed on 
trading a swap that would be subject to a mandatory clearing 
requirement if a DCO existed to clear the contract, and requested 
greater clarity as to possible solutions the Commission will consider 
to encourage DCOs to begin clearing a new class of swaps.
    The Commission does not think it would be prudent to have a set 
frequency of Commission-initiated reviews at this time. The Commission 
anticipates that the initial mandatory clearing determinations would 
only involve swaps that are either already being cleared or that a DCO 
wants to clear. Once those determinations are made, the Commission will 
be in a better position to assess that portion of the swaps market that 
remains uncleared. The Commission can confirm that it will use the same 
criteria to assess a swap for both Commission-initiated and DCO-
submitted reviews, and encourages all parties to make recommendations 
as to swaps that would be appropriate for a Commission-initiated 
review. Finally, the Commission notes that, under Regulation 
39.5(c)(3), for any swap that would otherwise be subject to a clearing 
requirement except that no DCO has accepted it for clearing, the 
Commission may ``take such actions as the Commission determines to be 
necessary and in the public interest * * *, '' and it will make such 
determinations on a case-by-case basis, after taking into consideration 
any comments received pursuant to the 30-day public comment period 
provided for in Regulation 39.5(c)(2).

I. Capital and Margin Requirements for Uncleared Swaps

    Regulation 39.5(c)(3)(iii) provides that, if the Commission 
identifies a swap or group, category, type, or class of swaps that 
would otherwise be subject to a clearing requirement except that no DCO 
has accepted it for clearing, the Commission may take such actions as 
it ``determines to be necessary and in the public interest, which may 
include requiring the retaining of adequate margin or capital by 
parties to the swap, group, category, type, or class of swaps.'' This 
language is taken directly from Section 723(a)(3) of the Dodd-Frank 
Act.\10\
---------------------------------------------------------------------------

    \10\ Section 731 of the Dodd-Frank Act (Section 4s(e)(1) of the 
CEA) requires rules imposing capital and margin for bank swap 
dealers and bank major swap participants to be set jointly by 
prudential regulators and gives the Commission authority to adopt 
rules imposing capital and margin for non-bank swap dealers and non-
bank major swap participants. The Commission would consult with the 
prudential regulators before taking action under Regulation 
39.5(c)(3)(iii).
---------------------------------------------------------------------------

    ISDA sought clarification that the Commission's authority is 
restricted to requiring the retention of adequate margin or capital 
only for swap transactions that are not otherwise exempt from the 
clearing requirements. First, the Commission notes that, with respect 
to swap dealers and major swap participants, it will not impose margin 
or capital requirements under Regulation 39.5(c)(iii) that differ from 
final Commission regulations on margin or capital for uncleared 
swaps.\11\ Further, the Commission does not foresee that it would take 
action under Regulation 39.5(c)(3)(iii) to impose margin or capital 
requirements on any swap counterparty permitted, under final Commission 
regulations, to exercise the end-user exception to mandatory clearing 
of swaps.\12\
---------------------------------------------------------------------------

    \11\ The Commission has proposed margin and capital requirements 
for certain swap dealers and major swap participants. See 76 FR 
23732 (Apr. 28, 2011) (Margin Requirements for Uncleared Swaps for 
Swap Dealers and Major Swap Participants) and 76 FR 27802 (May 12, 
2011) (Capital Requirements of Swap Dealers and Major Swap 
Participants).
    \12\ The Commission has proposed requirements governing the end-
user exception to mandatory clearing of swaps. See 75 FR 80747 (Dec. 
23, 2010).
---------------------------------------------------------------------------

J. Stay of Clearing Requirement

    Under Regulation 39.5(d), after making a determination that a swap 
or group, category, type, or class of swaps is required to be cleared, 
the Commission, on application of a counterparty to a swap or on its 
own initiative, may stay the clearing

[[Page 44470]]

requirement until it completes a review of the terms of the swap and 
the clearing arrangement. Upon completion of the review, the Commission 
could determine, subject to any terms or conditions as the Commission 
determines to be appropriate, that the swap must be cleared, or that 
the clearing requirement will not apply but clearing may continue on a 
non-mandatory basis.
    FHLB suggested that the right to request a stay would be more 
meaningful for market participants if the regulation enumerated certain 
factors that the Commission will consider in granting such a stay or an 
exemption from the clearing requirement. FHLB recommended that the 
Commission consider the following factors: DCO credit risk, lack of 
relationships with DCO clearing members, and unique/special 
characteristics of transactions.
    The FSR noted that there is no discussion in the Dodd-Frank Act or 
the notice of proposed rulemaking with respect to the time period for 
the issuance of the stay after an application has been made and 
believes a delay in the issuance of such a stay would defeat the 
purpose of the mechanism, especially in circumstances where complying 
with a mandatory clearing requirement may not be feasible. The FSR 
encouraged the Commission to adopt a policy to issue a stay within one 
business day of any request for a stay, unless the request on its face 
appears to be frivolous, so as to avoid any lengthy market disruption 
while the Commission determines whether the stay should be granted. 
Additionally, because the Commission may stay a mandatory clearing 
requirement on its own initiative, the FSR recommended that the 
Commission allow DCOs, DCMs, and SEFs to request a stay, because these 
entities will be in key positions to identify developing market 
disturbances related to mandatory clearing.
    Mr. Greenberger commented that a counterparty's written request for 
a stay should be very specific and the involvement of the DCO in aiding 
the investigation should be substantial.
    ISDA suggested that the clearing requirement should be stayed in 
the following circumstances: In the absence of competition; when there 
is an unresolved clearing member default at the only DCO then clearing 
the relevant product; when no DCO has elected to clear the product; or 
when a product becomes so illiquid as to threaten the DCO's ability to 
calculate margin or manage defaults.
    The Commission does not believe it would be prudent to enumerate 
the factors that it would consider in determining whether to stay a 
clearing requirement. Doing so could potentially limit the Commission's 
ability to respond to unforeseen or unusual circumstances. Likewise, 
the Commission is declining to adopt a deadline by which it must 
respond to a request for a stay. The Commission would respond to such 
requests in a timely manner and, if any situation developed that would 
necessitate the immediate staying of a clearing requirement, the 
Commission would not be required to await a request for a stay in order 
to take action. Finally, the Commission notes that it would expect to 
consult with DCOs, DCMs, and SEFs as appropriate before it would stay a 
clearing requirement.

K. Additional Comments

    The Commission received many comments that did not pertain to the 
aspects of the regulations discussed above. In particular, many of 
these comments related to the clearing of swaps in general, rather than 
the process for review of swaps for mandatory clearing.
    ABC expressed concern that, if a clearing mandate is too broad, 
entities could be precluded from customizing swaps to hedge very 
specific risks. ABC encouraged the Commission to clarify that it would 
not constitute illegal evasion for an entity to enter into a swap that 
would be subject to a clearing mandate but for the fact that the swap 
contains a unique tailored term adopted for a bona fide business or 
investment reason, even if that term prevented the swap from being 
accepted for clearing by any DCO.
    The Coalition for Derivatives End-Users urged the Commission to 
avoid regulations that would serve to discourage end-users from using 
customized transactions, and thereby preserve end-users' ability to 
enter into transactions that are tailored to meet specific economic and 
accounting objectives.
    The FSR stated that the need to establish appropriate hedges may 
require financial entities to enter into transactions that are similar 
to swaps that are subject to a mandatory clearing requirement, but are 
not themselves eligible for clearing. In such circumstances, the FSR 
believes the presumption should be that the terms of the swap were 
determined to support the hedge and not to evade the mandatory clearing 
requirement. In addition, the FSR encouraged the Commission to provide 
exemptions from the clearing requirement for any swaps entered into 
prior to the adoption of the relevant clearing requirement due to the 
costs and burdens involved in transitioning swaps into a clearing 
arrangement, especially where such swaps have terms that differ from 
the standardized terms established by the DCO for cleared swaps. 
Lastly, the FSR expressed its belief that the Commission needs to 
address whether entering into amendments to, and assignments and 
novations of, existing swap transactions will be considered to be 
``engaging in a swap,'' which could require them to be cleared.
    Freddie Mac urged that the Commission should clarify that the Dodd-
Frank Act requires parties to a swap subject to the clearing 
requirement to submit a swap for clearing but does not require parties 
to terminate or unwind swaps that fail to clear. Freddie Mac believes 
that the uncertainty of whether a swap may be terminated after 
execution would increase systemic risk and that allowing uncleared 
swaps subject to mandatory clearing to become OTC swaps would reduce 
uncertainty and not substantially increase systemic risk.
    The Financial Services Agency of the Government of Japan asked the 
Commission to confirm that, as the Commission phases in the central 
clearing requirement, it would only be applied if both parties of such 
swaps are U.S. institutions. If this treatment could not be made 
permanent, at the very least they would formally request that such a 
transitional arrangement be made until the end of 2012.
    NCGA and NGSA stated that the Commission should clarify in its 
final rule that, after the mandatory clearing provisions go into 
effect, a determination that a swap is required to be cleared will not 
apply retroactively to swaps that are open as of the date of such 
determination. They believe that retroactive application would impose 
substantial undue logistical burdens and transactional costs on market 
participants by requiring them to reexamine their portfolios each time 
a new determination is made and then arrange with counterparties to 
have affected swaps transferred for clearing.
    NMPF recommended that the process for reviewing swaps for mandatory 
clearing not be so heavily weighted toward a determination that swaps 
be mandatorily cleared. NMPF believes that DCOs have an interest in 
such a determination, and will have the preponderance of input in a 90-
day determination process. Thus NMPF believes that weight must be put 
on the other side for the process to be fair.
    In addition to the comments discussed above, the Commission

[[Page 44471]]

received multiple comments recommending that the Commission exempt 
interaffiliate transactions from mandatory clearing, and offering 
thoughts on how the Commission should implement a clearing requirement. 
The Commission notes that all of these comments go beyond the limited 
scope of these regulations, and it will consider how to address them 
outside of this rulemaking.

L. Effective Date

    Upon the effective date of this rule: (1) Any swap or group, 
category, type, or class of swaps listed for clearing by a DCO shall be 
considered submitted to the Commission, in accordance with Section 
2(h)(2)(B)(ii) of the CEA; (2) the Commission will review the 
submissions and make the required determinations under Sections 
2(h)(2)(B)(iii), (C), and (D); (3) the Commission may initiate its own 
reviews under Section 2(h)(2)(A); and (4) DCOs shall submit swaps that 
they plan to accept for clearing under Section 2(h)(2)(B)(i), and the 
Commission will review the submissions and make the required 
determinations under Sections 2(h)(2)(B)(iii), (C), and (D).

III. Cost-Benefit Considerations

    Section 15(a) of the CEA \13\ requires the Commission to consider 
the costs and benefits of its action before promulgating a regulation 
under the CEA. Section 15(a) specifies that costs and benefits shall be 
evaluated in light of five broad areas of market and public concern: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. In conducting its analysis, the Commission 
may, in its discretion, give greater weight to any one of the five 
enumerated areas and it may determine that, notwithstanding its costs, 
a particular rule is necessary to protect the public interest or to 
effectuate any of the provisions or to accomplish any of the purposes 
of the CEA.\14\
---------------------------------------------------------------------------

    \13\ 7 U.S.C. 19(a).
    \14\ See, e.g., Fisherman's Doc Co-op., Inc v. Brown, 75 F.3d 
164 (4th Cir. 1996); Center for Auto Safety v. Peck, 751 F.2d 1336 
(DC Cir. 1985) (noting that an agency has discretion to weigh 
factors in undertaking cost-benefit analysis).
---------------------------------------------------------------------------

    The Commission invited but did not receive public comments specific 
to its cost-benefit estimates and considerations within the initial 
comment period following the publication of the Commission's notice of 
proposed rulemaking. The Commission also invited the public ``to submit 
any data or other information that [it] may have quantifying or 
qualifying the costs and benefits of the proposal with their comment 
letters.'' The Commission received no such data or other information. 
The Commission did, however, receive comments generally discussing the 
``burden'' associated with the submission process proposed in this 
regulation.
    The Commission has considered the costs and the benefits of these 
final regulations, as amended below, in light of each area of public 
concern specified in Section 15(a) of the CEA. In this regard, the 
Commission would like to note that it has discussed the costs and 
benefits of its regulations throughout the narrative discussion of its 
regulations above and generally views the cost-benefit considerations 
of this final rulemaking to be an extension of that discussion. The 
Commission would also like to note that its Paperwork Reduction Act 
estimates have informed its analysis of the costs of the final 
regulations and that any information collection costs have been 
considered an important component of the overall compliance costs 
associated with final Regulation 39.5.
    Consideration of the five broad areas is set out immediately below, 
followed by a discussion of the comments received in response to the 
proposal that relate to the costs and benefits of the regulations. The 
Commission has determined that the public benefits associated with each 
of its final regulations promulgated in this release outweigh the 
costs.

1. Protection of Market Participants and the Public

    This regulation provides an orderly framework for determining the 
eligibility of a DCO to clear swaps that it plans to accept for 
clearing; for DCOs submitting swaps to the Commission for review; for 
Commission-initiated reviews of swaps; and for staying a clearing 
requirement. An orderly framework for such a review and determination 
reduces uncertainty while collecting relevant information in order to 
make an informed decision, which protects all market participants.
    Maintaining the Commission's prerogative to engage in Commission-
initiated reviews may also enhance risk management for the financial 
system as a whole because it will encourage parties to swap 
transactions to seek to have their swaps cleared, rather than face the 
uncertainty of not knowing what action the Commission may take at the 
conclusion of its review.
    Lastly, the notice of proposed rulemaking required DCOs to include 
various types of information in their submissions, including an 
analysis of the effect of a clearing requirement on the market 
``including the potential effect on market liquidity, trading activity, 
use of swaps by direct and indirect market participants, and any 
potential market disruption.'' This final regulation eliminates some of 
these requirements, thereby transferring the responsibility to collect 
and analyze this information to the Commission. The Commission has 
determined that this approach will provide the same benefits to market 
participants and the public while being less costly for DCOs.

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

    The final regulations require a DCO to submit swaps to the 
Commission ``to the extent reasonable and practicable to do so, by 
group, category, type or class of swaps.'' The Commission believes this 
will make the review process more efficient, allowing the Commission to 
move more swaps into clearing quickly, which in turn will promote 
clarity in the markets and contribute to their efficiency and 
integrity.
    The final regulations also provide an opportunity for the public to 
comment on DCO submissions and require DCOs to relay both negative and 
positive feedback they receive from market participants. To the extent 
that the feedback summarized by DCOs is complete and accurate or that 
the public submits feedback directly to the Commission, this provides 
ample opportunity for broad input into mandatory clearing decisions. 
This greater transparency and public participation increases the 
likelihood that all important costs and benefits of mandatory clearing 
will be identified and weighed by the Commission.

3. Price Discovery

    The process outlined in the regulations will move more swaps into 
clearing, which will facilitate price discovery in the swap markets.

4. Sound Risk Management Procedures

    The proposed regulations also required DCOs to obtain independent 
validation of the scalability of their ``risk management policies, 
systems, and procedures, including the margin methodology, settlement 
procedures, and default management procedures.'' The Commission finds 
that this would increase cost to DCOs and has determined that there is 
an alternative that will be less costly and will likely achieve similar 
benefits. Specifically,

[[Page 44472]]

DCOs will be required to evaluate the scalability of their risk 
management policies, systems, and procedures to comply with the DCO 
core principles and additional proposed risk management regulations 
that may be promulgated.

5. Other Public Interest Considerations

    An orderly framework for the review of swaps and determination on 
mandatory clearing will facilitate moving swaps quickly into clearing, 
which is likely to reduce risk to the financial system.
    Public comments. In its notice of proposed rulemaking, the 
Commission solicited comment from the public.\15\ Comments relating to 
costs and benefits are summarized below, together with corresponding 
responses.
---------------------------------------------------------------------------

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

    The National Milk Producers Federation suggested that small farmers 
will bear a disproportionate share of the costs associated with 
mandatory clearing. The subject of this rulemaking is not the costs to 
small farmers associated with mandatory clearing but the process a DCO 
must follow in order to submit a swap or group, category, type, or 
class of swaps to the Commission for a determination as to whether the 
swap must be cleared. Moreover, the National Milk Producers Federation 
did not specify how and to what extent this disproportionate cost will 
manifest itself. In this final regulation, the Commission has 
determined that an orderly review of swaps, a review mandated by 
Congress, reduces risk and increases certainty and therefore will 
reduce costs by making sure such swaps are quickly and properly vetted. 
Furthermore, the Commission has considered these concerns and believes 
that they should be addressed as each swap or group, category, type, or 
class of swaps is considered for mandatory clearing. The regulations 
create an opportunity for these concerns to be raised by the public for 
a period of 30 days as each swap submission is being reviewed. If there 
are particular swaps for which members of the public believe this 
concern is relevant, they are encouraged to bring that to the 
Commission's attention during the public comment period and these 
factors will be weighed as decisions about mandatory clearing are made. 
In addition, the Commission has proposed separate regulations that 
create an exception to mandatory clearing for end users, which may 
address some of these concerns.
    CME commented that the information required in the proposed 
regulations would be costly for the DCOs to gather and analyze. This 
concern has been addressed in the final regulations by eliminating the 
requirements that DCOs submit independent validation of the scalability 
of their risk management policies, systems, and procedures, and by 
eliminating the requirement that DCOs conduct an analysis of the effect 
of a clearing requirement on the market. The final regulations now only 
require the submission of some of the information that the Commission 
assumes a DCO would have gathered and considered in making its own 
decision to accept a particular swap for clearing.
    The Coalition for Derivative End-Users, expressed concern that 
central clearing and required margins for cleared swaps will be 
expensive for market participants and could be considered an 
inefficient use of resources. These comments are beyond the scope of 
this rule, which focuses exclusively on the process for reviewing 
swaps.
    The Coalition for Derivative End-Users also expressed concern that 
the indirect as well as the direct costs of mandatory clearing should 
be considered when reviewing swaps. The Commission agrees that it is 
important to take the full range of costs as well as the benefits into 
account when considering mandatory clearing of a swap. As previously 
noted, the regulations establish a public comment process through which 
those costs and benefits may be raised and given due consideration. If 
there are any ancillary costs related to mandatory clearing of a 
specific swap or group, category, type, or class of swaps that the 
public believes are either unlikely to be recognized or particularly 
problematic, the Commission encourages comments to that effect. 
Comments that quantify the referenced costs or that offer specific 
scenarios are particularly helpful in that regard.
    The Coalition for Derivative End-Users further suggested that the 
high cost to a DCO of submitting a swap to the Commission will put 
U.S.-based DCOs at a competitive disadvantage to foreign DCOs. The 
Coalition for Derivative End-Users did not illustrate how and to what 
extent a U.S.-based DCO will be disadvantaged nor specify to what 
extent non-U.S.-based DCOs offer the similar functionality, liquidity 
or risk profiles in comparison to U.S.-based DCOs. However, concerns 
over the costs of submission have been addressed in the final 
regulations by reducing the DCO's submission requirements and the 
attendant costs.
    Freddie Mac expressed concern that uncertainty about whether swaps 
that are rejected for clearing by DCOs have to be unwound could 
generate losses for organizations using those swaps for hedging 
purposes. This concern goes beyond the limited scope of these 
regulations, and the Commission will consider how to address it outside 
of this rulemaking.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires Federal agencies, in 
promulgating rules, to consider whether those rules will have a 
significant economic impact on a substantial number of small entities 
and, if so, provide a regulatory flexibility analysis respecting the 
impact.\16\ The rules adopted herein will affect DCOs. The Commission 
has previously established certain definitions of ``small entities'' to 
be used by the Commission in evaluating the impact of its rules on 
small entities in accordance with the RFA.\17\ The Commission has 
previously determined that DCOs are not small entities for the purpose 
of the RFA.\18\ Accordingly, the Chairman, on behalf of the Commission, 
hereby certifies pursuant to 5 U.S.C. 605(b) that these rules will not 
have a significant economic impact on a substantial number of small 
entities. The Chairman made the same certification in the proposed 
rulemaking,\19\ and the Commission did not receive any comments on the 
RFA in relation to the proposed rulemaking.
---------------------------------------------------------------------------

    \16\ 5 U.S.C. 601 et seq.
    \17\ 47 FR 18618 (Apr. 30, 1982).
    \18\ See 66 FR 45605, 45609 (August 29, 2001).
    \19\ See 75 FR 67277, 67280 (Nov. 2, 2010).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \20\ imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number. This 
rulemaking imposes new collection of information requirements within 
the meaning of the PRA. Accordingly, the Commission requested, but the 
Office of Management and Budget (OMB) has not yet assigned, a control 
number for the new collection of information. However, OMB has assigned 
the reference number 201011-3038-002 in the interim. The

[[Page 44473]]

Commission has submitted this final rule along with supporting 
documentation for OMB's review. Responses to this collection of 
information will be mandatory.
---------------------------------------------------------------------------

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

    The Commission will protect proprietary information according to 
the Freedom of Information Act and 17 CFR part 145, ``Commission 
Records and Information.'' In addition, section 8(a)(1) of the CEA 
strictly prohibits the Commission, unless specifically authorized by 
the CEA, from making public ``data and information that would 
separately disclose the business transactions or market positions of 
any person and trade secrets or names of customers.'' The Commission is 
also required to protect certain information contained in a government 
system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.
1. Information Provided by Reporting Entities/Persons
    These regulations require DCOs to collect and submit to the 
Commission information concerning swaps they plan to accept for 
clearing. The Commission is adopting these information collection 
requirements in order to give effect to certain provisions of the Dodd-
Frank Act.
    Each DCO will determine for itself whether and how often it will 
accept a new swap or group, category, type, or class of swaps for 
clearing, which will require a submission of the required information 
to the Commission. The regulations direct DCOs to submit swaps to the 
Commission, to the extent reasonable and practicable to do so, by 
group, category, type, or class of swaps, thereby reducing the number 
of submissions a DCO would be required to make. The Commission's notice 
of proposed rulemaking therefore estimated one annual response per 
respondent. Commission staff estimated that each DCO would expend 40 
hours to prepare each filing required under the proposed regulations, 
which was estimated based on the Commission's prior experience with 
DCOs and their preparation of filings for the Commission's review. This 
burden may be reduced under the final regulations, which do not require 
a DCO to include as much information in its submission as the proposed 
regulations would have. Commission staff estimated that it would 
receive filings from up to 12 respondents annually, which assumes that 
each DCO would make an average of one filing per year. Accordingly, the 
burden in terms of hours would in the aggregate be 40 hours annually 
per respondent and 480 hours annually for all respondents.
    Commission staff estimated that each respondent could expend up to 
$4000 annually, based on an hourly wage rate of $100, to comply with 
the proposed regulations. This would result in an aggregated cost of 
$48,000 per annum (12 respondents x $4,000).
2. Information Collection Comments
    The Commission did not receive any comments on the PRA in relation 
to the proposed rulemaking.

List of Subjects

17 CFR Part 39

    Business and industry, Commodity futures, Reporting and 
recordkeeping requirements.

17 CFR Part 140

    Authority delegations (Government agencies), Conflict of interests, 
Organization and functions (Government agencies).

    For the reasons stated in the preamble, amend 17 CFR parts 39 and 
140 as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
1. The authority citation for part 39 is revised to read as follows:

    Authority: 7 U.S.C. 7a-1 as amended by Pub. L. 111-203, 124 
Stat. 1376.


0
2. Redesignate Sec.  39.5 as Sec.  39.8 and add new Sec.  39.5 to read 
as follows:


Sec.  39.5  Review of swaps for Commission determination on clearing 
requirement.

    (a) Eligibility to clear swaps. (1) A derivatives clearing 
organization shall be presumed eligible to accept for clearing any swap 
that is within a group, category, type, or class of swaps that the 
derivatives clearing organization already clears. Such presumption of 
eligibility, however, is subject to review by the Commission.
    (2) A derivatives clearing organization that wishes to accept for 
clearing any swap that is not within a group, category, type, or class 
of swaps that the derivatives clearing organization already clears 
shall request a determination by the Commission of the derivatives 
clearing organization's eligibility to clear such a swap before 
accepting the swap for clearing. The request, which shall be filed 
electronically with the Secretary of the Commission, shall address the 
derivatives clearing organization's ability, if it accepts the swap for 
clearing, to maintain compliance with section 5b(c)(2) of the Act, 
specifically:
    (i) The sufficiency of the derivatives clearing organization's 
financial resources; and
    (ii) The derivative clearing organization's ability to manage the 
risks associated with clearing the swap, especially if the Commission 
determines that the swap is required to be cleared.
    (b) Swap submissions. (1) A derivatives clearing organization shall 
submit to the Commission each swap, or any group, category, type, or 
class of swaps that it plans to accept for clearing. The derivatives 
clearing organization making the submission must be eligible under 
paragraph (a) of this section to accept for clearing the submitted 
swap, or group, category, type, or class of swaps.
    (2) A derivatives clearing organization shall submit swaps to the 
Commission, to the extent reasonable and practicable to do so, by 
group, category, type, or class of swaps. The Commission may in its 
reasonable discretion consolidate multiple submissions from one 
derivatives clearing organization or subdivide a derivatives clearing 
organization's submission as appropriate for review.
    (3) The submission shall be filed electronically with the Secretary 
of the Commission and shall include:
    (i) A statement that the derivatives clearing organization is 
eligible to accept the swap, or group, category, type, or class of 
swaps for clearing and describes the extent to which, if the Commission 
were to determine that the swap, or group, category, type, or class of 
swaps is required to be cleared, the derivatives clearing organization 
will be able to maintain compliance with section 5b(c)(2) of the Act;
    (ii) A statement that includes, but is not limited to, information 
that will assist the Commission in making a quantitative and 
qualitative assessment of the following factors:
    (A) The existence of significant outstanding notional exposures, 
trading liquidity, and adequate pricing data;
    (B) The availability of rule framework, capacity, operational 
expertise and resources, and credit support infrastructure to clear the 
contract on terms that are consistent with the material terms and 
trading conventions on which the contract is then traded;
    (C) The effect on the mitigation of systemic risk, taking into 
account the size of the market for such contract and the resources of 
the derivatives clearing organization available to clear the contract;
    (D) The effect on competition, including appropriate fees and 
charges applied to clearing; and
    (E) The existence of reasonable legal certainty in the event of the 
insolvency of the relevant derivatives clearing organization or one or 
more of its

[[Page 44474]]

clearing members with regard to the treatment of customer and swap 
counterparty positions, funds, and property;
    (iii) Product specifications, including copies of any standardized 
legal documentation, generally accepted contract terms, standard 
practices for managing any life cycle events associated with the swap, 
and the extent to which the swap is electronically confirmable;
    (iv) Participant eligibility standards, if different from the 
derivatives clearing organization's general participant eligibility 
standards;
    (v) Pricing sources, models, and procedures, demonstrating an 
ability to obtain sufficient price data to measure credit exposures in 
a timely and accurate manner, including any agreements with clearing 
members to provide price data and copies of executed agreements with 
third-party price vendors, and information about any price reference 
index used, such as the name of the index, the source that calculates 
it, the methodology used to calculate the price reference index and how 
often it is calculated, and when and where it is published publicly;
    (vi) Risk management procedures, including measurement and 
monitoring of credit exposures, initial and variation margin 
methodology, methodologies for stress testing and back testing, 
settlement procedures, and default management procedures;
    (vii) Applicable rules, manuals, policies, or procedures;
    (viii) A description of the manner in which the derivatives 
clearing organization has provided notice of the submission to its 
members and a summary of any views on the submission expressed by the 
members (a copy of the notice to members shall be included with the 
submission); and
    (ix) Any additional information specifically requested by the 
Commission.
    (4) The Commission must have received the submission by the open of 
business on the business day preceding the acceptance of the swap, or 
group, category, type, or class of swaps for clearing.
    (5) The submission will be made available to the public and posted 
on the Commission Web site for a 30-day public comment period. A 
derivatives clearing organization that wishes to request confidential 
treatment for portions of its submission may do so in accordance with 
the procedures set out in Sec.  145.9(d) of this chapter.
    (6) The Commission will review the submission and determine whether 
the swap, or group, category, type, or class of swaps described in the 
submission is required to be cleared. The Commission will make its 
determination not later than 90 days after a complete submission has 
been received, unless the submitting derivatives clearing organization 
agrees to an extension. The determination of when such submission is 
complete shall be at the sole discretion of the Commission. In making a 
determination that a clearing requirement shall apply, the Commission 
may impose such terms and conditions to the clearing requirement as the 
Commission determines to be appropriate.
    (c) Commission-initiated reviews. (1) The Commission, on an ongoing 
basis, will review swaps that have not been accepted for clearing by a 
derivatives clearing organization to make a determination as to whether 
the swaps should be required to be cleared. In undertaking such 
reviews, the Commission will use information obtained pursuant to 
Commission regulations from swap data repositories, swap dealers, and 
major swap participants, and any other available information.
    (2) Notice regarding any determination made under paragraph (c)(1) 
of this section will be made available to the public and posted on the 
Commission Web site for a 30-day public comment period.
    (3) If no derivatives clearing organization has accepted for 
clearing a particular swap, group, category, type, or class of swaps 
that the Commission finds would otherwise be subject to a clearing 
requirement, the Commission will:
    (i) Investigate the relevant facts and circumstances;
    (ii) Within 30 days of the completion of its investigation, issue a 
public report containing the results of the investigation; and
    (iii) Take such actions as the Commission determines to be 
necessary and in the public interest, which may include requiring the 
retaining of adequate margin or capital by parties to the swap, group, 
category, type, or class of swaps.
    (d) Stay of clearing requirement. (1) After making a determination 
that a swap, or group, category, type, or class of swaps is required to 
be cleared, the Commission, on application of a counterparty to a swap 
or on its own initiative, may stay the clearing requirement until the 
Commission completes a review of the terms of the swap, or group, 
category, type, or class of swaps and the clearing arrangement.
    (2) A counterparty to a swap that wishes to apply for a stay of the 
clearing requirement for that swap shall submit a written request to 
the Secretary of the Commission that includes:
    (i) The identity and contact information of the counterparty to the 
swap;
    (ii) The terms of the swap subject to the clearing requirement;
    (iii) The name of the derivatives clearing organization clearing 
the swap;
    (iv) A description of the clearing arrangement; and
    (v) A statement explaining why the swap should not be subject to a 
clearing requirement.
    (3) A derivatives clearing organization that has accepted for 
clearing a swap, or group, category, type, or class of swaps that is 
subject to a stay of the clearing requirement shall provide any 
information requested by the Commission in the course of its review.
    (4) The Commission will complete its review not later than 90 days 
after issuance of the stay, unless the derivatives clearing 
organization that clears the swap, or group, category, type, or class 
of swaps agrees to an extension.
    (5) Upon completion of its review, the Commission may:
    (i) Determine, subject to any terms and conditions as the 
Commission determines to be appropriate, that the swap, or group, 
category, type, or class of swaps must be cleared; or
    (ii) Determine that the clearing requirement will not apply to the 
swap, or group, category, type, or class of swaps, but clearing may 
continue on a non-mandatory basis.

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

0
3. The authority citation for part 140 continues to read as follows:

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


0
4. In Sec.  140.94, revise paragraph (a)(5) and add new paragraph 
(a)(6) to read as follows:


Sec.  140.94  Delegation of authority to the Director of the Division 
of Clearing and Intermediary Oversight.

    (a) * * *
    (5) All functions reserved to the Commission in Sec.  5.14 of this 
chapter; and
    (6) All functions reserved to the Commission in Sec. Sec.  
39.5(b)(2) and (d)(3) of this chapter.
* * * * *


[[Page 44475]]


    Issued in Washington, DC, on July 19, 2011, by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Process for Review of Swaps for Mandatory Clearing--
Commission Voting Summary and Statements of Commissioners

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, Sommers, 
Chilton and O'Malia voted in the affirmative; no Commissioner voted in 
the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the final rulemaking to establish a process for the 
review and designation of swaps for mandatory clearing. One of the 
primary goals of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act was to lower risk by requiring standardized swaps to be 
centrally cleared. The final rule is consistent with the congressional 
requirement that derivatives clearing organizations be eligible to 
clear swaps and that the public has an opportunity for input before a 
swap is subject to mandatory clearing.

[FR Doc. 2011-18663 Filed 7-25-11; 8:45 am]
BILLING CODE 6351-01-P