[Federal Register Volume 76, Number 182 (Tuesday, September 20, 2011)]
[Proposed Rules]
[Pages 58176-58186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-24128]



[[Page 58176]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AC96; 3038-AC97


Swap Transaction Compliance and Implementation Schedule: Trading 
Documentation and Margining Requirements Under Section 4s of the CEA

AGENCY: Commodity Futures Trading Commission.

ACTION: Further notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing regulations that would establish a schedule to phase in 
compliance with previously proposed requirements, including the swap 
trading relationship documentation requirement under proposed 17 CFR 
23.504, 76 FR 6715 (Feb. 8, 2011) and the margin requirements for 
uncleared swaps under proposed 17 CFR 23.150 through 23.158, 76 FR 
23732 (Apr. 28, 2011). This release is a continuation of those 
rulemakings. The proposed schedules would provide relief in the form of 
additional time for compliance with these requirements. This relief is 
intended to facilitate the transition to the new regulatory regime 
established by the Dodd-Frank Act in an orderly manner that does not 
unduly disrupt markets and transactions. The Commission is requesting 
comment on the proposed compliance schedules, Sec. Sec.  23.175 and 
23.575, described in this release.

DATES: Submit comments on or before November 4, 2011.

ADDRESSES: For comments on proposed compliance schedule Sec.  23.175, 
you may submit comments identified by RIN number 3038-AC97 and Swap 
Transaction Compliance and Implementation Schedule: Trading 
Documentation and Margining Requirements under Section 4s of the 
Commodity Exchange Act (CEA). For comments on proposed compliance 
schedule Sec.  23.575, you may submit comments identified by RIN number 
3038-AC96 and Swap Transaction Compliance and Implementation Schedule: 
Trading Documentation and Margining Requirements under Section 4s of 
the CEA. Comments may be submitted by any of the following methods:
     Agency Web site, via its Comments Online process at http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Please submit your comments using only one method.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that may be exempt from disclosure under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the established procedures in 
Sec.  145.9 of the Commission's regulations, 17 CFR 145.9.
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Mark D. Higgins, Counsel, Office of 
the General Counsel, 202-418-5864, [email protected]; or Camden Nunery, 
Office of the Chief Economist, [email protected], 202-418-5723, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act).\1\ Title VII of 
the Dodd-Frank Act amends the CEA \2\ to establish a comprehensive new 
regulatory framework for swaps. The legislation was enacted to reduce 
risk, increase transparency, and promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and comprehensive regulation of swap dealers and major 
swap participants; (2) imposing clearing and trade execution 
requirements on standardized derivative products; (3) creating robust 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
rulemaking and enforcement authorities of the Commission with respect 
to, among others, all registered entities and intermediaries subject to 
the Commission's oversight.
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ 7 U.S.C. 1 et seq.
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    To implement the Dodd-Frank Act, the Commission has to-date issued 
55 advance notices of proposed rulemaking or notices of proposed 
rulemaking, two interim final rules, 12 final rules, and one proposed 
interpretive order. By the beginning of May 2011, the Commission had 
published in the Federal Register a significant number of notices of 
proposed rulemaking, which represented a substantially complete mosaic 
of the Commission's proposed regulatory framework under Title VII. In 
recognition of that fact and with the goal of giving market 
participants additional time to comment on the proposed new regulatory 
framework for swaps, either in part or as a whole, the Commission 
reopened or extended the comment period of many of its proposed 
rulemakings through June 3, 2011.\3\ In total, the Commission has 
received over 20,000 comments in response to its Dodd-Frank Act 
rulemaking proposals.
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    \3\ See Reopening and Extension of Comment Periods for 
Rulemakings Implementing the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, 76 FR 25274, May 4, 2011.
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    To give the public an opportunity to comment further on 
implementation phasing, on May 2-3, 2011, the Commission, along with 
the Securities and Exchange Commission (SEC), held a joint, two-day 
roundtable on issues related to implementation.\4\ In connection with 
this roundtable, Commission staff proposed thirteen concepts to be 
considered regarding implementation phasing, and staff asked a series 
of questions based on the concepts outlined.\5\ The Commission has 
received numerous comments in

[[Page 58177]]

response to both its roundtable and the staff concepts and 
questions.\6\
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    \4\ The transcripts from the roundtable are available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/csjac_transcript050311.pdf (``Day 1 Roundtable Tr.'') and http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/csjac_transcript050211.pdf (``Day 2 Roundtable Tr.'').
    \5\ See ``CFTC Staff Concepts and Questions Regarding Phased 
Implementation of Effective Dates for Final Dodd-Frank Rules,'' 
available at http://cftc.gov/ucm/groups/public/@newsroom/documents/file/staffconcepts050211.pdf.
    \6\ Such comments are available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1000.
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    These comments have come from a variety of existing and potential 
market infrastructures, such as clearinghouses, trading platforms, and 
swap data repositories. Comments also have come from entities that may 
potentially be swap dealers (SDs) or major swap participants (MSPs), as 
well as those financial entities that may not be required to register 
with the Commission, but whose swap transactions may have to be 
conducted in compliance with certain requirements under Section 4s of 
the CEA by virtue of their trading with registered SDs or MSPs. For 
example, the swap transactions between SDs or MSPs and their 
counterparties will be subject to certain documentation of trading and 
margining requirements as proposed by the Commission in ``Swap Trading 
Relationship Documentation Requirements for Swap Dealers and Major Swap 
Participants,'' 76 FR 6715 (Feb. 8, 2011),\7\ (hereinafter ``Trading 
Documentation'') and ``Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants,'' 76 FR 23732 (Apr. 28, 2011) 
(hereinafter ``Margin Requirements'').\8\
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    \7\ CFTC Docket 3038-AC96.
    \8\ CFTC Docket 3038-AC97.
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    One of the key themes to emerge from the comments received by the 
Commission is that some market participants may require more time to 
ensure that their swap transactions comply with certain new regulatory 
requirements that will apply when they enter into swap transactions 
with registered SDs and MSPs.\9\ For example, one commenter requested a 
``meaningful'' period after finalization of the suite of rulemakings 
that is applicable to it before actual compliance will be required.\10\ 
Similarly, several trade associations recommended the Commission allow 
``sufficient'' time for infrastructure and business practices to 
develop before requiring compliance with the new requirements.\11\ A 
group of international banks commented that the Commission should defer 
compliance until December 31, 2012, at which point the regulatory 
timetable as per the September 2009 G20 Pittsburgh statement will have 
reached a conclusion.\12\ Another commenter noted that some entities 
may be able to comply relatively quickly with certain documentation 
requirements that are largely consistent with current business 
practices while other requirements may need a longer implementation 
period.\13\ Although commenters varied in their recommendations 
regarding the time it would take to bring their swaps into compliance 
with the new regulatory requirements, many commenters agreed on phasing 
in compliance with these requirements by type of market participant 
based on a variety of factors, including a market participant's 
experience, resources, and the size and complexity of its 
transactions.\14\ The Commission has taken these comments into 
consideration in developing these proposed compliance schedules.
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    \9\ E.g., Letter from Electric Trade Association, dated May 4, 
2011 at 5; Letter from John R. Gidman, Association of Institutional 
Investors, dated June 10, 2011 at 3-4.
    \10\ Letter from the Coalition of Physical Energy Companies, 
dated Mar. 14, 2011 at 4.
    \11\ Letter from the Futures Industry Association, the Financial 
Services Forum, the International Swaps and Derivatives Association 
and the Securities Industry and Financial Markets Association, dated 
May 4, 2011 at 5.
    \12\ Letter from the Bank of Tokyo-Mitsubishi UFJ, Ltd., et al., 
dated May 6, 2011 at 6.
    \13\ Letter from the Financial Services Roundtable, dated May 
12, 2011 at 4.
    \14\ These comments are more fully discussed later in the 
preamble.
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    The swap transaction compliance requirements that are the focus of 
this proposed rulemaking include compliance with certain provisions of 
the Trading Documentation and Margin Requirements under Section 4s of 
the CEA.\15\ The Commission's proposed compliance schedules are 
designed to afford affected market participants a reasonable amount of 
time to bring their transactions into compliance with such 
requirements. The proposed schedules also would provide relief in the 
form of additional time for compliance with these transaction 
compliance requirements and are further explained below. This relief is 
intended to facilitate the transition to the new regulatory regime 
established by the Dodd-Frank Act in an orderly manner that does not 
unduly disrupt markets and transactions.
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    \15\ The Commission also is proposing Swap Transaction 
Compliance and Implementation Schedule: Clearing and Trade Execution 
Requirements under Section 2(h) of the CEA.
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    Under this further notice of proposed rulemaking, the Commission is 
seeking additional public comment on proposed compliance schedules that 
ultimately would be included in final rules regarding Trading 
Documentation and Margin Requirements.\16\ The proposed schedules would 
be finalized and become effective at such time as the final Trading 
Documentation and Margin Requirement rules were published in the 
Federal Register.
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    \16\ This release should be considered to be a continuation of 
the rulemaking undertaken by CFTC Dockets 3038-AC96 and 3038-AC97. 
Only comments pertaining to the proposed compliance schedule will be 
considered as part of this Further Notice.
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II. Proposed Regulation

A. Authority To Implement Proposed Regulations

    In this further notice of proposed rulemaking, the Commission 
relies on its general authority to phase in compliance with the rules 
and regulations enacted pursuant to the Dodd-Frank Act. Section 712(f) 
of Title VII also authorizes the Commission to promulgate rules to 
prepare for the effective dates of the provisions of the Dodd-Frank 
Act.\17\ In addition, the Commission relies on Section 8(a)(5) of the 
CEA, which authorizes the Commission to promulgate such regulations as, 
in the judgment of the Commission, are reasonably necessary to 
effectuate any of the provisions or to accomplish any of the purposes 
of the CEA. In accordance with this authority, the proposed regulations 
would amend part 23 of the Commission's regulations to phase compliance 
with previously proposed rules related to Trading Documentation and 
Margin Requirements under Section 4s of the CEA.
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    \17\ Section 712(f) of the Dodd-Frank Act states: ``Beginning on 
the date of enactment of this Act and notwithstanding the effective 
date of any provision of this Act, the [Commission] * * * may, in 
order to prepare for the effective dates of the provisions of this 
Act--(1) promulgate rules, regulations, or orders permitted or 
required by this Act * * *.''
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B. Implementation Phasing of Trading Documentation Under Section 4s(i) 
of the CEA

1. Background on the Trading Documentation Requirement
    Section 731 of the Dodd-Frank Act added a new Section 4s(i)(2) to 
the CEA that requires the Commission to adopt rules governing 
documentation standards for SDs and MSPs. As described in Section 
4s(i)(1), these documentation standards, as prescribed by the 
Commission, ``relate to the timely and accurate confirmation, 
processing, netting, documentation, and valuation of all swaps.'' On 
January 13, 2011, the Commission proposed regulations related to the 
Trading Documentation that SDs and MSPs must enter into with their 
counterparties in order to establish a swap trading relationship and 
document the swap transactions that occur pursuant to that 
relationship.\18\
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    \18\ See Swap Trading Relationship Documentation Requirements 
for Swap Dealers and Major Swap Participants, 76 FR 6715, Feb. 8, 
2011.

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    Specifically, previously proposed Sec.  23.504(a) would require SDs 
and MSPs to establish, maintain, and enforce written policies and 
procedures designed to ensure that each SD or MSP and its counterparty 
agree in writing to all terms of their swap trading relationship and 
have executed all agreements required by the rules.\19\ The proposal 
also would address the essential documentation needed to establish a 
trading relationship with a registered SD or MSP. Proposed Sec.  
23.504(b)(1) would require that the trading documentation include 
written agreement by the parties on terms relating to payment 
obligations, netting of payments, events of default or other 
termination events, netting of obligations upon termination, transfer 
of rights and obligations, governing law, valuation, and dispute 
resolution procedures.\20\ Proposed Sec.  23.504(b)(2) would establish 
that all confirmations of swap transactions, as required under proposed 
Sec.  23.501, would be considered to be part of the required swap 
trading relationship documents.\21\
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    \19\ 76 FR at 6725.
    \20\ 76 FR at 6726. In large part, proposed Sec.  23.504(b)(1) 
reflects existing trading relationship documentation between 
counterparties, such as the widely-used ISDA Master Agreement, but 
does propose additional documentation requirements.
    \21\ 76 FR at 6717 and 6726. In particular, under proposed Sec.  
23.504(b)(2) parties must document the confirmation of their swap 
transactions. The Commission proposed the timing requirements for 
confirmation under Sec.  23.501 in Confirmation, Portfolio 
Reconciliation, and Portfolio Compression Requirements for Swap 
Dealers and Major Swap Participants, 75 FR 81519, Dec. 28, 2010. 
However, the writing necessary for confirmation is required pursuant 
to Sec.  23.504(b)(2) and was proposed under the Trading 
Documentation rules.
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    Proposed Sec.  23.504(b)(3) would require that the trading 
documentation include documentation of the credit support arrangements 
between the counterparties. These arrangements would include the 
counterparties' agreement on initial and variation margin 
requirements,\22\ the types of assets that may be used as margin, and 
the investment and rehypothecation terms for those assets. The proposal 
also would include the custodial arrangements for margin assets, 
including whether margin assets are to be segregated with an 
independent third party in accordance with Section 4s(l) of the 
CEA.\23\
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    \22\ See section II.C below for further discussion of Margin 
Requirements. Proposed Sec.  23.504(b)(3)(i)-(iii) is intended to 
work together with, and serve as a cross-reference to, rules 
proposed by the Commission in its Margin Requirements proposal, 
Sec.  23.151 (76 FR at 23744), as well as rules proposed by the 
prudential regulators related to initial and variation margin 
requirements for SDs and MSPs that are banks. See Margin and Capital 
Requirements for Covered Swap Entities, 76 FR 27564, 27589, May 11, 
2011 (proposing Sec.  --.5 relating to documentation of margin 
matters). While proposed Sec.  23.504 would apply to all SDs and 
MSPs registered with the Commission, the specific initial and 
variation margin requirements for SDs or MSPs would depend on 
whether the entity has a prudential regulator as that term is 
defined under Section 1a(39) of the CEA.
    \23\ As explained in the preamble to the Trading Documentation 
proposal, proposed Sec.  23.504(b)(3)(iii) and (iv) are intended to 
work together with rules proposed under section 4s(l) of the CEA. 76 
FR at 6718 (citing Protection of Collateral of Counterparties to 
Uncleared Swaps; Treatment of Securities in a Portfolio Margining 
Account in a Commodity Broker Bankruptcy, 75 FR 75432, Dec. 3, 
2010). Accordingly, documentation of the collateral arrangements 
required under proposed Sec.  23.601-603 would be included in the 
trading documentation required under Sec.  23.504. Previously 
proposed Sec.  23.601 requires that the SD and MSP notify each 
counterparty of the counterparty's right to elect for segregation of 
the collateral it supplies as initial margin. Previously proposed 
Sec.  23.602 sets forth requirements for the treatment of segregated 
margin, including the use of an independent custodian and the 
requirement for a written agreement that includes the custodian as a 
party, and also allows for the SD or MSP to agree in writing with 
its counterparty that variation margin may also be held in a 
segregated account. Previously proposed Sec.  23.603 relates to the 
investment and use of collateral.
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    Proposed Sec.  23.504(b)(4) would require that a SD or MSP and its 
counterparty agree on how they will value each swap transaction into 
which they enter from the point of execution until the termination, 
maturity, or expiration of the swap.\24\ Proposed Sec.  23.504(b)(6) 
would establish certain documentation requirements for bilaterally-
executed swaps that are subsequently submitted for clearing to a DCO. 
Finally, proposed Sec.  23.504(b)(5), the subject of a separate notice 
of proposed rulemaking,\25\ would require that a SD or MSP and its 
counterparty include in their Trading Documentation ``a provision that 
confirms both parties' understanding of how the new orderly liquidation 
authority under the Title II of the Dodd-Frank Act and the Federal 
Deposit Insurance Act may affect their portfolios of uncleared, 
bilateral swaps.'' \26\
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    \24\ 76 FR at 6719. The valuation that would be established 
under Sec.  23.504(b)(4) is relied upon in the Margin Requirements 
rule Sec.  23.156(b)(1) as the basis for calculating variation 
margin. Similar valuation provisions also were included by the 
prudential regulators in their Margin and Capital Requirements 
proposal. See 76 FR 27589.
    \25\ Orderly Liquidation Termination Provision in Swap Trading 
Relationship Documentation for Swap Dealers and Major Swap 
Participants, 76 FR 6708, Feb. 8, 2011.
    \26\ 76 FR at 6709.
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    The audit, recordkeeping, and reporting provisions of proposed 
Sec.  23.504(c), (d), and (e) that were proposed by the Commission at 
the same time as proposed Sec.  23.504(a) and (b) would not be subject 
to the compliance schedule proposed below because the Commission 
believes that compliance with those requirements rests solely with 
registered SDs and MSPs and would not require that SDs or MSPs work 
with their non-registrant counterparties to comply with these 
requirements.\27\ The Commission solicits comment on whether the 
compliance schedule should be applied to these provisions as well. The 
Commission also solicits comment regarding whether the compliance 
schedule should be applied to proposed Sec.  23.505, which relates to 
end-user exception documentation.
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    \27\ While the compliance schedule proposed in this release 
would not apply to these provisions, the compliance dates for SDs 
and MSPs to come into compliance with these provisions will be taken 
up when the Commission adopts final rules.
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    The Commission observes that before swap dealers and major swap 
participants could be required to comply with Sec.  23.504, the 
Commission must adopt final rules related to confirmation of swap 
transactions \28\ and the protection of collateral for uncleared 
swaps.\29\ This is because the substance of the required documentation 
under proposed Sec.  23.504 is found in those two rulemakings. For this 
reason, the Commission anticipates that it will finalize the 
confirmation and protection of collateral proposals at approximately 
the same time that it finalizes the Trading Documentation rule. 
Consequently, the compliance schedules proposed under this release 
would not become effective until the Commission finalizes those two 
proposals in addition to the Trading Documentation rule.\30\
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    \28\ Confirmation, Portfolio Reconciliation, and Portfolio 
Compression Requirements for Swap Dealers and Major Swap 
Participants, 75 FR 81519, Dec. 28, 2010. The Commission notes that 
rules related to portfolio reconciliation (Sec.  23.502) and 
portfolio compression (Sec.  23.503) were not cross-referenced in 
the Trading Documentation rule and would not be required to be 
included in the counterparties' primary trading relationship 
documentation. However, if the Commission finalizes those 
requirements at the same time as the Trading Documentation rule 
parties may, in their discretion, include documentation establishing 
compliance with such provisions in their primary documentation, if 
applicable.
    \29\ Protection of Collateral of Counterparties to Uncleared 
Swaps; Treatment of Securities in a Portfolio Margining Account in a 
Commodity Broker Bankruptcy, 75 FR 75432, Dec. 3, 2010.
    \30\ In promulgating final rules regarding the timing of 
confirmation by SDs, MSPs, and their counterparties, the Commission 
will ensure that compliance with the final confirmation requirements 
work together with the compliance schedule as proposed under this 
release.
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    In addition, the Commission recognizes that the swap transaction 
compliance schedules that are the subject of this proposal reference 
terms such as ``swap,'' ``swap dealer,'' and ``major swap participant'' 
that are the subject of rulemaking under sections 712(d)(1) and 721(c) 
of the Dodd-Frank

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Act.\31\ The Commission and the SEC have proposed rules that would 
further define each of these terms.\32\ As such, and in a manner 
consistent with the temporary relief provided in the Commission's 
Effective Date Order,\33\ the Commission must adopt final rules 
regarding the further definitions in question prior to requiring 
compliance with the Trading Documentation rule.
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    \31\ Section 712(d)(1) provides: ``Notwithstanding any other 
provision of this title and subsections (b) and (c), the Commodity 
Futures Trading Commission and the Securities and Exchange 
Commission, in consultation with the Board of Governors [of the 
Federal Reserve System], shall further define the terms `swap', 
`security-based swap', `swap dealer', `security-based swap dealer', 
`major swap participant', `major security-based swap participant', 
and `security-based swap agreement' in section 1a(47)(A)(v) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)(A)(v)) and section 3(a)(78) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(78)).'' 
Section 721(c) provides: ``To include transactions and entities that 
have been structured to evade this subtitle (or an amendment made by 
this subtitle), the Commodity Futures Trading Commission shall adopt 
a rule to further define the terms `swap', `swap dealer', `major 
swap participant', and `eligible contract participant'.''
    \32\ Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant,'' and ``Eligible Contract Participant''; Proposed 
Rule, 75 FR 80174, Dec. 21, 2010 and Further Definition of ``Swap,'' 
``Security-Based Swap,'' and ``Security-Based Swap Agreement''; 
Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 76 FR 
29818, May 23, 2011.
    \33\ See Effective Date for Swap Regulation, 76 FR 42508, Jul. 
19, 2011.
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    Lastly, the Commission must adopt final rules relating to the 
registration, including procedures for the provisional registration, of 
SDs and MSPs.\34\ The finalization of these rules would enable SDs and 
MSPs to register with the Commission. As explained in the preamble to 
the proposed registration rule for SDs and MSPs, the Commission would 
afford SDs and MSPs an overall phased implementation approach with 
regard to the specific requirements under Section 4s (the ``Section 4s 
Requirements'').\35\ In other words, SDs and MSPs would be able to 
provisionally register with the Commission and come into compliance 
with the Section 4s Requirements within the compliance deadlines set 
forth in the respective final implementing rulemakings.\36\ The 
specific compliance schedules proposed in this release comport with the 
approach discussed in the proposed registration rules.
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    \34\ Registration of Swap Dealers and Major Swap Participants, 
75 FR 71379, Nov. 23, 2010.
    \35\ The Section 4s Requirements include capital and margin, 
reporting and recordkeeping, daily trading records, business conduct 
standards, documentation standards, risk management and trading 
duties, designation of a chief compliance officer, and segregation 
with regard to uncleared swaps. 75 FR at 71380.
    \36\ In accordance with the preamble to the Registration 
proposal, the Commission anticipates finalizing other Section 4s 
Requirements, such as those rules proposed under Section 4s(e) 
(capital requirements), Section 4s(f) (reporting and recordkeeping), 
Section 4s(g) (daily trading records), Section 4s(h) (business 
conduct standards), Section 4s(j) (duties, including trading, risk 
management, disclosure of information, conflicts of interest, and 
antitrust considerations), and Section 4s(k) (designation of a chief 
compliance officer), and providing for specific compliance deadlines 
in the respective final implementing rulemakings based on the 
extensive public comment already received.
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    Another proposed rule under Section 4s of the CEA indicated that 
certain requirements could be met through the use of swap trading 
relationship documentation (e.g., in the ISDA master agreement). The 
disclosure and documentation requirements proposed under the ``Business 
Conduct Standards for Swap Dealers and Major Swap Participants With 
Counterparties'' rulemaking \37\ could be included in Trading 
Documentation at the discretion of the SD or MSP and its counterparty. 
However, there is no express requirement under either the proposed 
Business Conduct Standards with Counterparties rules or proposed Sec.  
23.504 that the proposed disclosure and documentation requirements be 
included in the Trading Documentation. For that reason, issues related 
to compliance dates for the Business Conduct Standards with 
Counterparties rules will be taken up when finalizing that proposal.
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    \37\ 75 FR 80638, Dec. 22, 2010.
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2. Compliance Schedule for Documentation Requirements--Sec.  23.575
    As stated above, the Commission is proposing a compliance schedule, 
Sec.  23.575, that is specific to the documentation requirements of 
proposed Sec.  23.504. Under the proposed compliance schedule in Sec.  
23.575, an SD or MSP would be afforded ninety (90), one hundred eighty 
(180), or two hundred and seventy (270) days to bring its Trading 
Documentation with its various counterparties into compliance with the 
requirements of proposed Sec.  23.504, depending on the identity of 
each such counterparty. The categorization by type of counterparty is 
discussed further below.
    As a practical matter, in order for SDs and MSPs to comply with the 
requirements of proposed Sec.  23.504, they will need to work with each 
of their counterparties, including non-registrants, to review, 
negotiate, execute, and deliver the documentation required by proposed 
Sec.  23.504. Because every bilateral swap transaction has two 
counterparties, if a non-registrant is trading with a registered SD or 
MSP, the swap transactions entered into by those two parties would be 
subject to the new regulatory regime established by Section 4s of 
CEA.\38\ For this reason, the Commission is focusing on phasing swap 
transaction compliance.
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    \38\ Recognizing this reality, the Commission previously 
proposed rules under which SDs and MSPs would have policies and 
procedures to bring their transactions with all their counterparties 
into compliance with the requirements of Section 4s(i) of the CEA.
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    The Commission recognizes that a number of new regulations under 
Section 4s will apply to swap transactions where the counterparty to an 
SD or MSP is not registered with the Commission. In such cases, the 
Commission is affording more time for those transactions to be brought 
into compliance with the new regulations. Moreover, registered SDs or 
MSPs may require additional time to bring their transactions into 
compliance with respect to non-registrant counterparties that have 
hundreds or thousands of managed accounts, referred to as third-party 
subaccounts for the purposes of this proposal.
    In many instances, as noted in the proposing release for Sec.  
23.504, counterparties already will have in place industry standard 
documentation in the form of the widely-used ISDA master agreement, 
definitions, schedules, confirmations, and credit support annex to 
document their trades. The Commission anticipates that some of this 
existing documentation will meet some of the requirements of proposed 
Sec.  23.504. However, it may be necessary for parties to negotiate 
certain amendments or additional documentation to comply with the new 
rules. In these instances, and in instances where counterparties have 
not previously documented their trading relationship and/or individual 
transactions, the Commission proposes to afford relief in the form of 
additional time to comply.

C. Implementation Phasing of the Margin Documentation Requirements 
Under Section 4s(e) of the CEA

1. Background on the Margin for Uncleared Swaps Requirements
    Section 731 of the Dodd-Frank Act added a new Section 4s(e) to the 
CEA that explicitly requires the Commission to adopt rules establishing 
margin requirements for all registered SDs and MSPs that are not 
banks.\39\ Under

[[Page 58180]]

Section 4s(e)(2)(B), the Commission is required to adopt rules for non-
bank SDs and MSPs imposing ``both initial and variation margin 
requirements on all swaps that are not cleared by a registered 
derivatives clearing organization.''
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    \39\ Section 4s(e) applies a bifurcated approach that requires 
each SD and MSP for which there is a prudential regulator to meet 
margin requirements established by the applicable prudential 
regulator, and each SD and MSP for which there is no prudential 
regulator to comply with Commission's regulations governing margin.
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    On April 28, 2011, the Commission issued proposed regulations to 
implement the margin requirements for uncleared swaps for SDs and MSPs 
for which there is no prudential regulator (referred to as ``covered 
swap entities'' or ``CSEs'' under the proposal).\40\ The proposed 
Margin Requirements recognized that specific margin requirements would 
vary by the type of counterparty entering into a swap with a CSE. For 
instance, the proposed rules would not impose any margin requirements 
on swaps between CSEs and non-financial end users.\41\
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    \40\ Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 75 FR 23732, Apr. 28, 2011.
    \41\ 76 FR at 23734.
---------------------------------------------------------------------------

    The provisions of the proposed Margin Requirements include 
definitions (Sec.  23.150), documentation regarding credit support 
arrangements (Sec.  23.151), the specific margin requirements between 
CSEs and their counterparties (Sec. Sec.  23.152-23.154), provisions 
for the calculation of initial margin (Sec.  23.155), provisions for 
the calculation of variation margin (Sec.  23.156), requirements for 
the forms of margin (Sec.  23.157), and custodial arrangement 
requirements (Sec.  23.158). Specific margin requirements vary by the 
type of counterparty with which a CSE is trading--another SD or MSP 
\42\ (Sec.  23.152), a financial entity (Sec.  23.153), or a non-
financial entity (Sec.  23.154).
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    \42\ In some instances this SD or MSP counterparty may be 
subject to regulation by a prudential regulator. The margin rules 
proposed by the Commission and those proposed by the prudential 
authorities require any CSE to collect margin, but do require a CSE 
to post margin. Under this approach, a non-bank SD or MSP will look 
to the Commission's rules when calculating the margin that should be 
collected from its counterparty, and a bank SD or MSP will look to 
the prudential regulators' rules when calculating the margin that 
should be collected from its counterparty. As a result, in a trade 
between a bank SD and a non-bank SD, the initial margin amounts 
collected by each side could differ depending on the applicable 
rules.
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    As explained above with regard to the Trading Documentation rules, 
the Commission observes that no CSE could be required to comply with 
final Margin Requirements rules until (1) the Commission adopts further 
definitions of ``swap,'' ``swap dealer,'' and ``major swap 
participant''; and (2) the Commission adopts registration rules for SDs 
and MSPs. As noted above, the proposed Margin Requirements cross-
reference certain provisions in the Trading Documentation rule. As a 
result, the final Trading Documentation rule would have to be published 
in the Federal Register prior to requiring compliance with the final 
Margin Requirements.\43\
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    \43\ The Commission's proposed capital rules for SDs and MSPs 
are related to the proposed Margin Requirements rules, but the 
margin rules are not dependent on implementation of the capital rule 
in order to take effect.
---------------------------------------------------------------------------

2. Compliance Schedule for Margin Requirements Documentation--Sec.  
23.175
    In this further notice of proposed rulemaking, the Commission is 
proposing a compliance schedule, Sec.  23.175, that is specific to the 
Margin Requirements of proposed Sec.  23.150 through Sec.  23.158. 
Under the proposed Margin Requirements, an SD or MSP for which there is 
no prudential regulator, is defined as a ``covered swap entity.'' For 
consistency, this term also would be used in the proposed compliance 
schedule. In order to achieve compliance with the Margin Requirement, a 
CSE would be required to execute documentation regarding credit support 
arrangements and custodial arrangements with its counterparties. This 
documentation, required by proposed Sec.  23.151 and Sec.  23.158, 
would specify in advance material terms such as how margin would be 
calculated, what types of assets would be permitted to be posted, what 
margin thresholds, if any, would apply, and where margin would be held. 
As stated in the proposal, having comprehensive documentation in place 
at the time of transaction execution would allow each party to a swap 
to manage its risks more effectively throughout the life of the swap 
and to avoid disputes regarding issues such as valuation.\44\
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    \44\ 76 FR 23734. As stated in the proposal, margining 
requirements would also apply to swaps where one side of the trade 
is not registered with the Commission. 76 FR 23732-36.
---------------------------------------------------------------------------

    Under the proposed compliance schedule, a covered swap entity would 
be afforded ninety (90), one hundred eighty (180), or two hundred and 
seventy (270) days (depending on the identity of its counterparty) to 
come into compliance with all of the Margin Requirements. The 
categorization by type of counterparty is discussed further below.

D. Three-Part Implementation Phasing

    The Commission believes that it is in the public interest to afford 
SDs and MSPs over which the Commission has jurisdiction relief in the 
form of additional time to comply with proposed rules related to 
Trading Documentation (Sec.  23.504) and Margin Requirements (Sec.  
23.150-23.158), depending on the type of counterparty with which the SD 
or MSP is trading.
    These proposed compliance schedules, Sec. Sec.  23.575 and 23.175, 
seek to achieve the best balance among several goals. First, the 
Commission believes that SDs or MSPs may require additional time to 
work with certain market participants to bring their swaps into 
compliance with the new requirements of proposed Trading Documentation 
(Sec.  23.504) and Margin Requirements (Sec.  23.150-23.158). This is 
particularly true for those market participants that have hundreds or 
thousands of managed accounts, referred to as third-party subaccounts 
for the purposes of this proposal.
    As one commenter noted, ``[i]n the context of asset managers, the 
account set up process has to be multiplied over hundreds of 
subaccounts. Processing all of these subaccounts will take time even 
for the largest and most technologically advanced asset managers.'' 
\45\ In light of this, the Commission is proposing to afford SDs and 
MSPs with additional time to come into compliance with the requirements 
of Trading Documentation (Sec.  23.504) and Margin Requirements (Sec.  
23.150-23.158) for swaps involving entities that are defined as 
``third-party subaccounts'' because of the additional burden associated 
with documenting such accounts.
---------------------------------------------------------------------------

    \45\ Letter from Karrie McMillan, Investment Company Institute, 
dated June 10, 2011at 9-10.
---------------------------------------------------------------------------

    Moreover, several commentators emphasized the need to have adequate 
time to educate their clients regarding the new regulatory 
requirements.\46\ For instance, market participants that may not be 
registered with the Commission would be less familiar with the new 
regulatory requirements. In addition, market participants with third-
party subaccounts would have to educate additional clients. 
Accordingly, swaps involving either type of participant should be given 
additional time to comply with the new requirements.
---------------------------------------------------------------------------

    \46\ See Letter from Financial Services Forum, Futures Industry 
Association, International Swaps and Derivatives Association, and 
Securities Industry Association, dated May 4, 2011; Letter from 
Karrie McMillan, Investment Company Institute, dated June 10, 2011 
at 10-11.
---------------------------------------------------------------------------

    Another goal of the proposed compliance schedule is derived from 
the Commission's belief that it is important to have a cross-section of 
market participants involved at the outset of implementing the 
requirements under Trading Documentation (Sec.  23.504) and Margin

[[Page 58181]]

Requirements (Sec. Sec.  23.150-23.158). Accordingly, the Commission 
proposes that the first phase of implementation include SDs, MSPs and 
``active funds'' (a term that is defined and discussed further below) 
that are experienced, have the resources, and can come into compliance 
more readily than entities that trade swaps less frequently. The 
Commission believes that having a cross-section of market participants 
involved at the outset will facilitate the development of systems 
necessary for SDs and MSPs to achieve compliance with the new 
requirements.
    The Commission proposes a compliance schedule that affords 
additional time for SDs and MSPs to come into compliance with the 
requirements of Trading Documentation (Sec.  23.504) and Margin 
Requirements (Sec. Sec.  23.150-23.158) based on the type of 
counterparty with which they are trading. Market participants that are 
financial entities, as defined in Section 2(h)(7)(C) of the CEA, are 
grouped into the following four categories:
     Category 1 Entities include swap dealers, security-based 
swap dealers, major swap participants, major security-based swap 
participants, or active funds.
     Category 2 Entities include commodity pools; private funds 
as defined in Section 202(a) of the Investment Advisors Act of 1940 
other than active funds; employee benefit plans identified in 
paragraphs (3) and (32) of section 3 of the Employee Retirement Income 
and Security Act of 1974; or persons predominantly engaged in 
activities that are in the business of banking, or in activities that 
are financial in nature as defined in Section 4(k) of the Bank Holding 
Company Act of 1956, provided that the entity is not a third-party 
subaccount.
     Category 3 Entities include Category 2 Entities whose 
positions are held as third-party subaccounts.
     Category 4 Entities includes any person not included in 
Categories 1, 2, or 3.
Phase 1--Category 1 Entities
    Category 1 Entities include those dealers and major participants in 
the swap and security-based swap markets that will be required to 
register with the Commission or the Securities and Exchange Commission 
(SEC).\47\ Under Title VII, these market participants will be required 
to register with either the CFTC or SEC as a result of their swaps or 
security-based swaps activities. Based on their level of market 
experience, and based on their status as registrants, the Commission 
believes they should be capable of complying with proposed Trading 
Documentation (Sec.  23.504) and Margin Requirements (Sec. Sec.  
23.150-23.158) no later than 90 days from the date of adoption of final 
rules.
---------------------------------------------------------------------------

    \47\ If a security-based swap dealer or a major security-based 
swap participant is not yet required to register with the SEC at 
such time as the Commission issues final rules Sec.  23.504 or 
Sec. Sec.  23.150-23.158, then the security-based swap dealer or a 
major security-based swap participant would be treated as a Category 
2 Entity.
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    The Commission also is proposing to include those entities it 
defines as ``active funds'' in the first category of market 
participants. The proposed definition of ``active fund'' would mean any 
private fund as defined in section 202(a) of the Investment Advisors 
Act of 1940, that is not a third-party subaccount and that executes 20 
or more swaps per month based on a monthly average over the 12 months 
preceding the publication of either Sec.  23.504 or Sec. Sec.  23.150-
23.158, as applicable.\48\ By including these entities in Category 1, 
the Commission seeks to achieve the goal of ensuring a cross-section of 
market participants are included at the outset of trading and margining 
documentation implementation.
---------------------------------------------------------------------------

    \48\ It should be noted that many commodity pools meet the 
definition of private fund under section 202(a) of the Investment 
Advisors Act of 1940. Such a commodity pool would only be a Category 
1 Entity if it met the other criteria of an active fund.
---------------------------------------------------------------------------

    The Commission is relying on the definition of private fund from 
Section 2(h)(7)(C) of the CEA, as well as Section 402 of the Dodd-Frank 
Act. However, the Commission is limiting the definition in two ways. 
First, the definition excludes third-party subaccounts, as discussed 
further below. Second, the definition is limited to those private funds 
that execute 20 or more swaps per month based on the average over the 
12 months preceding either (1) the Commission's adoption of Sec.  
23.150 through Sec.  23.158 in the case of Sec.  23.175; or (2) the 
Commission's adoption of Sec.  23.504 in the case of Sec.  23.575. 
Based on a preliminary assessment, the Commission believes the proposed 
numerical threshold for active funds is appropriate because a private 
fund that conducts this volume of swaps would be likely to have: (1) 
Sufficient resources to enter into arrangements that comply with the 
Trading Documentation and Margin Requirements earlier than other types 
of market participants; and (2) sufficient market experience to 
contribute meaningfully to the ``buy-side'' perspective as industry 
standards are being developed.\49\ In defining ``active fund'' 
accordingly, the Commission believes it has included those market 
participants that are likely to be among the most experienced 
participants with expertise and resources needed to come into 
transaction compliance quickly.
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    \49\ The Commission is unaware of any position-level or 
transaction-level data on private fund swap activity in a publicly 
available form. In order to determine private fund activity levels 
the Commission consulted with academics focusing their research in 
this area, with industry participants, and with groups that 
represent the industry.
---------------------------------------------------------------------------

Phase 2--Category 2 Entities
    Next, the Commission proposes to phase in compliance for any swap 
transaction between an SD or MSP and a Category 2 Entity. The 
Commission is proposing to afford swap transactions between these types 
of market participants 180 days from the dates of adoption of Trading 
Documentation (Sec.  23.504) and Margin Requirements (Sec. Sec.  
23.150-23.158) to come into compliance. This additional time takes into 
consideration the fact that Category 2 Entities will not be required to 
be registered with the Commission and they may be less experienced and 
less frequent users of the swap markets than those in Category 1. 
Additionally, these financial entities may not have the same level of 
resources to review, analyze, negotiate, and enter into arrangements 
that comply with the new Trading Documentation and Margin Requirements 
as those in Category 1.
Phase 3--Category 3 and 4 Entities
    Finally, the Commission proposes to afford an SD or MSP trading 
with a Category 3 or 4 Entity 270 days from adoption of final rules 
relating to Trading Documentation (Sec.  23.504) and Margin 
Requirements (Sec. Sec.  23.150-23.158) to enter into arrangements that 
comply with the new rules.
    The Commission is proposing to afford SDs and MSPs with additional 
time to work with entities that are defined as ``third-party 
subaccounts'' to bring their documentation into compliance. Under the 
proposed definition, a third-party subaccount is a managed account that 
requires specific approval by the beneficial owner of the account to 
execute documentation necessary for executing, confirming, margining, 
or clearing swaps. By way of non-exclusive example, if investment 
management firm X manages the assets of pension fund Y, and does so in 
a separate account that requires the approval of pension fund Y to 
execute necessary documentation, then that account would be afforded 
270 days to come into compliance. On the other hand, if pension fund Y 
manages its own assets, it would fall within

[[Page 58182]]

Category 2 and be afforded 180 days to come into compliance. Likewise, 
if investment management firm X does not manage the assets of third 
parties, then it would fall within Category 2. The Commission is 
proposing to afford Category 3 an additional 90 days beyond the 180 
days proposed for Category 2 because such entities may have 
documentation obligations for hundreds or even thousands of third-party 
subaccounts, and each such account must meet the requirements of 
Trading Documentation (Sec.  23.504) and Margin Requirements 
(Sec. Sec.  23.150-23.158). For example, according to a statement made 
during the Joint SEC-CFTC Roundtable by Mr. William DeLeon of the firm 
Pacific Investment Management Company, LLC (PIMCO), PIMCO manages 
hundreds of third-party subaccounts, as defined above.\50\
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    \50\ Day-2 Roundtable Tr. at 62.
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    The Commission is proposing to afford an SD or MSP trading with any 
other person (defined as a Category 4 Entity) 270 days to enter into 
arrangements that comply with the new rules.
    The Commission stresses that nothing would prohibit any person from 
complying in advance of the proposed compliance schedule. Indeed, the 
Commission would encourage market participants that can come into 
compliance more quickly to do so.

E. Comment Requested

    The Commission requests comment on all aspects of the proposed 
compliance schedules, Sec. Sec.  23.175 and 23.575. The Commission may 
consider alternatives to the proposed compliance schedules and is 
requesting comment on the following questions:
     What, if any, other rules should have been taken into 
consideration when proposing an implementation schedule regarding 
margin or documentation requirements? If applicable, how should the 
implementation requirements of those other rules be taken into 
consideration?
     What factors, if any, would prevent an entity in any of 
the proposed categories from adhering to the compliance schedules 
proposed by the Commission? How much additional time would be needed to 
address these factors?
     Are there other considerations that the Commission should 
have taken into account when designing this tiered implementation 
schedule? Are the timeframes outlined in this implementation schedule 
adequate? If not, what alternative schedule should the Commission 
consider, and why?
     What other entities, if any, should be included in 
Category 1, 2, or 3, and why?
     What adjustments to the compliance schedule and/or other 
steps could the Commission take to ensure there is adequate 
representation from all market participants at the outset of 
implementing the requirements under Trading Documentation (Sec.  
23.504) and Margin Requirements (Sec. Sec.  23.150-23.158)?
     Is an entity's average monthly swap transaction activity a 
useful proxy for that entity's ability to comply with the Trading 
Documentation and Margin Requirements? Or whether an entity is required 
to be registered with the Commission (rather than whether an entity is 
already registered with the Commission)?
     Is the Commission's definition of ``active fund'' overly 
inclusive or under-inclusive? Should the numerical threshold for number 
of monthly swap transactions be higher or lower than 20? If so, why? 
Should the number of monthly swap transactions be linked to swap 
activity in a particular asset class?
     Should the Commission exclude from the definition of 
``active fund'' any investment advisor of private funds acting solely 
as an advisor to private funds with assets under management in the 
United States of less than $150,000,000, as provided for in the 
reporting exemption for private funds under Section 408 of the Dodd-
Frank Act?
     Would it be more appropriate for the Commission to measure 
a market participant's level of swap activity by measuring notional 
turnover and/or open exposure as suggested by some commenters? \51\
---------------------------------------------------------------------------

    \51\ Letter from Adam C. Cooper, Citadel, dated June 3, 2011, 
Appendix B.
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     Are there any anticompetitive implications to the proposed 
compliance schedules? If so, how could the proposed rules be 
implemented to achieve the purposes of the CEA in a less 
anticompetitive manner? If so, please quantify those costs, if 
possible, and provide underlying data sources, assumptions, and 
calculations.
     Are there additional costs or benefits associated with the 
current proposal that the Commission has not already taken into 
account? Please discuss any such costs in detail and quantify in dollar 
terms, if possible.
     Are there any assumptions, including quantitative 
assumptions, underlying the Commission's cost benefit analysis that the 
Commission should consider?
     Should the Commission consider an alternative 
implementation schedule? Would such an alternative schedule reduce the 
costs market participants will bear? Please describe any such 
alternative implementation schedule in detail, including how it will 
reduce costs and the benefits it will likely deliver. If possible, 
please quantify the cost and benefits associated with any alternative. 
If providing dollar values, please describe any data sources, 
assumptions, and calculations used to generate them.
     Should a compliance schedule such as those proposed herein 
apply to the disclosure and documentation requirements proposed in the 
Business Conduct Standards for Counterparties proposal? If so, should 
the compliance schedule be adjusted, and in what manner?

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act 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.\52\ The rules 
proposed by the CFTC provide compliance schedules for certain new 
statutory requirements of the Dodd Frank Act and do not by themselves 
impose significant new regulatory requirements. Accordingly, the 
Chairman, on behalf of the CFTC, hereby certifies pursuant to 5 U.S.C. 
605(b) that the proposed rules will not have a significant economic 
impact on a substantial number of small entities. The CFTC invites 
public comment on this determination.
---------------------------------------------------------------------------

    \52\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \53\ imposes certain 
requirements on Federal agencies (including the Commission) in 
connection with conducting or sponsoring any collection of information 
as defined by the PRA. This Further Notice of Proposed Rulemaking, if 
approved, would not require a new collection of information from any 
persons or entities.
---------------------------------------------------------------------------

    \53\ 44 U.S.C. 3507(d).
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C. Consideration of Costs and Benefits

    Section 15(a) of the CEA \54\ requires the Commission to consider 
the costs and benefits of its action before promulgating a regulation 
under the CEA. Section 15(a) of the CEA specifies

[[Page 58183]]

that the costs and benefits shall be evaluated in light of five broad 
areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission may in its discretion give greater 
weight to any one of the five enumerated areas and could in its 
discretion determine that, notwithstanding its costs, a particular 
regulation is necessary or appropriate to protect the public interest 
or to effectuate any of the provisions or accomplish any of the 
purposes of the Act.
---------------------------------------------------------------------------

    \54\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The purpose of this proposed rule is to afford SDs and MSPs 
additional time to comply with the Trading Documentation and the Margin 
Requirements beyond that which is provided for in the Dodd-Frank Act. 
Section 754 of the Dodd-Frank Act provides that required rulemakings 
can be considered to be effective 60 days after publication of the 
final rule or regulation. Without the proposed rule, SDs and MSPs could 
be required to comply with Trading Documentation (Sec.  23.504) and 
Margin Requirements (Sec. Sec.  23.150-23.158) rules without any 
implementation phasing of the sort provided for by the proposed 
compliance schedules.
    The Commission recognizes that requiring immediate compliance with 
the new requirements could indirectly impose costs on market 
participants that may not be registered with the Commission and those 
market participants that have hundreds or thousands of third-party 
subaccounts to bring into compliance. Accordingly, and in an effort to 
protect the public interest by facilitating an orderly transition to a 
new regulatory environment, the Commission's proposed compliance 
schedules would provide a substantial benefit in that they would afford 
SDs and MSPs adequate time to modify or create the requisite 
documentation in collaboration with their counterparties.
1. Protection of Market Participants and the Public
    The Trading Documentation (Sec.  23.504) and Margin Requirements 
(Sec. Sec.  23.150-23.158) rules for which the Commission has proposed 
compliance schedules would encourage transparency in the swap market by 
requiring that SDs, MSPs, and their counterparties clarify, in writing, 
many aspects of their trading relationship prior to entering into a 
swap, and also that they clarify many specific details related to 
margining their swaps. The proposed compliance schedules would further 
the objectives of Sections 4s(e) and 4s(i) of the CEA by establishing 
an orderly process for their implementation. The proposed compliance 
schedules have several benefits that contribute to protection of the 
public as well as market participants.
    It is in the public interest that the largest and most active 
participants in the swap markets come into compliance with Sections 
4s(e) and 4s(i) of the CEA as soon as possible, in order to facilitate 
an orderly transition to the new regulatory environment for swaps. The 
proposed compliance schedules would prioritize compliance for Category 
1 Entities because these entities are likely responsible for a large 
portion of the swap transactions occurring in this market. But the 
schedule would do so in a way that still safeguards the interests of 
the Category 1 Entities by providing the additional time that these 
entities need in order to document new trading relationship and 
margining arrangements required by Sections 4s(e) and 4s(i) of the CEA.
    The additional time provided by the proposed compliance schedules 
would create several benefits for the SDs, MSPs, and their 
counterparties. First, if market participants were concerned that they 
might not be able to meet statutory compliance timelines, it is likely 
that they would incur additional costs associated with the potential 
lack of regulatory compliance. Providing additional time for compliance 
through the proposed compliance schedule would reduce the costs that 
market participants may incur mitigating risks during the transition 
period, and would re-direct those resources to achieving compliance 
with the new rules.
    Second, if Category 2, 3, or 4 Entities want to come into 
compliance ahead of the timeframes proposed for their SD or MSP 
counterparties through the compliance schedules, they may work with 
their SD and MSP counterparties to do so. Category 2, 3, or 4 Entities 
may wish to achieve compliance earlier in order to achieve the benefits 
associated with greater clarity in their trading relationships and 
margin arrangements for non-cleared swaps. They also may wish to take 
advantage of newly developed template agreements as they develop. Such 
early compliance by market participants would provide additional 
protection for the public by decreasing the risks associated with 
failing to document trading relationships and swap transactions 
properly, as well as decreasing the risks associated with failing to 
collateralize the credit exposure posed by uncleared swaps. 
Additionally, early compliance would have the benefit of increasing 
clarity about how margin will be handled for non-cleared swaps.
    Category 3 Entities have the additional challenge of transitioning 
hundreds, and in some cases, thousands of subaccounts into compliance 
with the new documentation requirements for trading relationships and 
margining non-cleared swaps. The proposed compliance schedules would 
afford Category 3 Entities additional time to educate their customers 
about the new requirements, and then negotiate and formalize new 
trading and margining agreements between their customers and SDs or 
MSPs. Each of these tasks requires time. By giving Category 3 Entities 
and their counterparties 270 days to come into compliance, the 
Commission is attempting to provide adequate time for these entities to 
come into compliance without the need for significant additional legal 
assistance. The Commission also is attempting to avoid the risk of 
inadequate documentation and inappropriate margining arrangements that 
may result from a more rushed process. Both of these results would tend 
to reduce costs and risk for both SDs and MSPs and their Category 3 
Entities counterparties.
    As far as costs are concerned, by establishing a 3-month, 6-month, 
and 9-month compliance schedule for SDs and MSPs to achieve compliance 
with their counterparties that are Category 1, Category 2, and Category 
3 and 4 Entities, respectively, the proposed compliance schedule would 
delay certain benefits that would result from more timely and accurate 
documentation by SDs and MSPs, as well as timely compliance with Margin 
Requirements for non-cleared swaps. Those costs primarily include a 
delay in decreasing the risks associated with the failure to document 
trading relationships and swap transactions properly, as well as a 
delay in terms of decreasing the risks associated with not 
collateralizing the credit exposure posed by uncleared swaps.
    The proposed compliance schedules seek to balance the cost to SDs, 
MSPs, and the Category 1 Entities that would be associated with bearing 
a larger proportion of the ``start-up'' costs associated with most 
promptly implementing the Trading Documentation and Margin 
Requirements. SDs, MSPs, and Category 1 Entities are the entities 
likely to expend the most resources establishing industry standard 
agreements that can then be used by other market participants. It is 
appropriate for the

[[Page 58184]]

entities that are likely to be among the most active participants in 
these markets to shoulder a larger percentage of the relatively fixed 
start-up costs.
2. Efficiency, Competitiveness, and Financial Integrity of the Markets
    The SDs, MSPs, and Category 1 Entities that constitute the first 
phase under the proposed compliance schedules will be likely to work 
together to establish methods for compliance that other market 
participants may later consider. The experience with swaps that the 
first group of market participants brings to this process should help 
to ensure the integrity and effectiveness of their solutions. These 
solutions will likely be helpful to other market participants that 
comply later. This approach is likely to result in benefits for a broad 
group of market participants.
    Moreover, it is critical that a cross-section of market 
participants is involved in developing the solutions that become 
industry conventions in order to ensure that those approaches promote 
the efficiency, competitiveness, and integrity of participants on both 
the buy-side and sell-side. Category 1 includes market participants 
from both sides, which helps ensure that the interests of both will be 
represented well as the industry identifies and solves the problems 
that are necessary for compliance.
    With respect to the activities of Category 1 participants, 
providing them 90 days to come into compliance after the Trading 
Documentation (Sec.  23.504) and Margin Requirements (Sec. Sec.  
23.150-23.158) are published in the Federal Register would create some 
time and opportunity for industry coordination as multiple 
participants, representing both the sell-side and buy-side of the 
market, identify shared questions and work to develop sound answers. 
This is likely to facilitate better compliance systems and processes, 
which reduces the start-up costs of implementing new regulations for 
these and other entities, which is expected to lower costs to the 
public by promoting standardization.
    Lastly, in the absence of the proposed compliance schedules, some 
entities have expressed concern that they would be unable to comply 
with the new requirements and would choose to leave the swap market 
altogether or avoid the market for some period of time. If this 
occurred, it could reduce liquidity and might increase spreads in the 
market. By providing additional time for compliance, this rule reduces 
the chance that these adverse effects will occur in the swap market and 
facilitates an orderly transition to the new regulatory environment.
    As for costs related to the efficiency, competitiveness, and 
financial integrity of the markets, the proposed compliance schedules 
would allow for delayed compliance dates for new Trading Documentation 
and Margin Requirements. The schedules would delay the benefits of the 
new requirements that would come from more expeditious implementation.
3. Price Discovery
    As noted above, the Trading Documentation rule contains a 
requirement that an SD or MSP and its counterparty agree on how they 
will value each swap transaction into which they enter from the point 
of execution until the termination, maturity, or expiration of the 
swap. Prompt implementation of this requirement would facilitate price 
discovery between the counterparties to a swap. Delay in implementing 
this provision may inhibit price discovery to the extent that 
counterparties fail to value their swaps on a timely and accurate 
basis. In this way, the proposed rule would delay the benefits of 
increased price transparency that could flow from a more expeditious 
implementation of the Trading Documentation rule. Additionally, a 
disorderly implementation may inhibit price discovery to the extent 
that counterparties fail to value their swaps on a timely and accurate 
basis; whereas, an orderly implementation process would promote 
communication between counterparties, which is essential to price 
discovery.
4. Sound Risk Management Practices
    To the extent that the proposed compliance schedule would delay 
implementation of the Trading Documentation (Sec.  23.504) and Margin 
Requirements (Sec. Sec.  23.150-23.158) rules, the swap market could 
suffer costs in terms of poor risk management resulting from a failure 
to document trading relationships and swap transactions properly, as 
well as from failure to collateralize the outstanding credit exposure 
posed by uncleared swaps through appropriate margining.
    However, there are risk management benefits to be gained from the 
proposed compliance schedule. For instance, if SDs and MSPs were 
expected to comply with Trading Documentation (Sec.  23.504) and Margin 
Requirements (Sec. Sec.  23.150-23.158) on timelines that they could 
not meet, it is possible that some firms may avoid the swap market for 
a period of time, which could expose them to risks they could have 
otherwise used swaps to mitigate. Therefore, by providing a timetable 
for orderly implementation, this rule could encourage continued 
participation in the swap markets and the continued use of swaps for 
risk mitigation purposes.
5. Other Public Interest Considerations
    There are public interest benefits to phasing in compliance using 
the implementation structure proposed in this release. The proposed 
implementation structure generally allows market participants to comply 
with the requirements of Dodd-Frank as quickly and efficiently as 
possible and thereby provides a sound basis for achieving the 
overarching Dodd-Frank goals of risk reduction and increased market 
transparency.
    In sum, the Commission has considered the costs and benefits as 
required by Section 15(a) and is proposing the compliance schedules 
discussed herein. The Commission invites public comment on its cost-
benefit considerations. Commenters are also invited to submit any data 
or other information that they may have quantifying or qualifying the 
costs and benefits of the proposal with their comment letters.

List of Subjects in 17 CFR Part 23

    Antitrust, Commodity futures, Conduct standards, Conflicts of 
interest, Major swap participants, Reporting and recordkeeping, Swap 
dealers, Swaps.

    For the reasons stated in the preamble, 17 CFR part 23 is proposed 
to be amended as follows:

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

    1. The authority citation for part 23 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 6, 6a, 6b-1, 6c, 6p, 6r, 6s, 6t, 9, 
9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

    2. Add Sec.  23.175 to subpart E to read as follows:


Sec.  23.175  Compliance schedule.

    (a) Definitions. For the purposes of this rule:
    Active Fund means any private fund as defined in section 202(a) of 
the Investment Advisors Act of 1940, that is not a third-party 
subaccount and that executes 20 or more swaps per month based on a 
monthly average over the 12 months preceding the publication of Sec.  
23.150 through Sec.  23.158 in the Federal Register.
    Category 1 Entity means (1) A swap dealer, (2) a security-based 
swap dealer; (3) a major swap participant; (4) a major security-based 
swap participant; or (5) an active fund.

[[Page 58185]]

    Category 2 Entity means (1) A commodity pool; (2) a private fund as 
defined in section 202(a) of the Investment Advisors Act of 1940 other 
than an active fund; (3) an employee benefit plan as defined in 
paragraphs (3) and (32) of section 3 of the Employee Retirement Income 
and Security Act of 1974; or (4) a person predominantly engaged in 
activities that are in the business of banking, or in activities that 
are financial in nature as defined in section 4(k) of the Bank Holding 
Company Act of 1956, provided that, in each case, the entity is not a 
third-party subaccount.
    Category 3 Entity means a Category 2 Entity whose positions are 
held as a third-party subaccount.
    Category 4 Entity means any person not included in Categories 1, 2, 
or 3.
    Covered swap entity means a swap dealer or major swap participant 
for which there is no prudential regulator.
    Third-party Subaccount means a managed account that requires 
specific approval by the beneficial owner of the account to execute 
documentation necessary for executing, confirming, margining, or 
clearing swaps.
    (b) Compliance Schedule. The following schedule for compliance with 
the requirements of Sec.  23.150 through Sec.  23.158 shall apply:
    (1) For swap transactions with a Category 1 Entity, a covered swap 
entity shall comply with the requirements of Sec.  23.150 through Sec.  
23.158 no later than ninety (90) days from the date of publication of 
such requirements in the Federal Register.
    (2) For swap transactions with a Category 2 Entity, a covered swap 
entity shall comply with the requirements of Sec.  23.150 through Sec.  
23.158 no later than one hundred and eighty (180) days from the date of 
publication of such requirements in the Federal Register.
    (3) For swap transactions with a Category 3 Entity or a Category 4 
Entity, a covered swap entity shall comply with the requirements of 
Sec.  23.150 through Sec.  23.158 no later than two hundred and seventy 
(270) days from the date of publication of such requirements in the 
Federal Register.
    (c) Nothing in this rule shall prohibit any person from complying 
voluntarily with the requirements of Sec.  23.150 through Sec.  23.158 
sooner than the compliance schedule provided in paragraph (b).
    3. Add new Sec.  23.575 to part 23, subpart I, to read as follows:


Sec.  23.575  Compliance schedule.

    (a) Definitions. For the purposes of this rule:
    Active Fund means any private fund as defined in section 202(a) of 
the Investment Advisors Act of 1940, that is not a third-party 
subaccount and that executes 20 or more swaps per month based on a 
monthly average over the 12 months preceding the publication of Sec.  
23.504 in the Federal Register.
    Category 1 Entity means (1) A swap dealer, (2) a security-based 
swap dealer; (3) a major swap participant; (4) a major security-based 
swap participant; or (5) an active fund.
    Category 2 Entity means (1) A commodity pool; (2) a private fund as 
defined in section 202(a) of the Investment Advisors Act of 1940 other 
than an active fund; (3) an employee benefit plan as defined in 
paragraphs (3) and (32) of section 3 of the Employee Retirement Income 
and Security Act of 1974; or (4) a person predominantly engaged in 
activities that are in the business of banking, or in activities that 
are financial in nature as defined in section 4(k) of the Bank Holding 
Company Act of 1956, provided that, in each case, the entity is not a 
third-party subaccount.
    Category 3 Entity means a Category 2 Entity whose positions are 
held as a third-party subaccount.
    Category 4 Entity means any person not included in Categories 1, 2, 
or 3.
    Third-party Subaccount means a managed account that requires 
specific approval by the beneficial owner of the account to execute 
documentation necessary for executing, confirming, margining, or 
clearing swaps.
    (b) Compliance schedule. The following schedule for compliance with 
the requirements of Sec.  23.504 shall apply:
    (1) For swap transactions with a Category 1 Entity, a swap dealer 
or major swap participant shall comply with the requirements of Sec.  
23.504 no later than ninety (90) days from the date of publication of 
such requirements in the Federal Register.
    (2) For swap transactions with a Category 2 Entity, a swap dealer 
or major swap participant shall comply with the requirements of Sec.  
23.504 no later than one hundred and eighty (180) days from the date of 
publication of such requirements in the Federal Register.
    (3) For swap transactions with a Category 3 Entity or a Category 4 
Entity, a swap dealer or major swap participant shall comply with the 
requirements of Sec.  23.504 no later than two hundred and seventy 
(270) days from the date of publication of such requirements in the 
Federal Register.
    (c) Nothing in this rule shall prohibit any person from complying 
voluntarily with the requirements of Sec.  23.504 sooner than the 
compliance schedule provided in paragraph (b).

    Issued in Washington, DC, on September 8, 2011, by the 
Commission.
David A. Stawick,
Secretary of the Commission.

Appendices To Swap Transaction Compliance and Implementation Schedule: 
Trading Documentation and Margining Requirements Under Section 4s of 
the CEA--Commissioners Voting Summary and Statements of Commissioners

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

Appendix 1--Commissioners Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, 
Sommers, and Chilton voted in the affirmative; Commissioner O'Malia 
voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support this proposal to establish schedules to phase in 
compliance with previously proposed requirements, including the swap 
trading relationship documentation requirement and the margin 
requirements for uncleared swaps. The proposal would provide greater 
clarity to swap dealers and major swap participants regarding the 
timeframe for bringing their swap transactions into compliance with 
new documentation and margining rules. The proposal also would make 
the market more open and transparent, while giving market 
participants an adequate amount of time to comply. The proposal 
would help facilitate an orderly transition to a new regulatory 
environment for swaps.

Appendix 3--Statement of Commissioner Scott O'Malia

    I respectfully dissent from the Commission's decision today to 
approve for Federal Register publication two rule proposals related 
to implementation entitled ``Swap Transaction Compliance and 
Implementation Schedule: Clearing and Trade Execution Requirements 
under Section 2(h) of the CEA'' and ``Swap Transaction Compliance 
and Implementation Schedule: Trading Documentation and Margining 
Requirements under Section 4s of the CEA.'' For quite some time, I 
have been asking that the Commission publish for notice and comment 
a comprehensive implementation schedule that addresses the entire 
mosaic of rule proposals under the Dodd-Frank Act. I believe the 
Commission should have proposed a comprehensive schedule that 
detailed, at a minimum:
     For each registered entity (e.g., swap dealer and major 
swap participants), compliance dates for each of its entity-specific 
obligations (e.g., all obligations under Section 4s of the Commodity 
Exchange Act) under Dodd-Frank; and
     For each market-wide obligation (e.g., the clearing and 
trading mandates), the

[[Page 58186]]

entities affected (whether registered or unregistered) along with 
appropriate compliance dates.
    Such a schedule would have complemented and informed existing 
proposals and provided structure to future determinations. 
Additionally, a proposal regarding such a schedule should have 
adequately analyzed the costs and benefits of alternatives, 
including appropriate quantification. Unfortunately, the two rule 
proposals that the Commission approved today fail to either propose 
a comprehensive schedule or provide an adequate cost benefit 
analysis.
    The Commission's proposals also fail to request comment on a 
number of issues that I believe are important considerations in 
developing an implementation plan. As a result, I am encouraging 
commenters to submit responses to the questions below as part of 
their comments on the two rule proposals.

Swap Transaction Compliance and Implementation Schedule: Clearing 
and Trade Execution Requirements under Section 2(h) of the CEA

     Should the Commission provide guidance on how it will 
make and communicate a mandatory clearing determination prior to 
considering the first such determination? If so, what information 
should be included in guidance?
     As section II(E) of the proposal states: ``When issuing 
a mandatory clearing determination, the Commission would set an 
effective date by which all market participants would have to 
comply. In other words, the proposed compliance schedules would be 
used only when the Commission believes that phasing is necessary 
based on the considerations outlined in this release. The Commission 
will provide the public with notice of its intent to rely upon the 
compliance schedule pursuant to the process outlined in Sec.  
39.5(b)(5).'' To afford more certainty to market participants, 
should the Commission instead create a presumption that it will rely 
on the compliance schedule for each mandatory clearing determination 
that it issues, unless it finds that the compliance schedule is not 
necessary to achieve the benefits set forth in the proposal (e.g., 
facilitating the transition to the new regulatory regime established 
by the Dodd-Frank Act in an orderly manner that does not unduly 
disrupt markets and transactions)?
     What, if any, other issues not addressed in current 
proposed or final rulemakings should the Commission have taken into 
consideration when proposing the compliance schedule? For example, 
should the Commission have considered the extent to which its 
clearing and trade execution requirements apply to entities and 
transactions located outside the United States? Also, should the 
Commission have considered the extent to which such requirements 
apply to transactions between affiliates (whether domestic or cross-
border)? If applicable, how should the Commission adjust the 
proposed compliance schedule to account for such issues?
     What, if any, adjustments should the Commission make to 
the proposed compliance schedule for trade execution requirements if 
the Commission makes a determination that a group, category, type, 
or class of swaps, rather than a specific swap, is subject to 
mandatory clearing? Would such adjustments vary depending on the 
manner in which the Commission defines group, category, type, or 
class?

 Swap Transaction Compliance and Implementation Schedule: Trading 
Documentation and Margining Requirements Under Section 4s of the 
CEA

     What, if any, other issues not addressed in current 
proposed or final rulemakings should the Commission have taken into 
consideration when proposing the compliance schedule? For example, 
should the Commission have considered the extent to which its 
documentation and margin requirements apply to entities and 
transactions located outside the United States? Also, should the 
Commission have considered the extent to which such requirements 
apply to transactions between affiliates (whether domestic or cross-
border)? If applicable, how should the Commission adjust the 
proposed compliance schedule to account for such issues?
    Finally, I want to be clear that I support completing the final 
Dodd-Frank rulemakings in a reasonable time frame. I believe that 
the timely implementation of such rulemakings is important. Knowing 
when and how the markets are required to do what is vital to the 
success of implementing the new market structure required under the 
Dodd-Frank Act. When billions of dollars are at stake, you simply do 
not rely on guesses and estimates based on vague conditions.

[FR Doc. 2011-24128 Filed 9-19-11; 8:45 am]
BILLING CODE 6351-01-P