Table of Contents I. Background A. Statutory Background B. Section 4s(l) of the CEA C. Section 20(c) of the CEA II. Margin Segregation for SD or MSP Counterparties With Respect to Uncleared Swaps A. Regulation 23.700: Definitions B. Regulation 23.701: Notification of Right to Segregation C. Regulation 23.702: Requirements for Segregated Margin D. Regulation 23.703: Investment of Segregated Margin E. Regulation 23.704: Requirements for Non-Segregated Margin F. Compliance Date III. Portfolio Margining IV. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act C. Cost-Benefit Considerations I. Background A. Statutory Background

On July 21, 2010, President Obama signed the Dodd-Frank Act. 3 Title VII of the Dodd-Frank Act  4 amended the Commodity Exchange Act (“CEA”)  5 to establish a comprehensive new regulatory framework for swaps and certain security-based swaps. The legislation was enacted to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things: (i) Providing for the registration and comprehensive regulation of SDs and MSPs; (ii) imposing mandatory clearing and trade execution requirements on clearable swap contracts; (iii) creating recordkeeping and real-time reporting regimes; and (iv) enhancing the rulemaking and enforcement authorities of the Commission with respect to, among others, all registered entities and intermediaries subject to the oversight of the Commission.

Section 724(c) of the Dodd-Frank Act amended the CEA to add section 4s(l), which includes provisions concerning the rights of counterparties to SDs and MSPs with respect to the treatment of such counterparty's margin for uncleared swaps. As discussed further in Part II of this preamble, these changes are implemented in new Subpart L to Part 23 of Title 17, §§ 23.700 through 23.704. 6

Section 713(c) of the Dodd-Frank Act amends the CEA to add, as section 20(c) thereof, a provision that requires the Commission to exercise its authority to clarify the legal status, in the event of a commodity broker bankruptcy, of (i) securities in a portfolio margining account held as a futures account, and (ii) an owner of such account.

Section 4s(l) of the CEA sets forth certain requirements concerning the rights of counterparties of SDs and MSPs with respect to the segregation of money, securities, or other property used to margin, guarantee, or otherwise secure uncleared swaps. These requirements apply only to initial margin. Section 4s(l) requires that:

• An SD or MSP notify each counterparty at the beginning of a swap transaction that the counterparty has the right to require segregation of the funds or other property supplied to margin, guarantee, or secure the counterparty's obligations;  7 and

• at the request of the counterparty, the SD or MSP shall segregate such funds or other property with an independent third party custodian. The funds or other property of the counterparty must be kept in a segregated account with an independent third party, designated for and on behalf of that counterparty, separate from the assets and other interests of the SD or MSP.

Section 713(c) of the Dodd-Frank Act, codified as section 20(c) of the CEA, directs the Commission to exercise its authority to ensure that securities held in a portfolio margining account carried as a futures account are customer property and the owners of those accounts are customers for the purposes of subchapter IV of chapter 7 of title 11.

The Commission sought public comment on customer collateral protection with respect to money, securities, or other property used to margin, guarantee, or otherwise secure uncleared swaps. First, on October 22, 2010, the Commission, through its staff, held a roundtable to discuss individual customer collateral protection with respect to cleared and uncleared swaps. 8 Following consideration of the comments made during the roundtable, on December 3, 2010, the Commission issued a Notice of Proposed Rulemaking (“NPRM”), 9 and sought comment on all aspects of the NPRM, including the definition of initial margin, counterparty notification, the nature of the custodian, and the investment of segregated collateral. 10 The Commission received comments from twenty-two different commenters regarding the proposed regulations in the NPRM. 11 The Commission, through its staff, also met extensively with market participants both prior to and following issuance of the NPRM.

In the NPRM, the Commission proposed to define “segregate” according to its commonly-understood meaning: To keep two or more items in separate accounts, and to avoid combining them in the same transfer between two accounts.

One commenter agreed with the Commission's proposed definition of “segregate.”  12 Another commenter requested clarification regarding the definition of the term segregate and whether it requires that collateral be held in an individual customer account or whether such term permits an SD or MSP to hold segregated customer collateral in an omnibus customer account. 13 The Commission notes that section 4s(l)(3)(B) requires that a segregated account be “designated as a segregated account for and on behalf of the counterparty.”  14 Moreover, regulation 23.702(b) of the final rules requires initial margin that is segregated pursuant to a counterparty's election to be held in an account for and on behalf of the counterparty. 15 Thus, regulation 23.702(b) requires initial margin to be held in an individual customer account. As such, the Commission is adopting the definition of “segregate” as proposed.

The Commission proposed to define “variation margin” (for which a counterparty does not have the right to segregation as section 4s(l)(2)(B)(i) prescribes) as an amount calculated to cover the current exposure arising from changes in the market value of the position since the trade was executed or the previous time the position was marked to market.

Six commenters discussed the “variation margin” definition. 16 SIFMA/ISDA wrote that the concept of variation margin is different in the over-the-counter swaps market than it is in the futures market. 17 In particular, SIFMA/ISDA noted that parties to swaps do not “pay” margin to each other based on mark-to-market prices; rather they post and grant a security interest in collateral based on estimated payment amounts derived from current market conditions. 18 SIFMA/ISDA recommended replacing the term “variation margin” with the term “exposure collateral,” and defining “exposure collateral” to mean “money, securities or property posted by a party to secure its obligations pursuant to the terms of a swap agreement, the amount of which is based on an estimate of the net mark-to-market exposure of all transactions under the master swap agreement.”  19 AIMA wrote that the proposed definition of “variation margin” was appropriate. 20

The fact that the statute refers to “variation margin” indicates that Congress was contemplating the use of the term “variation margin” as opposed to “exposure collateral.” For the sake of consistency with other regulations, the Commission is amending the definition of “variation margin” to add the phrase “or collateral posted by” after the phrase “a payment made by”. However, the Commission agrees with SIFMA/ISDA's comments regarding the fact that in the uncleared OTC derivatives markets, parties do not necessarily “pay” variation margin to each other, and instead post collateral. 21 The Commission therefore notes that although the definition of variation margin will include payments, where a payment is made, there would not be any collateral to be segregated. The definition is otherwise being adopted as proposed.

The Commission proposed to define “initial margin” (for which a counterparty has the right to segregation pursuant to CEA section 4s(l)) as an amount calculated based on anticipated exposure to future changes in the value of a swap.

Ten commenters addressed the definition of “initial margin.”  22 ICI wrote that the proposed definition of initial margin was too broad, and might be interpreted to also include variation margin. 23 By contrast, Fidelity suggested that “the proposed definition of `initial margin' may be too narrow and could exclude `upfront' deliveries of collateral that should properly be treated as initial margin.”  24 FHLB recommended that the term “independent amount” be used instead of “initial margin.”  25 However, if the Commission elects to use the term “initial margin,” FHLB argued that the definition of “initial margin” should, at the very least, track and reference “independent amount” as it appears in the ISDA documentation. 26 SIFMA/ISDA also recommended that the term “independent amount” be used in the place of “initial margin,” and suggested that “independent amount” be defined to mean “money, securities or property posted by a party to secure its obligations pursuant to the terms of a swap agreement and that is either (i) specified as an [`independent amount'] in the relevant agreement of the parties or (ii) calculated based upon terms agreed between the parties (in either case, in addition to and separately from any [exposure collateral] requirement).”  27 Chris Barnard suggested that the Commission clarify that initial margin is posted at the commencement or outset of a swap transaction as a way to distinguish initial margin from variation margin. 28 AIMA and MetLife wrote that the proposed definition of initial margin was appropriate. 29

The Commission has considered the comments and understands that some commenters prefer the traditional practice of using the term “independent amount.” However, the statute uses the term “variation margin” and the obvious complimentary term to “variation margin” would be “initial margin.” Moreover, a reference to “independent amount,” by itself, would not be effective, since the definition of “independent amount” in the ISDA “Credit Support Annex” directs the reader to a form. 30 A reference to a form would not be desirable as a definition both because it is ambiguous and because the substance of the form is subject to change. Therefore, the Commission is adopting the definition of initial margin as proposed.

Proposed regulation 23.601(a)  31 implemented the statutory requirement set forth in section 4s(l)(1)(A) of the CEA. Specifically, with respect to an uncleared swap, proposed regulation 23.601(a) would have required an SD or MSP to notify each of its counterparties that a counterparty has the right to require any initial margin posted by it to be segregated in accordance with Commission regulations. 32 The Commission also stated that it interpreted the language of CEA section 4s(l)(1)(A) as a segregation right that can be elected or renounced by the SD's or MSP's counterparty in its discretion. 33 As stated in the NPRM, Congress's description as a “right” of what would otherwise be a simple matter for commercial negotiation suggests that this decision is an important one, with a certain degree of favor given to an affirmative election. 34 As such, in implementing section 4s(l)(1)(A) the Commission is requiring SDs and MSPs to offer their counterparties segregation that meets the minimum standards set forth in these rules. However, SDs, MSPs and counterparties may negotiate alternative arrangements for the handling of collateral if all parties agree.

In the NPRM, the Commission did not propose specific disclosure requirements with respect to this notification. Instead, the Commission requested comment as to whether the SD or MSP should be required to disclose the price of segregation, the price of fees to be paid to the custodian (if the SD or MSP is aware of the amount of such fees), or differences in the terms of the swap that the SD or MSP is willing to offer to the counterparty ( e.g., differences in the fixed interest rate for an interest rate swap) if the counterparty elects or renounces the right to segregation. 35

Thirteen commenters discussed the costs associated with segregation, 36 with most expressing concern about proper price disclosures by the SDs and MSPs. Two commenters indicated that price disclosure was not particularly important.

Several commenters expressed concern that an SD or MSP would not make counterparties aware of the price associated with segregation and might impose higher prices or offer less attractive terms to counterparties electing segregation. 37 MFA recommended “that the Commission require SDs and MSPs to provide counterparties with robust disclosure of all costs that the SD or MSP will charge to the counterparty if the counterparty elects to segregate its initial margin.”  38 State Street suggested that “the Commission should . . . provide that, although the pricing of the same transaction with and without a segregated account may differ, the pricing difference should be reflective of actual out-of-pocket costs expected to be incurred by the [SD/MSP] as a result of use of the segregated account, and that the nature and amounts of those costs should be fully disclosed.”  39 AGA argued that, without proper disclosure, counterparties will be forced “to exercise in a vacuum their right to seek segregation of initial margin for an uncleared swap” and suggested that each SD or MSP be required to notify each counterparty as to the price of having a third party hold collateral. 40

ICI sought to distinguish between fees charged by the custodian—which ICI does not believe need be disclosed by the SD or MSP—and fees embedded in the SD's swaps pricing for not having access to the customer's collateral. 41 SIFMA/ISDA do not believe that mandating disclosure is necessary or desirable because “a counterparty can always, in accordance with current market practice, request the disclosures it considers necessary from its SD/MSP . . . [and] mandatory disclosure by the SD/MSP is impractical because much of the material costs are within the control of a third party: the custodian.”  42

Finally the FHLB wrote that “it is very important for SDs/MSPs to respond to requests for information regarding the additional costs that may be imposed on end-user counterparties that elect to have initial margin segregated with an independent custodian.”  43

In light of the concerns expressed by commenters, the Commission has determined that a limited set of disclosures should be required. First, the SD or MSP must inform the counterparty of the price associated with segregation, including custodial fees, to the extent the SD or MSP has such information. It is the Commission's view that the price of segregation is a material term in any segregation package offered by the SD or MSP. Further, where the custodian is an affiliate of, or a regular custodian for, the SD or MSP, the SD or MSP may be better positioned to know the amount of any such custody costs. 44 In addition, in order for counterparties to make an informed decision as to whether to exercise the right of segregation, the identity of an acceptable custodian(s) is a material aspect of the notification so that counterparties may make informed decisions as to the degree of independence of such custodian(s). 45 As described in more detail in section C.1, below, this notification must include at least one credit-worthy non-affiliate as an option for custodian of segregated initial margin. The Commission has amended regulation 23.701 accordingly.

The Commission notes that certain entities have developed or are in the process of developing electronic platforms through which counterparties could access account information regarding the status of their collateral. The Commission may consider, in a future rulemaking, whether the notification required pursuant to regulation 23.701 should include information from the SD or MSP regarding such platforms.

Proposed regulation 23.601(b)  46 incorporated the limitation in section 4s(l)(2)(B)(i) of the CEA that the right to segregation does not apply to variation margin. Fidelity recommended that the final rule require that SDs and MSPs “segregate variation margin posted by a counterparty at the counterparty's request.”  47 Fidelity requested that, at a minimum, the rule clarify that “no change will be necessary to collateral agreements [not in conflict with the rule] . . . that involve segregation of all margin, initial and variation. . . .”  48

The statute clearly excludes variation margin from the 4s(l) segregation requirements. 49 Thus, the request for such a requirement is not supported by the statute. However, the Commission confirms that this rule governs collateral arrangements for swaps entered into on and subsequent to the compliance date and does not affect collateral arrangements agreed to for swaps that are entered into prior to the compliance date. In addition, the Commission notes that this rulemaking does not restrict parties from negotiating segregation arrangements for variation margin.

The Commission regards the inclusion of the term “right to require segregation” in section 4s(l) of the CEA as requiring that the segregation decision is made by appropriate decision-makers within the counterparty organization. Proposed regulation 23.601(c)  50 would require that the “right to require segregation” notification be made to certain senior decision-makers, in descending order of preference. Notification would be made to the Chief Risk Officer, or the Chief Executive Officer, or to the highest level decision-maker for the SD's or MSP's counterparty. The Commission sought comment as to whether this list of decision-makers would be appropriate.

Eleven commenters opposed the requirement that the Chief Risk Officer receive the segregation notification. 51 EEI wrote that this requirement “fails to take into account existing governance and compliance structures and processes developed and implemented by entities for the express purpose of meeting compliance and risk management objectives.”  52 ICI suggested that notices go to “an authorized person to avoid the disruption that would be associated with a [Chief Risk Officer] or other `high-level decision-maker' making an election to each SD or MSP before a trade can settle.”  53 AGA recommended that the notification “be made to the officer in the counterparty responsible for the management of collateral.”  54 ISDA suggested that the counterparty should identify the proper party to receive notice from the SD or MSP. 55 Similarly, Fidelity wrote that the “final rule should allow the counterparty to select the notice recipient.”  56

A counterparty's decision to elect its segregation right is a financial decision that is heavily dependent on such counterparty's risk assessments. It would seem appropriate, therefore, for a counterparty employee who is involved in the assessment of risk and/or collateral management to receive this notification. However, after consideration of the comments, it is clear that such person does not necessarily need to be the Chief Risk Officer. The Commission agrees with AGA's comment that a notification should be sent to the “officer in the counterparty responsible for the management of collateral.”  57 If such a person is not identified by the counterparty to the SD or MSP, then the notification should be sent to the Chief Risk Officer and so on, as described in the proposed rule. Regulation 23.701(c) has been amended accordingly.

Before the terms of an uncleared swap are confirmed, proposed regulation 23.601(d)  58 would require that the SD or MSP obtain from the counterparty(1) confirmation of receipt of the segregation notification by a specified decision-maker, and (2) whether the counterparty has elected to exercise its section 4s(l) segregation rights. The SD or MSP must maintain records of such confirmation and election as business records in accordance with regulation 1.31. 59

ICI's comment letter alone addressed this point. 60 ICI agreed with the proposal that “confirmation of receipt of the notification and election to require segregation or not should occur prior to confirming the terms of the uncleared swap.”  61 The Commission believes that requiring the SD or MSP to obtain confirmation of receipt of the segregation notification and the counterparty's decision whether to elect segregation prior to confirming the terms of the swaps will provide greater certainty for both parties regarding the counterparty's segregation election. The Commission also agrees that such confirmation should be obtained prior to confirming the terms of the uncleared swap. Therefore, the Commission is adopting paragraph (d) as proposed.

Section 4s(l)(1)(A) of the CEA states that an SD or MSP must notify its counterparty of the right to require segregation of funds or other property supplied to margin, guarantee or secure the obligations of the counterparty “at the beginning of a swap transaction.” While this language could be read to require transaction-by-transaction notification, where the parties have a preexisting or on-going relationship, such repetitive notification could be redundant, costly and needlessly burdensome. On the other hand, the importance of the segregation decision, as discussed above, suggests that some periodic reconsideration might be appropriate. Proposed regulation 23.601(e)  62 sought to balance these considerations by providing that notification to a particular counterparty by a particular SD or MSP need only be made once in any calendar year.

Twelve commenters discussed issues surrounding the substance and timing of segregation notification, 63 with the primary concern being whether the notification of the right to segregation had to be done on a transaction-by-transaction basis or merely once per year.

The Working Group requested that the rule require notification on segregation no more often than once a year, rather than a transaction-by-transaction notification. 64 Fidelity supported the proposal that notification be required at least annually, stating that this could “prompt a counterparty to reconsider its elections in light of [changes that could occur during the life of a swap transaction].”  65 FHLB and MetLife characterized transaction-by-transaction notification as repetitive and redundant. 66 AGA believes that once a year is an appropriate notification frequency, unless the price of segregation has changed in which case another notice should be delivered. 67

Several commenters requested that the Commission loosen the once-per-year notification in the Commission's proposed rule. NRECA, SIFMA/ISDA, AIMA and AMG each wrote that an initial notification is all that should be required—a counterparty's initial choice should be deemed to apply to all future swaps unless the counterparty seeks to change its election. 68 SIFMA/ISDA proposed “that an [SD or MSP] should only be required to deliver a single notification of the right to segregate, and the counterparty should be deemed to have elected not to require segregation of its [independent amount] until such time as the counterparty duly notifies the [SD or MSP] of its election to require segregation.”  69

After careful consideration of the comments, the Commission agrees that requiring notification on a transaction-by-transaction basis may be overly costly and burdensome. In addition, the Commission notes the difficulty associated with identifying material changes in the cost of segregation and the burden that would be created should the Commission require that additional notices be delivered upon such event. However, the Commission notes that Congress emphasized the importance of the ability of a counterparty to elect to have its collateral segregated, describing segregation as a “right.” Moreover, the statute does not merely grant counterparties the legal right to segregation; it specifically requires that the existence of this right be communicated to them. The Commission therefore believes that this notification requirement is met when an SD or MSP provides notification to a counterparty, at least once, in each calendar year. Where an SD or MSP does not enter into any swap with the counterparty during a calendar year, the notification requirement would not apply. The Commission believes that such notification requirement would not be overly burdensome, particularly when one considers the importance of the counterparty's decision to require segregation. Thus, the Commission has decided to adopt the final rule language as proposed.

In the NPRM, the Commission proposed regulation 23.601(f), 70 which makes clear that a counterparty's election with respect to the segregation of initial margin may be changed at the discretion of the counterparty upon delivery of written notice, and such decision shall be applicable with respect to swaps entered into between the parties after such delivery. Rather than grant the counterparty an absolute right to change its election, the Working Group recommended that the counterparty must expressly reserve such right: “[if] a party makes an election under the Proposed Rule and does not expressly reserve the right to change that election in the relevant swap trading relationship documentation, then they cannot do so.”  71

The Commission does not believe that the commenter's clarification is appropriate. The Commission notes that the rule clearly states that any change to the counterparty's segregation election would only apply to “swaps entered into between the parties after . . . delivery” of written notice to the SD or MSP. Therefore, if a counterparty sought to change its segregation election, such election would not have retroactive effect (unless both the counterparty and the SD or MSP so agreed). In other words, the proposed rule leaves changes in terms for pre-existing swaps—including with respect to segregation of collateral—as matters for negotiation between the parties. The counterparty should retain its rights, under the statute, to change its election as to swaps entered into after the notice is delivered. As such, the Commission is adopting the final rule language as proposed.

Pursuant to section 4s(l)(3) of the CEA, the Commission proposed regulation 23.602(a)(1), 72 which required that initial margin, segregated in accordance with an election under regulation 23.601, be held with a custodian that is independent of both the SD or MSP and the counterparty. Proposed regulation 23.602(a)(2)  73 required such initial margin to be held in an account designated as a segregated account for and on behalf of the counterparty. 74 While, as noted, the right to segregation does not apply to variation margin, the proposed regulation provided that the SD or MSP and the counterparty may agree that collateral falling within the definition of variation margin may also be held in such segregated account. The Commission requested comment on, among other things, whether an affiliate of the SD, MSP or the counterparty should be considered an independent custodian. In addition, the Commission requested comment on whether either party could choose a custodian and, if so, what restrictions, if any, should be placed on that choice.

Fourteen commenters discussed the choice of custodian for segregation. 75 The topics discussed by commenters included the freedom of negotiation between the SD or MSP and counterparty, the use of a custodian affiliated with an SD or MSP, the right of the counterparty to choose the custodian, and qualifying criteria for a custodian.

Four commenters argued that the custodian should be determined purely by negotiation between the counterparty and SD or MSP. ICI opined that “the choice of custodian should be left to the agreement of the parties.”  76 AIMA wrote that “[t]he parties should be free to negotiate which custodian is used, and it may be useful for the [SD] or MSP to let the customer know which custodians it has relationships with and has conducted appropriate due diligence on, including affiliates and non-affiliates, and thus its preferred choices of custodian.”  77 Similarly, the Working Group suggested “that outside the election to segregate collateral, which is the right of a [SD's or MSP's] counterparty, all other terms and parameters of a custodial relationship should be left to negotiation between counterparties. . . .”  78 The NRECA wrote that it “see[s] no benefit to the Commission making [the choice of custodian] by regulation, rather than leaving them to arm's length negotiations between contract counterparties.”  79

However, AMG stated that while both the counterparty and the SD or MSP have an interest in the selection of the custodian, the counterparty is likely the party with the greatest interest and should therefore have the right to select the custodian. 80

Several commenters discussed whether an affiliate of the SD or MSP would qualify as an independent custodian. MetLife suggested “that a custodial arrangement with an affiliate of the SD or MSP would satisfy the requirements for the use of an Independent Custodian. . . .”  81 AMG wrote that “the CFTC should not limit the choice of custodian solely to those unaffiliated with the relevant SD/MSPs and Customer Counterparties but should provide the flexibility to use a custodian who may also be affiliated with any SD/MSP or Customer Counterparty.”  82 Fidelity expressed concern that an “unintended and undesirable consequence of banning affiliates from acting as third-party custodians could be to prevent counterparties from entering into swaps with [SD/MSPs], where an affiliate of the [SD/MSP] already serves as a depository or custodian of the counterparty.”  83

Other commenters were receptive to the idea of an affiliate custodian, but advised that the SD or MSP should be required to present options to the counterparty on this issue. For example, AIMA recommended that the Commission require SDs and MSPs to “offer a choice of . . . five custodians on whom they have conducted [a] due diligence examination, including both an affiliate (if applicable) and a non-affiliate.”  84 Similarly, FHLB urged the Commission to condition allowing an affiliate of the SD or MSP to act as custodian upon mutual agreement of the counterparty and the SD or MSP, and suggested that “the SD/MSP [should be] required to offer segregation with at least one non-affiliated custodian.”  85 SIFMA/ISDA wrote that an SD or MSP “should be required, upon counterparty request, to propose at least one creditworthy non-affiliated custodian that the SD/MSP is willing to use, as an option.”  86 AMG noted that the regulations should be flexible enough to allow the use of a custodian affiliated with an SD, MSP, or the counterparty. 87

Three other commenters suggested that counterparties should have the right to designate a non-affiliate custodian. State Street recommended that the proposed rules be revised to provide that a “counterparty has the right to designate the independent custodian, if that custodian is a U.S. bank . . . and otherwise serves as a usual depository for assets of the counterparty.”  88 Fidelity wrote that while affiliates of the SD or MSP can be appropriate custodians, “a counterparty should have the right to require that a third-party custodian be independent from the [SD or MSP].”  89 Norges proposed that the final rule should provide the “non-dealer/MSP counterparties the option to require that initial margin . . . be held with a custodian that is in fact independent of any affiliate of the swap dealer or MSP.”  90

Two commenters offered qualifying criteria for a custodian. The MFA suggested that a custodian ought to be “regulated by a federal or state bank regulator, be authorized under federal or state laws to exercise corporate trust powers, and have equity of at least [$200 million].”  91 MetLife suggested that an affiliate custodian could satisfy the requirements for an independent custodian where it, inter alia, “maintains a minimum asset value [of at least $2 billion] under custodial management.”  92

The Commission also received one comment regarding the timing of the requirement to segregate. SIFMA/ISDA requested that, due to the amount of time required to fully negotiate a custodial arrangement, parties “be permitted to enter into new swaps pending completion of custodial documentation satisfactory to both parties for so long as the parties are negotiating in good faith to complete such custodial documentation.”  93 SIFMA/ISDA also argued that the requirement to segregate the initial margin “with respect to all swaps entered into after delivery of an election to require segregation . . . unless otherwise agreed, become effective only upon the completion of custodial documentation.”  94

The language of the statute does not require that affiliates of a counterparty be prohibited from serving as the custodian for segregated funds. Affiliates are third-parties in that they are separate legal entities, and therefore fall within the terms of the statute. However, in light of the correlated insolvency risk wherein if an SD or MSP becomes insolvent its affiliates will have an elevated risk of also becoming insolvent, the Commission has determined that an SD or MSP should be required to provide the counterparty with at least one credit worthy non-affiliate as an option to serve as the custodian. The final rule text has been amended to incorporate the requirement that SDs and MSPs must provide their counterparties with at least one credit worthy non-affiliate as an option to serve as the custodian. 95

Regarding SIFMA/ISDA's question relating to the timing of segregation, waiting until the completion of custodial documentation for an election to require segregation to become effective would likely create difficulties where an insolvency occurs in the time period between agreement and documentation. Thus, it is the Commission's position that protection of initial margin is best achieved by requiring customer segregation to become effective upon election, not upon completion of custodial documentation. In addition, the Commission notes that compliance with SIFMA/ISDA's suggested “good faith” requirement would be impracticable to assess and is not amending the rule as suggested.

In the NPRM, the Commission proposed regulation 23.602(b), 96 which imposed certain requirements on agreements for the segregation of margin. Regulation 23.602(b) was intended to provide a balance between the minimum interests of (i) the counterparty posting the margin, (ii) the SD or MSP for whom the margin is posted, and (iii) the custodian, while avoiding the necessity for time-consuming and expensive interpleader proceedings. 97 Under the proposal, an agreement for the segregation of margin would have to be in writing, and must include the custodian as a party. In addition, to ensure that the SD or MSP receives the margin promptly in case it is entitled to do so, and that the margin is returned to the counterparty in case it is entitled to such return, the agreement must also provide that turnover of control shall be made promptly upon presentation of a statement in writing, signed by an authorized person under penalty of perjury, that one party is entitled to such turnover pursuant to an agreement between the parties. 98 Otherwise, withdrawal of collateral may only be made pursuant to the agreement of both the counterparty and the SD or MSP, with the non-withdrawing party also receiving immediate notice of such withdrawal. 99

Nine commenters argued against imposing a perjury standard on any written statements by either the counterparty or the SD or MSP informing the custodian to turn over of control of margin. 100 For example, ICI wrote that it “believe[s] that it is unnecessary to introduce the specter of criminal prosecution into custodial account documentation. . . .”  101

The Commission believes that a perjury standard is appropriate because it mitigates the tradeoff between speed and accuracy in stress situations. In circumstances where one party to a swap needs expedient turnover of segregated margin (for example, in order to meet margin calls on positions hedging the swap) and is unable to obtain timely approval from the counterparty ( e.g., if margin is being taken from the account because the counterparty is in financial trouble), it is important for a depository to be able to respond to a unilateral request for collateral without having to take the time to independently investigate the legitimacy of the request. 102 At the same time, circumstances of market stress may also create incentives for parties to illegitimately withdraw collateral from a segregated account. 103 The perjury standard acts as a check on the legitimacy of a demand for collateral without requiring the time needed for an independent inquiry by the depository. At the same time, an SD, MSP or counterparty making a demand for collateral can avoid criminal liability if it does not engage in purposeful fraud.

The Commission has decided to adopt the rule substantively as proposed. However, the Commission points out that it has re-organized the rule and modified certain language to provide greater clarity. Specifically, the Commission combined the language in paragraphs (a) and (a)(1) into paragraph (a). The Commission also renumbered paragraph (a)(2) as paragraph (b). The Commission then renumbered paragraph (b) as paragraph (c) and switched the text in subparagraphs (1) and (2). The Commission also added clarifying language to paragraphs (a),(b) and (c) to facilitate this reorganization.

Proposed regulation 22.603(a)  104 provides that segregated initial margin may only be invested consistent with the standards for investment of customer funds that the Commission applies to exchange-traded futures and cleared swaps, regulation 1.25. 105

Eight commenters expressed the view that imposing the standards of regulation 1.25 on the investment of collateral for uncleared swaps was overly restrictive. 106

Fidelity suggested that “custodians under tri-party custody arrangements may limit the types of collateral that it will permit under such arrangements to those investments permitted pursuant to [regulation] 1.25.”  107 Fidelity further proposed that the Commission require not only segregation of initial margin but also variation margin, explaining that “the right to require segregation of variation margin . . . would reduce systemic risk for the same reasons that segregation of initial margin reduces systemic risk.”  108 Similarly, AMG argued that the Commission should “confirm the right of Customer Counterparties to require segregation of both initial margin and variation margin,” explaining that the current practice in the OTC market is to require all collateral to be segregated and held by a third-party custodian. 109

MetLife wrote that such a restriction is “outside the scope of normal market practice” and that counterparties “should be able to negotiate the terms for investment of Initial Margin consisting of cash within [their] own established investment guidelines.”  110 FHLB added that “Congress appropriately did not seek to limit how margin for uncleared swaps would be invested,” asserting that Congress had assumed that “both the end-user counterparty and the SD/MSP would necessarily be involved in the decision as to how such funds would be invested.”  111 Federated warned that this proposal will cause a loss of investment returns. 112

In contrast, AIMA wrote that “[t]he requirements of Regulation 1.25 of the CFTC Regulations . . . likely strike[ ] the right balance between flexibility and the protection of the value of the collateral.”  113

Regulation 1.25 establishes a general prudential standard used in the futures and cleared swaps markets that requires all permitted investments of customer segregated funds to be consistent with the objectives of preserving principal and maintaining liquidity. 114 As stated by the Commission in regulation 1.25's adopting release, “[i]n finalizing amendments to Regulation 1.25, the Commission seeks to impose requirements on the investment of customer segregated funds with the goal of enhancing the preservation of principal and maintenance of liquidity consistent with Section 4d of the Act.”

Similarly, the Commission believes that applying the requirements of regulation 1.25 to uncleared swaps will increase the safety and maintain the liquidity of counterparty funds held by the custodian. Regulation 1.25 establishes a general prudential standard by requiring that all permitted investments be “consistent with the objectives of preserving principal and maintaining liquidity.”  115 While such a standard may lead to lower investment returns, lower investment returns correlate to decreased investment risk and must be viewed in the context of the importance of protecting counterparties' collateral and mitigating systemic risk that could result from the loss of access to such collateral and, in turn, adversely impact the stability of the U.S. financial markets. After considering the comments, the Commission has decided to adopt the rule as proposed. The Commission believes that the rule achieves the appropriate balance between the goals of protecting counterparties' collateral and mitigating systemic risk, on the one hand, and the goals of retaining an appropriate degree of investment flexibility and opportunities for attaining capital efficiency for DCOs and FCMs investing customer segregated funds, on the other hand.”  116

It should be noted that § 23.703(a) only restricts the manner in which an SD or MSP may invest margin that is segregated pursuant to an election under § 23.701. This rule does not in any way restrict the types of collateral that a counterparty may post to an SD or MSP, nor does it require an SD or MSP to convert, in any way, posted collateral. 117

In addition, as discussed above, the Commission notes that requiring the segregation of variation margin would be beyond the scope of section 4s(l) of the statute and what Congress prescribed therein. 118 However, the Commission believes that it would be consistent with that statute to allow the parties to agree to have segregation arrangements for variation margin. Moreover, the Commission acknowledges that where a counterparty and its SD or MSP have agreed to segregate both initial margin and variation margin, such margin may be commingled and held in the same account. But, to the extent that the parties agree to commingle segregated initial and variation margin, the Commission clarifies that the requirements set forth in Subpart L to this Part 23, including the investment restrictions in regulation 23.703(a), would apply to all margin held (both initial margin and variation margin) in such account.

As required by section 4s(l)(2)(B)(ii) of the CEA and subject to the limitations set forth in regulation 23.603(a), proposed regulation 22.603(b) provided that the SD or MSP and the counterparty may enter into any written commercial arrangement regarding the terms of the investment of segregated margin and the related allocation of gains and losses resulting from such investment. The Commission is adopting this aspect of the rule as proposed. 119

Section 4s(l)(4) of the CEA mandates that, if the counterparty does not choose to require segregation, the SD or MSP shall report to the counterparty, on a quarterly basis, “that the back office procedures of the swap dealer or major swap participant relating to margin and collateral requirements are in compliance with the agreement of the counterparties.”  120 Proposed regulation 23.604(a)  121 implemented this provision and required that such reports be made no later than the fifteenth (15th) business day of each calendar quarter for the preceding calendar quarter. Proposed regulation 23.604(a) made the Chief Compliance Officer of the SD or MSP responsible for such report. In addition, proposed regulation 23.604(b) provided that this obligation shall apply no earlier than the 90th calendar day after the date on which the first swap is transacted between the counterparties.

Four commenters discussed this proposal. 122 The Working Group wrote that quarterly report of back office compliance for swaps with non-segregated margin is unnecessarily burdensome. 123 SIFMA and ISDA also argued that the requirement for a Chief Compliance Officer statement would be burdensome. 124

SIFMA and ISDA went further, suggesting that disclosure should not be required especially where the relevant SD/MSP is permitted to freely sell, pledge, rehypothecate, assign, invest, use, commingle, or otherwise dispose of any independent amount that it holds, since any such disclosure would be meaningless. 125

The Working Group argued that an initial representation as to compliance should be treated as renewed each quarter unless altered by the SD or MSP. 126 SIFMA and ISDA proposed giving the counterparty permission to waive receipt of the quarterly disclosure. 127

The Working Group also suggested that in addition to forgoing or electing segregation under the rule, parties may choose to segregate outside of the proposed rule. 128 For example, the Working Group stated that a counterparty may wish to have its collateral held in an SD's omnibus customer account, and that such agreements should be permitted. 129

By contrast AIMA agreed with the proposal for reporting on a regular basis and suggested that reporting also occur immediately following entry of a swap agreement. 130

While quarterly reporting may impose certain administrative burdens on SDs and MSPs, such quarterly reporting, as contemplated by regulation 23.704, is expressly required by the statute. 131 The Commission agrees that since a counterparty may choose not to segregate at all, it also may elect to segregate in some lesser manner than that contemplated by regulation 23.702. However, the Commission notes that, for counterparties who do not choose segregation, as contemplated by section 4s(l)(1)(B) of the CEA, the purpose of section 4s(l)(4) of the CEA is to confirm that the SD or MSP is adhering to the obligations of their agreement. Therefore, the requirements of regulation 23.704 will apply to all agreements relating to uncleared swaps for which the counterparty does not elect to segregate initial margin pursuant to regulation 23.702. Moreover, the Commission believes that placing responsibility for the report with the chief compliance officer of the SD or MSP required by Section 4s(k) of the CEA is appropriate in light of the chief compliance officer's role in making sure the SD or MSP complies with its statutory and regulatory obligations. 132 The Commission is adopting the rule as proposed.

In the NPRM, the Commission requested comment on the appropriate timing of effectiveness for the final rules for Part 23. SIFMA/ISDA recommended a 6 month implementation period for swaps that are entered into with new counterparties and a 12 month implementation period for swaps that are entered into with existing counterparties. 133 The Working Group recommended a 12 month implementation period. 134 After consideration of the comments, the Commission has decided to adopt SIFMA/ISDA's suggestion, which would provide a 6 month implementation period for swaps that are entered into with “new counterparties” and a 12 month implementation period for swaps that are entered into with “existing counterparties.”

The NRPM proposed changes to the definition of “customer” in § 190.01(k)  135 and the definition of “customer property” in § 190.08(a)(1)(i)(F)  136 to implement section 713(c) of the Dodd-Frank Act, which added section 20(c) of the CEA and stated that the Commission “shall exercise its authority to ensure that securities held in a portfolio margining account carried as a futures account are customer property and the owners of those accounts are customers for the purposes of” subchapter IV of chapter 7 of the U.S. Bankruptcy Code.

The Commission received three comments on these proposals. 137 ICE agreed with the proposed amendments to the definition of “customer” and “customer property” stating that the proposal was “a necessary step toward realizing the important benefits of portfolio margining for market participants.”  138 ICE also expressed concern that the reference to “futures account” while excluding swaps referred to in 4d(f) of the CEA would “create artificial and unnecessary distinctions between futures and other products regulated by the Commission,”  139 and would detract from the “certainty for the treatment in insolvency of portfolio margining arrangements that include both swaps and securities.”  140 As such, ICE requested a technical clarification to make clear that the treatment in insolvency of portfolio margining arrangements includes arrangements involving swaps. 141 AIMA also indicated its approval of the proposed amendments to the definition of “customer” and “customer property,”  142 and ICI supported the proposed amendment as an implementation of section 713(c) of the Dodd-Frank Act. 143

After careful consideration of the comments, the Commission agrees that Congress, in directing the Commission to clarify the treatment of “securities” held in a “futures account,” did not mean to imply that securities held in a Cleared Swaps Customer Account would not be treated as customer property. Accordingly, the Commission will adopt a technical clarification, as suggested by ICE's comments, to avoid the implication that portfolio margining arrangements involving swaps do not receive the same bankruptcy protection as portfolio margining arrangements involving futures. Thus, where the Commission has referred to a “futures account” in the definition of “customer” in § 190.01(k) and the definition of “customer property” in § 190.08(a)(1)(i)(F), the Commission is adding a reference to a “Cleared Swaps Customer Account.” The Commission is otherwise adopting these changes as proposed.

The Commission also proposed certain technical corrections to sections 190.02 and 190.06. The Commission notes, however, that substantively identical technical corrections were completed in a prior rulemaking, and thus no further action is necessary in this regard herein. 144

The Regulatory Flexibility Act (“RFA”) requires Federal agencies to consider the impact of its rules on “small entities.”  145 A regulatory flexibility analysis or certification typically is required for “any rule for which the agency publishes a general notice of proposed rulemaking pursuant to” the notice-and-comment provisions of the Administrative Procedure Act, 5 U.S.C. 553(b). 146

With respect to the proposed release, while the Commission provided an RFA statement that the proposed rule would impose regulatory obligations on SDs and MSPs and noted that SDs and MSPs were new categories of registrants, the Commission determined that the SDs and MSPs were like FCMs and large traders that have been determined not to be small entities. 147 Thus, in the proposal, the Commission certified that the rulemaking would not have a significant economic effect on a substantial number of small entities. Comments on that certification were sought.

As indicated in the NPRM, the final rule will impose regulatory obligations on SDs and MSPs. The conclusion that the rule will not have a significant economic impact on a substantial number of small entities within the meaning of the RFA remains valid for the final rule, which like the proposed rule, imposes duties only on SDs and MSPs. Subsequent to the publication of the NPRM for this rule, the Commission has determined in other rulemakings that SDs and MSPs should not be considered small entities based on their size and characteristics analogous to non-small entities that pre-dated the adoption of the Dodd-Frank Act and has certified that these entities are not small entities for RFA purposes. 148 As stated in prior rules, because of the SDs and MSPs size and characteristics and the “de minimis” requirements, SDs and MSPs should not be considered small entities for purposes of the RFA and SBA regulations. 149 Nevertheless, in the “entities” rule that further defined the terms SD and MSP, supplementing the statutory definitions of those terms, the Commission expected that if any small entity were to engage in the activities covered by the definition, most such entities would be eligible for the “de minimis” exception from the definition. 150 Also, the Commission noted that the MSP participant definition applies only to persons with very large swap positions, and therefore the definition of MSP is incompatible with small entity status. 151 Thus, the “entities” final rule concluded that the rule, insofar as it affected SDs and MSPs, would not have a significant economic impact on a substantial number of small entities. 152 The same reasoning applies to the present rule.

One commenter, representing a number of market participants in the energy business, submitted a comment related to the RFA, stating that “[e]ach of the complex and interrelated regulations currently being proposed by the Commission has both an individual, and a cumulative, effect on . . . small entities.”  153 Upon consideration of this commenter's statements, the CFTC notes that it is not required to consider the cumulative economic impact of the entire mosaic of rules under the Dodd-Frank Act, since an agency is only required to consider the impact of how it exercises its discretion to implement the statute through a particular rule. In all rulemakings, the Commission performs an RFA analysis for that particular rule. The observations of this commenter therefore do not provide a reason to conclude that the rules being promulgated in this rulemaking will have a significant economic impact on a substantial number of small entities within the legal meaning of the RFA. This is so because, as explained above, the rules in question impose duties only on SDs and MSPs and not on other entities, small or otherwise.

Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the final rules will not have a significant economic impact on a substantial number of small entities.

Provisions of new regulation Part 23, specifically regulations 23.701 and 23.704, include information disclosure requirements that constitute the collection of information within the meaning of the Paperwork Reduction Act of 1995 (“PRA”). 154 The Commission therefore has submitted this collection of information to the Office of Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. Under the PRA, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. 155 The title for this collection of information is “Disclosure and Retention of Certain Information Relating to Swaps Customer Collateral,” OMB Control Number 3038-0075, which has been submitted to OMB for approval. The collection of information will be mandatory. The information in question will be held by private entities and, to the extent it involves consumer financial information, may be protected under Title V of the Gramm-Leach-Bliley Act as amended by the Dodd-Frank Act. 156 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 OMB control number.

Estimates of the expected information collection burden related to regulations 23.701 and 23.704 were published for comment in the NPRM. 157 General comments on these regulations and the Commission's response are discussed in a previous section of this preamble. The Commission received two comments specifically addressing the Commission's numerical PRA burden estimate for regulation 23.701. 158 A comment from ISDA stated that the annual burden estimate of 0.3 hours per counterparty for this requirement appeared insufficient. The comment stated:

Specifically, the following documentation-related functions would be necessary: Scheduling, drafting, issuing, tracking, receipt, validation, classification and storage. As a result, we believe that the process contemplated by the Proposed Rules would entail multiple hours of staff time per counterparty. 159

The second comment made substantially the same point. 160 In response to these comments, and certain other considerations, the Commission has reevaluated the per-disclosure burden estimate for regulation 23.701 and has modified the estimate as discussed below.

The Commission has determined to adjust the burden estimate for Regulations 23.701 and 23.704 based on a number of considerations. Both regulations apply to SDs and MSPs. At the time the NPRM was published, it was estimated, for purposes of the PRA burden estimate, that the total number of SDs and MSPs would be about 300 entities. Based on information developed since that time, the Commission now estimates that the total number of SDs and MSPs, and thus the total number of entities required to engage in information collection pursuant to these rules, will be about 125 entities. 161

For the disclosure required by regulation 23.701 the Commission is also adjusting its estimate of the per disclosure burden, for a number of reasons. First, the final regulation requires that the disclosure (a) identify one or more custodians for segregated initial margin acceptable to the SD or MSP, at least one of which must be legally independent of the parties to the transactions and (b) provide information on the price of segregation for each identified custodian to the extent that the SD or MSP has such information. As a result of these changes, it is expected that part of the disclosure required by the regulation will be standardized, with accompanying efficiencies in drafting and making disclosure, but that part of the disclosure may be specific to particular transactions. Second, as noted above, commenters suggested that the burden estimate in the NPRM was insufficient to cover all of the tasks necessary to make the required disclosure.

In the NPRM, the Commission estimated that disclosure required by regulation 23.701 would require 0.3 hours of work per disclosure, which could be performed by staff with a salary level of approximately $20 per hour. The Commission has adjusted this time estimate to 2 hours per disclosure based on the considerations discussed immediately above. The Commission further estimates that the average dollar cost of the disclosure per hour will be $50, giving a cost of $100 for 2 hours of work. 162 In addition, for purposes of the NPRM, the Commission estimated that each SD and MSP would make the disclosure once per year to an average of between 433 and 666 counterparties. 163 The Commission is adjusting the estimate of number of disclosures per SD or MSP per year based on the reduction, noted above, in the estimate of the total number of SDs and MSPs from about 300 to about 125. Assuming a roughly similar total number of counterparties will be doing business with SDs and MSPs, this implies that the number of counterparties doing business with each individual SD or MSP in a year will probably be higher on average than was estimated at the time of the NPRM. To account for this likely effect, the Commission now estimates that each SD and MSP will, on average, make the disclosure to approximately 1300 counterparties each year. As at the time of the NPRM, the Commission expects that the number of counterparties per SD or MSP per year is likely to be considerably higher than this average figure for the largest SDs and MSPs, and smaller than this average figure for some other SDs and MSPs. Given the absence of experience with this newly promulgated rule, these estimates are subject to an inherent degree of uncertainty.

The Commission, in the NPRM, estimated that regulation 23.701 would require a total of approximately 130,000-200,000 disclosures per year, generating an estimated total annual information collection burden of approximately 40,000-60,000 hours and $800,000-$1,200,000. Based on the adjustments described above the Commission estimates that regulation 23.701 will require a total of approximately 162,500 disclosures per year, generating an estimated total annual information collection burden of approximately 325,000 hours and cost of $16,250,000.

The Commission, in the NPRM, estimated that regulation 23.704 would require a total of approximately 260,000-400,000 disclosures per year, generating an estimated total annual information collection burden of approximately 80,000-120,000 hours and $2,400,000-$3,500,000. 164 The Commission is adjusting this estimate based on the reduced estimate of the number of affected SDs and MSPs from 300 to 125, and the increased estimate of 1300 counterparties per SD or MSP. In the absence of more specific information, the Commission continues to assume for purposes of this calculation that half of counterparties will elect not to segregate, and will receive the required quarterly disclosure. The Commission notes that the cost per counterparty can be divided into two costs: An initial cost and an on-going, annual cost. In respect of the initial cost, the Commission estimates a total of twenty hours of the Chief Compliance Officer's time to prepare and design the SD or MSP's compliance procedures for its 23.704 disclosure requirements. In respect of ongoing costs, the Commission recognizes that, while the degree of disclosure to particular counterparties may differ (e.g., agreements may require no disclosure, high-level disclosure only or more in-depth disclosure), it is likely that the levels of disclosures may coalesce around certain intervals such that efficiencies may be observed in respect of analysis and preparation of current disclosures and ongoing updates to the same. The Commission estimates that the Chief Compliance Officer will spend five hours, on an annual basis, updating the existing procedures and reviewing compliance with such procedures as well as an additional hour, on a non-regular basis in perhaps 2% of the cases, addressing non-routine issues that may arise in respect of a particular disclosure to a counterparty. The Commission further estimates that a junior compliance officer will spend, on average, approximately 0.3 hours per counterparty on a quarterly basis, analyzing the procedures followed and preparing the disclosure to be sent.

Based on these adjustments, the Commission now estimates that regulation 23.704 will require initial costs of approximately $280,000 and, on an ongoing basis, a total of approximately 325,000 disclosures per year generating an estimated total annual information collection burden of approximately $3.7 million, based on the following: An annual cost of $29,300 per SD/MSP comprising eighteen hours for the Chief Compliance Officer with a salary level of approximately $110.97 per hour and the annual cost of 780 hours for junior compliance staff with a salary level of approximately $35 per hour, multiplied by an estimated 125 SD/MSPs.

Prior to the passage of the Dodd-Frank Act, the decision to segregate and the mechanics of such segregation were unregulated and left to the negotiation of the parties to the swap. Under new CEA section 4s(l)(1)(A), an SD or MSP is required to notify the counterparty of its right to segregation. Upon request by the counterparty, the SD or MSP must segregate the funds for the benefit of the counterparty, among other requirements under section 4s(l)(1)(B). Other paragraphs of section 4s(l) outline the applicability of the segregation notification, the nature of the custodian and the reporting requirement for unsegregated initial margin.

This legislative act is indicative of Congress's broad intent to increase the safety of the swaps market. While many aspects of Title VII of the Dodd-Frank Act promote the increased clearing of swaps, section 4s(l) indicates Congress' intent to increase the safety in the market for uncleared swaps by creating a self-effectuating requirement for the segregation of counterparty initial margin in an entity legally separate from the SD or MSP.

In the NPRM, the Commission invited the public “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.”  165 The Commission received no such quantitative data or information with respect to these rules. While the Commission did not receive comments directly on the costs and benefit analysis, it did receive comments that alluded to costs, as discussed in more detail in the sections below. For example, some commenters believed that the notification of counterparties of their right to segregation would create an administrative cost (although no commenters attempted to quantify such costs). FHLB, MetLife and EEI characterized transaction-by-transaction notification as repetitive and redundant. 166 Some commenters believed that even yearly notification was unnecessary. 167 On the topic of investing initial margin only as allowed under regulation 1.25, Federated directly stated that this would cause a loss of investment returns. 168 Finally, the Working Group wrote that requiring quarterly reporting for non-segregated margin would be unnecessarily burdensome, indicating that producing such reports might create a needless administrative cost. 169

Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its action before promulgating a regulation. 170 In particular, costs and benefits must 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. Accordingly, the Commission considers the costs and benefits resulting from its own discretionary determinations with respect to the section 15(a) factors.

In issuing these final rules, the Commission has considered the costs and benefits of each aspect of the rules, as well as alternatives to them. In addition, the Commission has evaluated comments received regarding costs and benefits in response to its proposal. Where quantification has not been reasonably estimable due to lack of necessary underlying information, the Commission has considered the costs and benefits of the final rules in qualitative terms.

A discussion of the costs and benefits of this rule and the relevant comments is set out immediately below and continues in the discussion of the section 15(a) factors. The discussion of costs and benefits here should be read in conjunction with the discussion of rule provisions and comments in the remainder of the preamble, which was also taken into account in the Commission's overall consideration of costs and benefits as part of its decision to promulgate the rule.

The major provisions of this final rule reflect specific requirements compelled by the CEA, as amended by the Dodd-Frank Act. This discussion of costs and benefits focuses on the areas in which the Commission used its discretion to introduce standards or requirements beyond those which were required by statute.

The final rule, in regulation 23.701(e), requires notification of the right to segregation once per each year that a new swap is entered into rather than, e.g., at the beginning of a swap transaction or notification only when a counterparty first does business with the SD or MSP. Annual notification offers the benefit of ensuring that the right to segregation is called to the attention of counterparties reasonably close in time to the point at which decisions are made with respect to the handling of collateral for particular swaps transactions without requiring excessive or repetitive notification in cases where a counterparty engages in multiple swaps with a particular SD or MSP over the course of a year. Annual notification also reduces the likelihood that required information regarding custodians and pricing will become obsolete, which would be a significant possibility if notification were given only at the beginning of a multi-year business relationship between a counterparty and the SD or MSP.

The final rule, in regulation 23.701(a)(2), requires the SD or MSP to identify, in the notification, at least one creditworthy non-affiliate acceptable to the SD or MSP as a custodian. As discussed above, there are benefits to requiring that the counterparty have the option of using a non-affiliate custodian for collateral because of the likely higher correlation of default risk between an affiliate custodian and the SD or MSP. There are also benefits to requiring the identity of such a custodian acceptable to the SD or MSP to be specifically disclosed because the identity of the custodian is a material aspect of any segregation package.

The final rule also requires, in regulation 23.701(a)(3), the SD or MSP to provide the counterparty with the price of segregation to the extent that the SD or MSP has such information ( e.g., where the custodian is an affiliate of, or a regular custodian for, the SD or MSP). Requiring the SD or MSP to disclose price information that it has available is beneficial because knowledge of the price of segregation is essential in order for the counterparty to determine the net value of choosing segregation. In transactions in which the parties have agreed that a withdrawal of segregated margin may be made without the written consent of both the counterparty and the SD or MSP, the final rule, in regulation 23.702(c)(2), includes a perjury standard for a party unilaterally representing to the custodian that it is entitled to segregated initial margin. The benefit of a perjury standard for unilateral requests for collateral is that it provides a disincentive to parties who might otherwise be inclined to fraudulently request collateral, particularly in circumstances where financial distress may create incentives to cut corners.

The final rule requires, in regulation 23.703(a), that any investments of segregated initial margin given to an SD or MSP conform to regulation 1.25. While not required by statute, this aspect of the final rule is beneficial because it will serve to safeguard segregated initial margin in the same way that regulation 1.25 safeguards futures and cleared swaps customer collateral. Without this requirement, there exists a possible moral hazard concern that an SD or MSP may engage in excessive risk taking with the funds of a counterparty. This moral hazard arises out of either (i) lack of customer awareness, (ii) agency costs facing the customer that make it difficult to contract around issues of collateral use ( e.g., monitoring costs of the SD's or MSP's activities by the customer), or (iii) existence of a potential government backstop, which lessens the incentive of either SDs or MSPs or their customers to impose restrictions on collateral investment.

The final rule, in regulation 23.704(a), also makes the Chief Compliance Officer of the SD or MSP required by section 4s(k) of the CEA responsible for the report to each counterparty that elects not to require segregation whether or not the back office procedures relating to margin and collateral requirements of the SD or MSP were out of compliance with the agreement between the SD or MSP and the counterparty, consistent with the Chief Compliance Officer's section4s(k)(2)(D) of the CEA duties. This provision should enhance compliance by SDs and MSPs with these aspects of their agreements with their counterparties by highlighting breaches and by incentivizing SDs and MSPs to avoid breaches that would have to be reported. Compliance by SDs and MSPs with provisions concerning margin and collateral requirements should lead to better protection of counterparties in the event of the insolvency of the SD or MSP.

As noted previously, the final rule, in regulation 23.701(e), requires yearly notification of the right to segregation. This is less costly than a requirement that such notification be given with each swap transaction, which would result from a more literal reading of the statute. 171

An estimate of the cost of the required yearly notification is given in the Paperwork Reduction Act section of this preamble, above. The Commission believes that the cost of requiring SDs and MSPs to deliver one notification per year to each counterparty is not overly burdensome, particularly when one considers the importance of the counterparty's decision to require segregation and the large dollar volume of business that is typically done by SDs and MSPs. 172 The increased cost associated with an annual notification requirement, as compared to a requirement that notification only be required at the beginning of a swap relationship between the parties as was urged by some commenters, is the difference in the administrative costs of sending each additional yearly notification as opposed to just one initial notification. Commenters who favored less-than-annual notification did not provide specific estimates of this cost difference. Based on its assessment of the cost of annual notification, the Commission does not believe that this cost difference would impose an unreasonable burden. 173

The requirement that SDs or MSPs reveal to counterparties the identity of one or more potential custodians (one of which must be unaffiliated), and their respective prices of segregation, should impose minimal costs. It is likely that both the identities of custodians and related pricing information would, in the ordinary course, be included in any negotiation between an SD or MSP and a counterparty. In any event, the SD's or MSP's own custodial and pricing decisions are known (or certainly readily knowable) by the SD or MSP, and thus requiring them to be disclosed should introduce minimal cost upon the SD or MSP. There may be an administrative cost to the SD or MSP in initially selecting an unaffiliated custodian, if the SD or MSP did not previously have a relationship with such an entity. This administrative expense need only be a one-time cost and should not be overly burdensome.

The perjury standard introduces a heightened punishment for the inappropriate seizure of customer collateral based on false representations. The primary cost of such a standard is the exercise of excessive caution by SDs or MSPs in asserting their right to this collateral, even in instances where that right is warranted.

The requirement that investments of segregated margin given to an SD or MSP adhere to regulation 1.25 may impose costs. The primary cost would be a loss of investment returns to SDs and MSPs under the rule as opposed to investment returns that would have been permitted without the regulation's restriction. Regulation 1.25 requires that investments of customer collateral by an SD or MSP adhere to a list of enumerated investments, concentration limits and other restrictions because certain investments may not adequately meet the statute's paramount goal of protecting customer funds. 174 Nonetheless, the Commission recognizes that restricting the type and form of permitted investments could result in certain SDs and MSPs earning less income from their investments of customer funds. The Commission has (conservatively) estimated the excess return (or spread) of investing without restrictions, as compared to investing according to regulation 1.25 guidelines, to be between 0% and 4%. 175 The associated cost of imposing regulation 1.25, which needs to also consider the (risk-based) preferences of counterparties over the set of foregone investment opportunities, exists somewhere within this range. Secondarily, there may be administrative costs to SDs and MSPs in ensuring compliance with regulation 1.25 limitations. However, the Commission notes that parties are free to negotiate arrangements outside of the final rule.

An estimate of the cost of the quarterly reporting required pursuant to regulation 23.704 is given in the Paperwork Reduction Act section of this preamble, above. As noted above, the Chief Compliance Officer and junior compliance officers' time may result in an added cost to the implementation of regulation 23.704. The Chief Compliance Officer's involvement with design and implementation of these procedures, however, is commensurate with its section 4s(k)(2)(D) CEA responsibilities for “administrating each policy and procedure that is required to be established pursuant to [section 4s].” In addition, this cost is outweighed by the relative benefit of the design and implementation of effective recordkeeping procedures for the large number of counterparties served by each SD or MSP.

In arriving at the final rules, in areas in which the Commission exercised its discretion, the Commission has considered a number of alternatives suggested by commenters.

The Commission asked in the NPRM whether the SD or MSP should be required to disclose the price of segregation, the fees to be paid to the custodian (if the SD or MSP was aware of such costs) or differences in the terms of the swap that the SD or MSP is willing to offer to the counterparty if the counterparty elects or renounces the right to segregation. SIFMA/ISDA wrote that mandating disclosure is not necessary or desirable because “a counterparty can always, in accordance with current market practice, request disclosures it considers necessary from its SD/MSP … [and] mandatory disclosure by the SD/MSP is impractical because much of the material costs are within the control of a third party: The custodian.”  176 ICI sought to distinguish between fees charged by the custodian—which ICI does not believe need to be disclosed by the SD or MSP—and fees embedded in the SD's or MSP's pricing. 177 State Street suggested that “the Commission should … provide that, although the pricing of the same transaction with and without a segregated account may differ, the pricing difference should be reflective of actual out-of-pocket costs expected to be incurred by the [SD or MSP] as a result of use of the segregated account, and that the nature and amounts of those costs should be fully disclosed.”  178

The Commission could have chosen to take the path requested by SIFMA/ISDA, in which no disclosures are mandated by the regulation, or the path requested by ICI, in which only fees embedded in the SD's or MSP's pricing for segregated margin are disclosed. However, as discussed by several commenters, what is relevant to the counterparty in determining whether to segregate (and with which custodian) is the sum of all associated costs;  179 both those directly associated with the custodian, and any additional charges imposed by the SD or MSP.

The SD or MSP will typically be in a better position to know the fees charged by the custodian than the counterparty. In such instances, the alternatives suggested by SIFMA/ISDA and ICI could result in a lack of pricing information for the counterparty, or at best, a more difficult path for a counterparty to obtain such information. The SD or MSP is responsible for segregation and for using an independent third-party custodian, and providing price information about the total cost of segregation to the counterparty is a key component of evaluating a custodian's service.

The Commission notes State Street's argument, but believes that mandating that the difference in prices charged by the SD or MSP should only reflect the SD's or MSP's out-of-pocket costs would be excessively proscriptive. To the extent that this rule promotes price transparency, it will foster more competitive pricing.

In addition, several commenters requested the Commission eliminate the once-per-year notification in the Commission's proposed rule. SIFMA/ISDA and AMG each wrote that an initial notification is all that should be required. The Commission considered requiring only an initial notification, however it opted for a yearly notification. Yearly notification serves as an appropriate means for calling attention to the importance of the right to segregate collateral, and offers a number of benefits, relative to one-time-only disclosure, as has been discussed above. Similarly, the Commission has concluded that any difference in administrative costs should not be excessively burdensome.

The alternative to a perjury standard for unilateral requests to withdraw collateral from segregation is not to have one. However, it is the Commission's view that heightening the penalty for fraudulently requesting funds to which one is not entitled reduces the incidence of such claims, and may serve the general intent of section 4s(l) to increase the safety and financial integrity of the uncleared swap market and to safeguard the initial margin of parties to uncleared swaps, once segregated, while still providing the benefits of a unilateral ability to withdraw collateral to parties who agree to such an approach. 180

The alternatives to subjecting the investment of segregated initial margin to regulation 1.25 are to subject it to no restrictions at all or to subject it to some other collateral investment regime. The Commission notes that none of the commenters proposed an alternative investment framework or detailed set of restrictions. 181 It is the Commission's view that the purpose of section 4s(l) is to increase the safety of the uncleared swaps market and to protect initial margin, once segregated. Regulation 1.25 is used by the Commission for both futures and cleared swaps as a means by which to protect segregated customer funds against risky investment. Having created a legal standard for this purpose, it makes sense to apply it to uncleared swaps transactions in which counterparties choose to have their collateral segregated within a regulatory framework established by the Commission under the authority of section 4s(l).

Alternatives to reporting requirements to non-segregated collateral would be to require reports less frequently than quarterly and to not place responsibility for such reports on the chief compliance officer. The Commission notes that while quarterly reporting may impose certain administrative burdens on SDs and MSPs, such quarterly reporting, as contemplated by regulation 23.704, is expressly required by the statute. 182 In addition, under section 4s(k)(2)(D) of the CEA, the chief compliance officer is “responsible for administering each policy and procedure that is required to be established pursuant to [section 4s].” Thus, responsibility for compliance with the quarterly reporting requirement, a procedure required by section 4s(l)(4) of the CEA, properly rests with the chief compliance officer.

As noted above, in this final rule, the Commission considers the costs and benefits that result from the regulations issued herein according to the requirements of section 15(a) of the CEA. Previous sections identify four main issues for cost-benefit considerations: (1) Notification of the right to segregate, (2) requirements to reveal the price of segregation, (3) statements affirming the right to seize collateral, and (4) adherence to regulation 1.25 in the investment of segregated collateral. This section discusses those considerations in light of the section 15(a) criteria described above.

This requirement ensures that the right to segregation is called to the attention of counterparties reasonably close in time to the point at which they make decisions regarding the handling of collateral for particular swaps transactions and therefore increases the likelihood that counterparties will make informed decisions on whether to elect segregation. It thereby furthers the protection of market participants and the public and promotes sound risk management practices.

The statute requires the SD or MSP to notify the counterparty of its right to segregation. The final regulation goes beyond the statutory requirement by also requiring that the SD or MSP provide an unaffiliated custodian that it would be willing to use as well as the price associated with segregation. The Commission has determined that the benefits for this requirements are compelling and do not entail any significant costs.

The requirement also promotes the protection of market participants and the public and promotes sound risk management practices. The ability of a counterparty to know the custodian and the price associated with segregation is important because it facilitates the counterparty's decisions regarding whether to segregate initial margin and with whom it wishes to transact swaps. In addition to benefitting counterparties facilitating decisions regarding protection of collateral in uncleared swaps transactions benefits the public. Notwithstanding the movement towards clearing, a large number of swaps will remain bilateral contracts. Congress has determined that systemic risk will be reduced by offering counterparties the right to segregate collateral to avoid losses brought about by default of an SD or MSP and providing information on custodians and pricing promotes the exercise of this right.

This requirement also promotes market efficiency, competitiveness and financial integrity by facilitating counterparty comparison of custodians, which may influence its choice of the SD or MSP with which it wishes to transact swaps. To the extent that such price transparency promotes competition among custodians, one can expect reductions in the cost of segregation, which, in turn, may lead to increased use of the segregation option, with the resultant positive implications for sound risk management practices. Second, requiring that pricing information be obtained by the party best positioned to know such information eliminates a circumstance where a party at a comparative disadvantage for obtaining such information has to do so.

The baseline for comparison of this requirement is typical market practice, which may include civil and criminal actions against a party falsely claiming that it is entitled to funds to which it, in fact, is not.

Introducing a perjury standard for unilateral requests for collateral will serve as an additional disincentive for parties who might otherwise be inclined to fraudulently request collateral. To the extent this standard reduces the incidence of such false claims, the rule acts to promote the protection of market participants and the public. In addition, fraudulent requests for collateral, if honored, can shake victimized parties' confidence in the uncleared segregation regime and damage public confidence in the safety of the uncleared swap market. Heightening disincentives for fraudulent conduct will therefore help to safeguard the financial integrity of the uncleared swap market place. As previously mentioned, a primary cost of this standard is the exercise of excessive caution by SDs or MSPs in asserting their right to this collateral, even in instances where the SD or MSP believes that the unilateral withdrawal of such collateral is authorized, because of the costs and risks of exposure to a potential criminal action. To the extent that this potential cost arises, therefore, the requirement can negatively impact the practice of sound risk management.

Absent this requirement, an SD or MSP's investment options for collateral would be left up to the negotiation of the counterparties.

As discussed above, without this requirement, there exists a possible moral hazard concern that an SD or MSP may engage in excessive risk taking with the funds of a counterparty. The Commission agrees with commenters who claim that this requirement may constrain the investment returns of SDs and MSPs relative to those returns achievable absent the enhanced safety criteria. Recognizing that there may be some reduction in returns, applying regulation 1.25 standards to segregated initial margin of uncleared swaps will benefit market participants and the public by safeguarding such segregated funds.

This regulation also benefits the financial integrity of the market place. A party who invests its customer's segregated funds is required to replenish any losses in the customer account with its own funds. During a period of market stress, such a party might be experiencing losses in other areas, which may increase the difficulty of making the customer whole. In that regard, even if there are not losses in the customer account, strains on the SD's or MSP's sources of funds may cause delays in a counterparty receiving funds to which it is entitled. Regulation 1.25 requires that customer fund investments be made in an enumerated list of instruments which preserve principal and maintain liquidity.

Finally, requiring that investments of segregated initial margin adhere to regulation 1.25 benefits sound risk management practices by ensuring that segregated funds are invested in a safe manner. This benefits the counterparty, whose initial margin is safeguarded, and the market as a whole, because of the decreased likelihood of a market shock causing a chain reaction which results in the loss of segregated funds. While the Commission realizes that there may be administrative costs in ensuring that regulation 1.25 requirements are followed, the Commission expects that SDs and MSPs are sophisticated firms that should be able to make the necessary adjustments without much delay or expense. The overall benefits of safeguarding segregated funds and the resultant reductions in risk to portfolios, as compared to those based on a regulatory framework without such limitations, exceed those costs. 183

For the reasons stated in the preamble, the Commodity Futures Trading Commission amends 17 CFR parts 23 and 190 as follows:

On October 13, 2010, we published final rules that temporarily authorized State agency disability examiners to make fully favorable determinations without the approval of a State agency medical or psychological consultant in claims that we consider under our QDD and CAL processes. 75 FR 62676.

We included in 20 CFR 404.1615(c)(3) and 416.1015(c)(3) provisions by which the State agency disability examiners' authority to make fully favorable determinations without medical or psychological consultant approval in QDD and CAL claims would no longer be effective on November 12, 2013, unless we decided to terminate the rules earlier or extend them beyond that date by publication of a final rule in the Federal Register . 75 FR 62676.

This final rule extends for 1 year the authority in the rules we published on October 13, 2010 allowing disability examiners to make fully favorable determinations in certain disability claims under our QDD and CAL processes without the approval of a medical or psychological consultant. This rule is consistent with our strategic goal to make fully favorable determinations when we can as quickly as possible. 1 The rule will also help us process cases more efficiently because it will allow State agency medical and psychological consultants to spend their time on cases that require their expertise.

In the rules we published on October 13, 2010, we noted that our experience adjudicating QDD and CAL cases led us to our decision to allow disability examiners to make some fully favorable determinations without a medical or psychological consultation. When we implemented the rules, we also knew that State agencies would require some time to establish procedures, adopt necessary software modifications, and satisfy collective bargaining obligations. Extending the rule will provide us at least three years of data on the active processes.

This final rule will allow us to continue to adjudicate fully favorable determinations more quickly under our QDD and CAL processes. Our reviews of cases in fiscal years 2012 and 2013 adjudicated under the current rules show that the rules have not had an adverse effect on the quality of our determinations, and we are continuing to review more recent data. In fact, QDD and CAL cases adjudicated under these rules have accuracy rates that are comparable to, if not higher than, the accuracy rates of other cases involving a medical or psychological consultation. Moreover, among cases for which our reviews identified an error, a significantly smaller share contained material errors that resulted in an incorrect outcome. For these reasons, we have decided to extend the expiration date in §§ 404.1615(c)(3) and 416.1015(c)(3). Accordingly, we are extending the rule for 1 year, until November 14, 2014. As before, we reserve the authority to terminate the rule earlier or to extend it by publishing a final rule in the Federal Register .

We are also making minor, nonsubstantive editorial changes to the first sentence of current §§ 404.1615(c)(3) and 416.1015(c)(3). These minor changes merely improve the clarity of the current sentence.

We follow the Administrative Procedure Act (APA) rulemaking procedures specified in 5 U.S.C. 553 when developing regulations. Section 702(a)(5) of the Social Security Act, 42 U.S.C. 902(a)(5). Generally, the APA requires that an agency provide prior notice and opportunity for public comment before issuing a final rule. However, the APA provides exceptions to its notice and public comment procedures when an agency finds there is good cause for dispensing with such procedures because they are impracticable, unnecessary, or contrary to the public interest.

We have determined that good cause exists for dispensing with the notice and public comment procedures for this rule. 5 U.S.C. 553(b)(B). Good cause exists because this final rule only extends the expiration date of the existing provision and makes minor nonsubstantive editorial changes to the rule. It makes no substantive changes. The current regulations expressly provide that we may extend or terminate this rule. Therefore, we have determined that opportunity for prior comment is unnecessary, and we are issuing this rule as a final rule.

In addition, for the reasons cited above, we find good cause for dispensing with the 30-day delay in the effective date of this final rule. 5 U.S.C. 553(d)(3). We are not making any substantive changes in our current rule, but are only extending the expiration date of the rule and making minor editorial changes. In addition, as discussed above, the change we are making in this final rule will allow us to better utilize our scarce administrative resources in light of the current budgetary constraints under which we are operating. For these reasons, we find that it is contrary to the public interest to delay the effective date of our rule.

We consulted with the Office of Management and Budget (OMB) and determined that this final rule does not meet the criteria for a significant regulatory action under Executive Order 12866, as supplemented by Executive Order 13563. Therefore, OMB did not review it.

We also determined that this final rule meets the plain language requirement of Executive Order 12866.

We certify that this final rule will not have a significant economic impact on a substantial number of small entities because it affects individuals only. Therefore, the Regulatory Flexibility Act, as amended, does not require us to prepare a regulatory flexibility analysis.

This final rule does not create any new or affect any existing collections and, therefore, does not require OMB approval under the Paperwork Reduction Act.

For the reasons stated in the preamble, we are amending subpart Q of part 404 and subpart J of part 416 of title 20 of the Code of Federal Regulations as set forth below:

Background

This document contains amendments to 26 CFR part 1. On July 22, 2011, temporary regulations (TD 9538) relating to the effect of the transfer or assignment of certain derivative contracts under section 1001 of the Internal Revenue Code (Code) were published in the Federal Register (76 FR 43892). A notice of proposed rulemaking (REG-109006-11) cross-referencing the temporary regulations was published in the Federal Register for the same day (76 FR 43957). A correction to the temporary regulations was published on August 19, 2011, in the Federal Register (76 FR 51878). No public hearing was requested or held. No written or electronic comments responding to the notice of proposed rulemaking were received. The proposed regulations are adopted as amended by this Treasury decision, and the corresponding temporary regulations are removed.

Section 1001 provides rules for the computation and recognition of gain or loss from a sale or other disposition of property. For purposes of section 1001, § 1.1001-1(a) of the Income Tax Regulations generally provides that gain or loss is realized upon an exchange of property for other property differing materially either in kind or in extent. As a general matter, the assignment of a derivative contract is treated as a taxable disposition to a nonassigning counterparty if the resulting contract differs materially either in kind or in extent. See Cottage Savings Association v. Commissioner, 499 U.S. 554, 566 (1991) [1991-2 CB 34, 38] (“Under [the Court's] interpretation of [section] 1001(a), an exchange of property gives rise to a realization event so long as the exchanged properties are `materially different'—that is, so long as they embody legally distinct entitlements.”). The temporary regulations provide, however, that the transfer or assignment of a derivative contract by a dealer or clearinghouse to another dealer or clearinghouse is not treated as a deemed exchange of the contract by the nonassigning counterparty for purposes of § 1.1001-1(a) provided that the transfer or assignment is permitted by the terms of the contract and the terms of the contract are not otherwise modified.

The final regulations adopt the general rule in the temporary regulations providing that a transfer or assignment of a derivative contract that satisfies the conditions specified in the regulations is generally not treated by the nonassigning counterparty as a deemed exchange of the original contract under § 1.1001-1(a). As explained below, a sentence has been added to the final regulations to clarify that a loan is not created when a notional principal contract (NPC) is transferred or assigned under the conditions specified in these final regulations.

In general, § 1.446-3(h) provides rules that prescribe the treatment of a termination payment made or received by the assignor or assignee pursuant to an assignment of an NPC, while the consequences to the nonassigning counterparty are governed by section 1001. A termination payment made or received on an NPC is treated by the assignee as a nonperiodic payment under § 1.446-3(h)(3). See § 1.446-3(h)(5), Example 2. In addition, § 1.446-3(h)(3) makes the special rules of § 1.446-3(g)(4) applicable to a termination payment made pursuant to an NPC. Section 1.446-3(g)(4) generally provides that a swap with significant nonperiodic payments is treated as two transactions, an on-market, level payment swap and a loan.

These final regulations expressly provide that a payment between the party transferring or assigning its rights and obligations under the contract and the party to which the rights and obligations are transferred or assigned pursuant to the transfer or assignment of an NPC that meets the conditions specified in these regulations is not subject to the embedded loan rules in § 1.446-3(g)(4). Thus, neither the assignee nor the nonassigning counterparty is treated as having an embedded loan under § 1.446-3(g)(4) as a result of a payment made between the assignor and the assignee of an NPC pursuant to a transfer or assignment that satisfies the requirements of § 1.1001-4(a). The Treasury Department and the IRS believe that it would be inconsistent for an embedded loan to result from such a payment in circumstances in which the general rule in § 1.1001-4(a) treats the transfer or assignment of an NPC as not creating a taxable event for the nonassigning counterparty.

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received.

The principal author of these regulations is Andrea M. Hoffenson, Office of Associate Chief Counsel (Financial Institutions and Products). However, other personnel from the IRS and the Treasury Department participated in their development.

The final regulations that are the subject of these corrections superseded their predecessor regulations in 29 CFR parts 1910 and 1926 on the effective date, and affect employers required to use accident prevention signs and tags under the specified standards.

As published, the final regulations contain errors that may prove to be misleading and ambiguous references to illustrative figures in incorporated-by-reference ANSI standards. Specifically, the incorporation-by-reference provisions in 29 CFR 1910.6(e)(66) and (e)(67) and 1926.6(h)(28)-(h)(30) misidentify the vendors and locations where the public can purchase the updated ANSI Z535 standards. In addition, the references in 29 CFR 1926.200(b) and (c), “Accident prevention signs and tags,” to figures in ANSI Z535.2-2011 are ambiguous. These references need to be clarified because the figures they denote illustrate sign specifications that employers have the option of following.

Accordingly, 29 CFR parts 1910 and 1926 are corrected by making the following correcting amendments:

Copies of this Federal Register notice: Electronic copies of this Federal Register notice are available at http://www.regulations.gov . This Federal Register notice, as well as news releases and other relevant information, also are available at OSHA's Web page at http://www.osha.gov .

Confirmation of the effective date: On June 13, 2013, OSHA published a direct final rule (DFR) in the Federal Register that revised its signage standards for general industry at 29 CFR 1910.97, 1910.145, and 1910.261, and construction at 29 CFR 1926.200, by updating references to the American National Standards Institute (ANSI) signage protection standards ( see 78 FR 35559). Specifically, the DFR updated the signage references in OSHA's existing general industry and construction standards, including references to ANSI Z53.1-1967 (Safety Color Code for Marking Physical Hazards), Z35.1-1968 (Specifications for Accident Prevention Signs), and Z35.2-1968 (Specifications for Accident Prevention Tags), by adding references to the latest ANSI standards, including ANSI Z535.1-2006 (R2011) (Safety Colors), Z535.2-2011 (Environmental and Facility Safety Signs), and Z535.5-2011 (Safety Tags and Barricade Tapes (for Temporary Hazards)). Thus, the DFR allowed employers to follow either the updated ANSI standards or the older ANSI signage standards already referenced in OSHA's existing general industry and construction standards.

The DFR also incorporated by reference Part VI of the Manual of Uniform Traffic Control Devices, 1988 Edition, Revision 3, into 29 CFR 1926.6, and amended citations in two provisions of the construction standards to show the correct incorporation-by-reference section.

In the DFR, OSHA stated that it would confirm the effective date of the DFR if it received no significant adverse comments. OSHA received eight favorable and no adverse comments on the DFR ( see ID: OSHA-2013-0005-0008 thru -0015 in the docket for this rulemaking). Accordingly, OSHA is confirming the effective date of the final rule.

In addition to explicitly supporting the DFR, several of the commenters provided supplemental information. Mr. Charles Johnson of AltairStrickland stated that as a result of “[OSHA's] incorporating both the 1968 and the [2011] versions of the ANSI Z535 standard by reference[,] both manufacturers and employers will likely migrate to the newer versions and the older versions will likely fade away as demand declines” (ID: OSHA-2013-0005-0011). Mr. Johnson also commented that “[h]ad OSHA deleted the reference to the ANSI Z35.1-1968 language, these signs would require replacement at considerable and unnecessary cost to employers.” Id.

A second commenter, Mr. Blair Brewster of MySafetySign.com, described several advantages and limitations of the updated ANSI signage standards, concluding that “[i]t would be arrogant to assume that a single standard is best. The ANSI Z535 designs, the traditional safety sign and tag designs, as well as the countless other designs to come, will all have their place and will all coexist” (ID: OSHA-2013-0005-0014).

A third commenter, Mr. Kyle Pitsor of the National Electrical Manufacturers Association (NEMA) stated that “[w]hile we would have preferred that the references to the outdated standards be removed entirely from OSHA's regulations, NEMA agrees that giving employers the option of using signs and tags that meet either the 1967-1968 or the most recent versions of the standards will provide the greatest flexibility without imposing additional costs” (ID: OSHA-2013-0005-0013). Mr. Pitsor also helpfully noted that, contrary to proposed §§ 1910.6(e)(66) and (e)(67) and 1926.6(h)(28)-(h)(30), the International Safety Equipment Association (ISEA) is not authorized to sell the ANSI Z535 standards proposed for incorporation by reference, and these standards are not sold on the ISEA Web site, www.safetyequipment.org. In response to Mr. Pitsor's comment, OSHA is correcting the incorporation-by-reference provisions in question in 29 CFR 1910.6 and 1926.6 in a separate Federal Register notice identifying the three locations where the public can purchase the updated ANSI Z535 standards.

Finally, OSHA received an email from Jonathan Stewart, Manager, Government Relations, NEMA, after the comment period ended (ID: OSHA-2013-0005-0015). In his email, Mr. Stewart mentioned NEMA's earlier comments to the docket (ID: OSHA-2013-0005-0013), and stated that “[w]hile reflective of NEMA's position, those comments did not include a clarification regarding the language that the NRPM used in Sec. 1926.200 Accident prevention signs and tags.” He further indicated that “[t]he language, while not inaccurate, was unclear regarding which figure(s) it intended to reference in the ANSI Z535.2-2011 standard.” Although this comment was late, OSHA considered it because it was a purely technical comment, pointing out an ambiguity in the cited provision's reference to figures in the updated version of the national consensus standard, ANSI Z535.2-2011. OSHA finds that the comment has merit, and accordingly is clarifying the language in 29 CFR 1926.200(b) and (c) specifying which figures employers must follow in ANSI Z535.2-2011.

David Michaels, Ph.D., MPH, Assistant Secretary of Labor for Occupational Safety and Health, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210, authorized the preparation of this final rule. OSHA is issuing this final rule pursuant to 29 U.S.C. 653, 655, and 657, 5 U.S.C. 553, Secretary of Labor's Order 1-2012 (77 FR 3912), and 29 CFR part 1911.

Pursuant to section 4 of the Federal Civil Penalties Inflation Adjustment Act of 1990, 28 U.S.C. 2461 note, as amended by the DCIA, 31 U.S.C. 3701 note, each federal agency is required to issue regulations adjusting for inflation the statutory civil monetary penalties  1 (“civil penalties” or “penalties”) that can be imposed under the laws administered by that agency. The purpose of these adjustments is to maintain the deterrent effect of civil penalties and to further the policy goals of the underlying statutes. The DCIA requires adjustments to be made at least once every four years following the initial adjustment. EPA's initial adjustment to each statutory civil penalty amount was published in the Federal Register on December 31, 1996 (61 FR 69360), and became effective on January 30, 1997 (“the 1996 Rule”). EPA's second adjustment to civil penalty amounts was published in the Federal Register on February 13, 2004 (69 FR 7121), and became effective on March 15, 2004 (“the 2004 Rule”). EPA's third adjustment to civil penalty amounts was published in the Federal Register on December 11, 2008 (73 FR 75340), as corrected in the Federal Register on January 7, 2009 (74 FR 626), and became effective on January 12, 2009 (“the 2008 Rule”).

Where necessary under the DCIA, this rule, specifically Table 1 in 40 CFR 19.4, adjusts for inflation the maximum and, in some cases, the minimum amount of the statutory civil penalty that may be imposed for violations of EPA-administered statutes and their implementing regulations. Table 1 of 40 CFR 19.4 identifies the applicable EPA-administered statutes and sets out the inflation-adjusted civil penalty amounts that may be imposed pursuant to each statutory provision after the effective dates of the 1996, 2004 and 2008 rules. Where required under the DCIA formula, this rule amends the adjusted penalty amounts in Table 1 of 40 CFR 19.4 for those violations that occur after the effective date of this rule.

The formula prescribed by the DCIA for determining the inflation adjustment, if any, to statutory civil penalties consists of the following four-step process:

1. Determine the Cost-of-Living Adjustment (COLA). The COLA is determined by calculating the percentage increase, if any, by which the Consumer Price Index  2 for all-urban consumers (CPI-U) for the month of June of the calendar year preceding the adjustment exceeds the CPI-U for the month of June of the calendar year in which the amount of such civil monetary penalty was last set or adjusted. 3 Accordingly, the COLA applied under this rule equals the percentage by which the CPI-U for June 2012 ( i.e., June of the year preceding this year), exceeds the CPI-U for June of the year in which the amount of a specific penalty was last adjusted ( i.e., 2008, 2004 or 1996, as the case may be). Given that the last inflation adjustment was published on December 11, 2008, the COLA for most civil penalties set forth in this rule was calculated by determining the percentage by which the CPI-U for June 2012 (229.478) exceeds the CPI-U for June 2008 (218.815), resulting in a COLA of 4.87 percent. For those few civil penalty amounts that were last adjusted under the 2004 Rule, the COLA equals 20.97 percent, calculated by determining the percentage by which the CPI-U for June 2012 (229.478) exceeds the CPI-U for June 2004 (189.7). In the case of the maximum civil penalty that can be imposed under section 311(b)(7)(A) of the Clean Water Act, 33 U.S.C. 1321(b)(7)(A), which is the sole civil penalty last adjusted under the 1996 Rule, the COLA is 46.45 percent, determined by calculating the percentage by which the CPI-U for June 2012 (229.478) exceeds the CPI-U for June 1996 (156.7).

2. Calculate the Raw Inflation Increase. Once the COLA is determined, the second step is to multiply the COLA by the current civil penalty amount to determine the raw inflation increase.

3. Apply the DCIA's Rounding Rule to the Raw Inflation Increase. The third step is to round this raw inflation increase according to section 5(a) of the Federal Civil Penalties Inflation Adjustment Act of 1990, 28 U.S.C. 2461 note, as amended by the DCIA, 31 U.S.C. 3701 note. The DCIA's rounding rules require that any increase be rounded to the nearest multiple of: $10 in the case of penalties less than or equal to $100; $100 in the case of penalties greater than $100 but less than or equal to $1,000; $1,000 in the case of penalties greater than $1,000 but less than or equal to $10,000; $5,000 in the case of penalties greater than $10,000 but less than or equal to $100,000; $10,000 in the case of penalties greater than $100,000 but less than or equal to $200,000; and $25,000 in the case of penalties greater than $200,000. ( See section 5(a) of the Federal Civil Penalties Inflation Adjustment Act of 1990, 28 U.S.C. 2461 note, as amended by the DCIA, 31 U.S.C. 3701 note.)

4. Add the Rounded Inflation Increase, if any, to the Current Penalty Amount. Once the inflation increase has been rounded pursuant to the DCIA, the fourth step is to add the rounded inflation increase to the current civil penalty amount to obtain the new, inflation-adjusted civil penalty amount. For example, in this rule, the current statutory maximum penalty amounts that may be imposed under Clean Air Act (CAA) section 113(d)(1), 42 U.S.C. 7413(d)(1), and CAA section 205(c)(1), 42 U.S.C. 7524(c)(1), are increasing from $295,000 to $320,000. These penalty amounts were last adjusted with the promulgation of the 2008 Rule, when these penalties were adjusted for inflation from $270,000 to $295,000. Applying the COLA adjustment to the current penalty amount of $295,000 results in a raw inflation increase of $14,376 for both penalties. As stated above, the DCIA rounding rule requires the raw inflation increase to be rounded to the nearest multiple of $25,000 for penalties greater than $200,000. Rounding $14,376 to the nearest multiple of $25,000 equals $25,000. That rounded increase increment of $25,000 is then added to the $295,000 penalty amount to arrive at a total inflation adjusted penalty amount of $320,000. Accordingly, once this rule is effective, the statutory maximum amounts of these penalties will increase to $320,000.

In contrast, this rule does not adjust those civil penalty amounts where the raw inflation amounts are not high enough to round up to the required multiple stated in the DCIA. For example, under section 3008(a)(3) of the Resource Conservation and Recovery Act, 42 U.S.C. 6928(a)(3), the Administrator may assess a civil penalty of up to $37,500 per day of noncompliance for each violation. This penalty was last adjusted for inflation under the 2008 Rule. Multiplying the applicable 4.87 percent COLA to the statutory civil penalty amount of $37,500, the raw inflation increase equals only $1,827.40; the DCIA rounding rule requires a raw inflation increase increment to be rounded to the nearest multiple of $5,000 for penalties greater than $10,000 but less than or equal to $100,000. Because this raw inflation increase is not sufficient to be rounded up to a multiple of $5,000, in accordance with the DCIA's rounding rule, this rule does not increase the $37,500 penalty amount. However, if during the development of EPA's next Civil Monetary Penalty Inflation Adjustment Rule, anticipated to be promulgated in 2017, the raw inflation increase can be rounded up to the next multiple of $5,000, statutory maximum penalty amounts currently at $37,500 will be increased to $42,500.

Because of the low rate of inflation since 2008, coupled with the application of the DCIA's rounding rules, only 20 of the 88 statutory civil penalty provisions implemented by EPA are being adjusted for inflation under this rule. Assuming there are no changes to the mandate imposed by the DCIA, EPA intends to review all statutory penalty amounts and adjust them as necessary to account for inflation in the year 2017 and every four years thereafter.

EPA is revising the row of Table 1 of 40 CFR 19.4, which lists the statutory maximum penalty amounts that can be imposed under section 325(b) of EPCRA, 42 U.S.C. 11045(b), to break out separately the three penalty authorities contained in subsection (b). Since 1996, EPA has been adjusting for inflation all of the statutory maximum penalty amounts specified under EPCRA section 325(b), 42 U.S.C. 11045(b). Under past rules, the Agency has grouped the maximum penalty amounts that may be assessed under section 325(b) under the heading of 42 U.S.C. 11045(b) in Table 1 of 40 CFR 19.4. For example, under the 2008 Rule, Table 1 of 40 CFR 19.4 reflects that the statutory maximum penalties that can be imposed under any subparagraph of EPCRA section 325(b) are $37,500 and $107,500. Consistent with how the other penalty authorities are displayed under Part 19.4, Table 1 now delineates, on a subpart-by-subpart basis, the penalty authorities enumerated under section 325(b) of EPCRA, 42 U.S.C. 11045(b) ( i.e., 42 U.S.C. 11045(b)(1)(A), (b)(2), and (b)(3)). That is, upon the effective date of this rule, the statutory maximum penalty that can be imposed under section 325(b)(1)(A) is $37,500; the statutory maximum penalties that can be imposed under section 325(b)(2) are $37,500 and $117,500; and the statutory maximum penalties that can be imposed under section 325(b)(3) are $37,500 and $117,500.

Section 6 of the DCIA provides that “any increase under [the DCIA] in a civil monetary penalty shall apply only to violations which occur after the date the increase takes effect.” ( See section 6 of the Federal Civil Penalties Inflation Adjustment Act of 1990, 28 U.S.C. 2461 note, as amended by the DCIA, 31 U.S.C. 3701 note.) Thus, the new inflation-adjusted civil penalty amounts may be applied only to violations that occur after the effective date of this rule.

Section 553(b) of the Administrative Procedure Act (APA) provides that, when an agency for good cause finds that “notice and public procedure . . . are impracticable, unnecessary, or contrary to the public interest,” the agency may issue a rule without providing notice and an opportunity for public comment. EPA finds that there is good cause to promulgate this rule without providing for public comment. The primary purpose of this final rule is merely to implement the statutory directive in the DCIA to make periodic increases in civil penalty amounts by applying the adjustment formula and rounding rules established by the statute. Because the calculation of the increases is formula-driven and prescribed by statute, EPA has no discretion to vary the amount of the adjustment to reflect any views or suggestions provided by commenters. Accordingly, it would serve no purpose to provide an opportunity for public comment on this rule. Thus, notice and public comment is unnecessary.

In addition, EPA is making the technical revisions discussed above without notice and public comment. Because the technical revisions to Table 1 of 40 CFR 19.4 more accurately reflect the statutory provisions under each of the subparagraphs of section 325(b) ( i.e., under 42 U.S.C. 11045(b)(1)(A), (b)(2), and (b)(3)) and do not constitute substantive revisions to the rule, these changes do not require notice and comment.

This action is not a “significant regulatory action” under the terms of Executive Order 12866 (58 FR 51735, October 4, 1993) and therefore is not subject to review under the Executive Orders 12866 and 13563 (76 FR 3821, January 21, 2011).

This action does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501-3521. Burden is defined at 5 CFR 1320.3(b). This rule merely increases the amount of civil penalties that could be imposed in the context of a federal civil administrative enforcement action or civil judicial case for violations of EPA-administered statutes and their implementing regulations.

Today's final rule is not subject to the Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612, which generally requires an agency to prepare a regulatory flexibility analysis for any rule that will have a significant economic impact on a substantial number of small entities. The RFA applies only to rules subject to notice and comment rulemaking requirements under the APA or any other statute. This rule is not subject to notice and comment requirements under the APA or any other statute because although the rule is subject to the APA, the Agency has invoked the “good cause” exemption under 5 U.S.C. 553(b), therefore it is not subject to the notice and comment requirements.

This action contains no federal mandates under the provisions of Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1531-1538 for state, local, or tribal governments or the private sector. The action implements mandates specifically and explicitly set forth by Congress in the DCIA without the exercise of any policy discretion by EPA. By applying the adjustment formula and rounding rules prescribed by the DCIA, this rule adjusts for inflation the statutory maximum and, in some cases, the minimum, amount of civil penalties that can be assessed by EPA in an administrative enforcement action, or by the U.S. Attorney General in a civil judicial case, for violations of EPA-administered statutes and their implementing regulations. Because the calculation of any increase is formula-driven, EPA has no policy discretion to vary the amount of the adjustment. Given that the Agency has made a “good cause” finding that this rule is not subject to notice and comment requirements under the APA or any other statute ( see Section IV of this notice), it is not subject to sections 202 and 205 of UMRA. EPA has also determined that this action is not subject to the requirements of section 203 of UMRA because it contains no regulatory requirements that might significantly or uniquely affect small governments. This rule merely increases the amount of civil penalties that could conceivably be imposed in the context of a federal civil administrative enforcement action or civil judicial case for violations of EPA-administered statutes and their implementing regulations.

This action does not have federalism implications. It will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999). This rule merely increases the amount of civil penalties that could conceivably be imposed in the context of a federal civil administrative enforcement action or civil judicial case for violations of EPA-administered statutes and their implementing regulations. Thus, Executive Order 13132 does not apply to this rule.

This action does not have tribal implications, as specified in Executive Order 13175 (65 FR 67249, November 9, 2000). This rule merely increases the amount of civil penalties that could be imposed in the context of a federal civil administrative enforcement action or civil judicial case for violations of EPA-administered statutes and their implementing regulations. This final rule will not have substantial direct effects on tribal governments, on the relationship between the federal government and Indian tribes, or on the distribution of power and responsibilities between the federal government and Indian tribes. Thus, Executive Order 13175 does not apply to this action.

EPA interprets Executive Order 13045 (62 FR 19885, April 23, 1997) as applying only to those regulatory actions that concern health or safety risks, such that the analysis required under section 5-501 of the Executive Order has the potential to influence the regulation. This action is not subject to Executive Order 13045 because it does not establish an environmental standard intended to mitigate health or safety risks.

This action is not subject to Executive Order 13211 (66 FR 28355, May 22, 2001), because it is not a significant regulatory action under Executive Order 12866.

Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (“NTTAA”), 15 U.S.C. 272 note, directs EPA to use voluntary consensus standards in its regulatory activities unless to do so would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards (e.g., materials specifications, test methods, sampling procedures, and business practices) that are developed or adopted by voluntary consensus standards bodies. NTTAA directs EPA to provide Congress, through the U.S. Office of Management and Budget, explanations when the Agency decides not to use available and applicable voluntary consensus standards. This action does not involve technical standards. Therefore, EPA did not consider the use of any voluntary consensus standards.

Executive Order 12898 (59 FR 7629, February 16, 1994) establishes federal executive policy on environmental justice. Its main provision directs federal agencies, to the greatest extent practicable and permitted by law, to make environmental justice part of their mission by identifying and addressing, as appropriate, disproportionately high and adverse human health or environmental effects of their programs, policies, and activities on minority populations and low-income populations in the United States. EPA lacks the discretionary authority to address environmental justice in this final rulemaking. The primary purpose of this final rule is merely to apply the DCIA's inflation adjustment formula to make periodic increases in the civil penalties that may be imposed for violations of EPA-administered statutes and their implementing regulations. Thus, because calculation of the increases is formula-driven, EPA has no discretion in updating the rule to reflect the allowable statutory civil penalties derived from applying the formula. Since there is no discretion under the DCIA in determining the statutory civil penalty amount, EPA cannot vary the amount of the civil penalty adjustment to address other issues, including environmental justice issues.

The Congressional Review Act, 5 U.S.C. 801-808, as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register . A major rule cannot take effect until 60 days after it is published in the Federal Register . This action is not a “major rule” as defined by 5 U.S.C. 804(2).

For the reasons set out in the preamble, title 40, chapter I, part 19 of the Code of Federal Regulations is amended as follows:

I. General Information A. Does this action apply to me?

You may be potentially affected by this action if you are an agricultural producer, food manufacturer, or pesticide manufacturer. The following list of North American Industrial Classification System (NAICS) codes is not intended to be exhaustive, but rather provides a guide to help readers determine whether this document applies to them. Potentially affected entities may include:

• Crop production (NAICS code 111).

• Animal production (NAICS code 112).

• Food manufacturing (NAICS code 311).

• Pesticide manufacturing (NAICS code 32532).

You may access a frequently updated electronic version of EPA's tolerance regulations at 40 CFR part 180 through the Government Printing Office's e-CFR site at http://www.ecfr.gov/cgi-bin/text-idx?&c=ecfr&tpl=/ecfrbrowse/Title40/40tab_02.tpl.

Under FFDCA section 408(g), 21 U.S.C. 346a, any person may file an objection to any aspect of this regulation and may also request a hearing on those objections. You must file your objection or request a hearing on this regulation in accordance with the instructions provided in 40 CFR part 178. To ensure proper receipt by EPA, you must identify docket ID number EPA-HQ-OPP-2012-0107 in the subject line on the first page of your submission. All objections and requests for a hearing must be in writing, and must be received by the Hearing Clerk on or before January 6, 2014. Addresses for mail and hand delivery of objections and hearing requests are provided in 40 CFR 178.25(b).

In addition to filing an objection or hearing request with the Hearing Clerk as described in 40 CFR part 178, please submit a copy of the filing (excluding any Confidential Business Information (CBI)) for inclusion in the public docket. Information not marked confidential pursuant to 40 CFR part 2 may be disclosed publicly by EPA without prior notice. Submit the non-CBI copy of your objection or hearing request, identified by docket ID number EPA-HQ-OPP-2012-0107, by one of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the online instructions for submitting comments. Do not submit electronically any information you consider to be CBI or other information whose disclosure is restricted by statute.

• Mail: OPP Docket, Environmental Protection Agency Docket Center (EPA/DC), (28221T), 1200 Pennsylvania Ave. NW., Washington, DC 20460-0001.

• Hand Delivery: To make special arrangements for hand delivery or delivery of boxed information, please follow the instructions at http://www.epa.gov/dockets/contacts.html.

Section 408(b)(2)(A)(i) of FFDCA allows EPA to establish a tolerance (the legal limit for a pesticide chemical residue in or on a food) only if EPA determines that the tolerance is “safe.” Section 408(b)(2)(A)(ii) of FFDCA defines “safe” to mean that “there is a reasonable certainty that no harm will result from aggregate exposure to the pesticide chemical residue, including all anticipated dietary exposures and all other exposures for which there is reliable information.” This includes exposure through drinking water and in residential settings, but does not include occupational exposure. Section 408(b)(2)(C) of FFDCA requires EPA to give special consideration to exposure of infants and children to the pesticide chemical residue in establishing a tolerance and to “ensure that there is a reasonable certainty that no harm will result to infants and children from aggregate exposure to the pesticide chemical residue. . . .”

Consistent with FFDCA section 408(b)(2)(D), and the factors specified in FFDCA section 408(b)(2)(D), EPA has reviewed the available scientific data and other relevant information in support of this action. EPA has sufficient data to assess the hazards of and to make a determination on aggregate exposure for spirotetramat including exposure resulting from the tolerances established by this action. EPA's assessment of exposures and risks associated with spirotetramat follows.

In the Federal Register of July 17, 2013 (78 FR 42736) (FRL-9391-6), the EPA proposed, on its own initiative under FFDCA section 408(e), 21 U.S.C. 346a(e), to establish a tolerance for residues of the insecticide spirotetramat in or on corn, sweet kernel plus cob with husks removed at 1.5 parts per million (ppm) and persimmon at 2.5 ppm. Additionally, EPA proposed to revise 40 CFR 180.641 by amending established tolerances in or on feijoa from 0.30 ppm to 2.5 ppm, papaya from 2.5 ppm to 0.40 ppm, and Spanish lime from 0.60 ppm to 13 ppm. The proposed rule referenced a recently published spirotetramat final rule printed in the Federal Register of May 15, 2013 (78 FR 28507) (FRL-9382-8); in the risk assessments associated with that final rule, the EPA also considered these proposed uses. Since that time, the toxicity profile of spirotetramat has not changed, and the risk assessments that supported the establishment of those spirotetramat tolerances published in the May 15, 2013 Federal Register final rule remain valid. For a detailed discussion of the aggregate risk assessments and determination of safety that support these new and revised uses, please refer to the May 15, 2013 Federal Register final rule and its supporting documents, available at http://www.regulations.gov.

Therefore, EPA concludes that there is a reasonable certainty that no harm will result to the general population and to infants and children from aggregate exposure to spirotetramat residues. EPA relies upon the findings made in the May 15, 2013 Federal Register final rule and the underlying risk assessments in order to establish the new and revised tolerances as detailed in the July 17, 2013 Federal Register proposed rule.

Adequate enforcement methodology, a high-performance liquid chromatography with tandem mass spectrometry (HPLC-MS/MS), is available to enforce the tolerance expression. The method may be requested from: Chief, Analytical Chemistry Branch, Environmental Science Center, 701 Mapes Rd., Ft. Meade, MD 20755-5350; telephone number: (410) 305-2905; email address: residuemethods@epa.gov.

In making its tolerance decisions, EPA seeks to harmonize U.S. tolerances with international standards whenever possible, consistent with U.S. food safety standards and agricultural practices. EPA considers the international maximum residue limits (MRLs) established by the Codex Alimentarius Commission (Codex), as required by FFDCA section 408(b)(4). The Codex Alimentarius is a joint United Nations Food and Agriculture Organization/World Health Organization food standards program, and it is recognized as an international food safety standards-setting organization in trade agreements to which the United States is a party. EPA may establish a tolerance that is different from a Codex MRL; however, FFDCA section 408(b)(4) requires that EPA explain the reasons for departing from the Codex level.

The Codex has established a MRL for spirotetramat in or on papaya at 0.4 milligram/kilogram (mg/kg). This MRL is the same as the tolerance established for spirotetramat in or on papaya at 0.40 ppm in the United States. There are no Codex MRLs established for the other commodities associated with this final rule.

The EPA received one comment to the proposed rule which stated that no tolerances should be allowed for spirotetramat. The commenter expressed a general opposition to the use of “toxic chemicals” on food and faulted EPA for not conducting toxicity testing that combined spirotetramat with the “thousands” of other approved pesticides. The Agency understands the commenter's concerns and recognizes that some individuals believe that certain pesticide chemicals should not be permitted in our food. However, the existing legal framework provided by FFDCA section 408 states that tolerances may be set when the pesticide meets the safety standard imposed by that statute. The Agency is required by FFDCA section 408 to estimate the risk of the potential exposure to these residues. EPA has concluded that there is a reasonable certainty that no harm will result from aggregate human exposure to spirotetramat residues from these uses. As far as the toxicity testing relied upon by EPA, testing requirements for pesticide tolerances have been specified by rulemaking after allowing for notice and comment by the public and peer review by appropriate scientific bodies. See 40 CFR part 158. Toxicity testing of a pesticide in combination with all other approved pesticides is neither required by the testing regulations nor practical.

Therefore, tolerances are established for residues of spirotetramat, (cis-3-(2,5-dimethlyphenyl)-8-methoxy-2-oxo-1-azaspiro[4.5]dec-3-en-4-yl-ethyl carbonate) and its metabolites, cis-3-(2,5-dimethylphenyl)-4-hydroxy-8-methoxy-1-azaspiro[4.5]dec-3-en-2-one, cis-3-(2,5-dimethylphenyl)-3-hydroxy-8-methoxy-1-azaspiro[4.5]decane-2,4-dione, cis-3-(2,5-dimethylphenyl)-8-methoxy-2-oxo-1-azaspiro[4.5]dec-3-en-4-yl beta-D-glucopyranoside-, and cis-3-(2,5-dimethylphenyl)-4-hydroxy-8-methoxy-1-azaspiro[4.5]decan-2-one, calculated as the stoichiometric equivalent of spirotetramat, in or on corn, sweet, kernel plus cob with husks removed at 1.5 ppm; and persimmon at 2.5 ppm. Additionally, the regulation amends established tolerances in or on feijoa from 0.30 ppm to 2.5 ppm, papaya from 2.5 ppm to 0.40 ppm, and Spanish lime from 0.60 ppm to 13 ppm.

This final rule establishes tolerances under FFDCA section 408(d). The Office of Management and Budget (OMB) has exempted these types of actions from review under Executive Order 12866, entitled “Regulatory Planning and Review” (58 FR 51735, October 4, 1993). Because this final rule has been exempted from review under Executive Order 12866, this final rule is not subject to Executive Order 13211, entitled “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001) or Executive Order 13045, entitled “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997). This final rule does not contain any information collections subject to OMB approval under the Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq. ), nor does it require any special considerations under Executive Order 12898, entitled “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations” (59 FR 7629, February 16, 1994).

This final rule directly regulates growers, food processors, food handlers, and food retailers, not States or tribes, nor does this action alter the relationships or distribution of power and responsibilities established by Congress in the preemption provisions of FFDCA section 408(n)(4). As such, the Agency has determined that this action will not have a substantial direct effect on States or tribal governments, on the relationship between the national government and the States or tribal governments, or on the distribution of power and responsibilities among the various levels of government or between the Federal Government and Indian Tribes. Thus, the Agency has determined that Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999) and Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000) do not apply to this final rule. In addition, this final rule does not impose any enforceable duty or contain any unfunded mandate as described under Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1501 et seq. ).

This action does not involve any technical standards that would require Agency consideration of voluntary consensus standards pursuant to section 12(d) of the National Technology Transfer and Advancement Act of 1995 (NTTAA) (15 U.S.C. 272 note).

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq. ), EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register . This action is not a “major rule” as defined by 5 U.S.C. 804(2).

Therefore, 40 CFR chapter I is amended as follows:

You may be potentially affected by this action if you are an agricultural producer, food manufacturer, or pesticide manufacturer. The following list of North American Industrial Classification System (NAICS) codes is not intended to be exhaustive, but rather provides a guide to help readers determine whether this document applies to them. Potentially affected entities may include:

• Crop production (NAICS code 111).

• Animal production (NAICS code 112).

• Food manufacturing (NAICS code 311).

• Pesticide manufacturing (NAICS code 32532).

You may access a frequently updated electronic version of EPA's tolerance regulations at 40 CFR part 180 through the Government Printing Office's e-CFR site at http://www.ecfr.gov/cgi-bin/text-idx?&c=ecfr&tpl=/ecfrbrowse/Title40/40tab_02.tpl .

Under FFDCA section 408(g), 21 U.S.C. 346a, any person may file an objection to any aspect of this regulation and may also request a hearing on those objections. You must file your objection or request a hearing on this regulation in accordance with the instructions provided in 40 CFR part 178. To ensure proper receipt by EPA, you must identify docket ID number EPA-HQ-OPP-2012-0583 in the subject line on the first page of your submission. All objections and requests for a hearing must be in writing, and must be received by the Hearing Clerk on or before January 6, 2014. Addresses for mail and hand delivery of objections and hearing requests are provided in 40 CFR 178.25(b).

In addition to filing an objection or hearing request with the Hearing Clerk as described in 40 CFR part 178, please submit a copy of the filing (excluding any Confidential Business Information (CBI)) for inclusion in the public docket. Information not marked confidential pursuant to 40 CFR part 2 may be disclosed publicly by EPA without prior notice. Submit the non-CBI copy of your objection or hearing request, identified by docket ID number EPA-HQ-OPP-2012-0583, by one of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov . Follow the online instructions for submitting comments. Do not submit electronically any information you consider to be CBI or other information whose disclosure is restricted by statute.

• Mail: OPP Docket, Environmental Protection Agency Docket Center(EPA/DC), (28221T), 1200 Pennsylvania Ave. NW., Washington, DC 20460-0001.

• Hand Delivery: To make special arrangements for hand delivery or delivery of boxed information, please follow the instructions at http://www.epa.gov/dockets/contacts.html .

Additional instructions on commenting or visiting the docket, along with more information about dockets generally, is available at http://www.epa.gov/dockets .

In the Federal Register of August 22, 2012 (77 FR 163) (FRL-9358-9), EPA issued a document pursuant to FFDCA section 408(d)(3), 21 U.S.C. 346a(d)(3), announcing the filing of a pesticide petition (PP 2E8045) by BASF Corporation, 26 Davis Drive, Research Triangle Park, NC 27709. The petition requested that 40 CFR 180.500 be amended by establishing tolerances for residues of the herbicide, imazapyr [2-[4,5-dihydro-4-methyl-4-(1-methylethyl)-5-oxo-1H-imidazol-2-yl]-3-pyridinecarboxylic acid], in or on lentil at 0.2 ppm; and rapeseed subgroup 20A and sunflower subgroup 20B at 0.05 ppm. That document referenced a summary of the petition prepared by BASF Corporation, the registrant, which is available in the docket, http://www.regulations.gov . There were no comments received in response to the notice of filing.

EPA has revised the tolerance expression to clarify the chemical moieties that are covered by the tolerances and specify how compliance with the tolerance is to be measured. The reason for this change is explained in Unit IV.C.

Section 408(b)(2)(A)(i) of FFDCA allows EPA to establish a tolerance (the legal limit for a pesticide chemical residue in or on a food) only if EPA determines that the tolerance is “safe.” Section 408(b)(2)(A)(ii) of FFDCA defines “safe” to mean that “there is a reasonable certainty that no harm will result from aggregate exposure to the pesticide chemical residue, including all anticipated dietary exposures and all other exposures for which there is reliable information.” This includes exposure through drinking water and in residential settings, but does not include occupational exposure. Section 408(b)(2)(C) of FFDCA requires EPA to give special consideration to exposure of infants and children to the pesticide chemical residue in establishing a tolerance and to “ensure that there is a reasonable certainty that no harm will result to infants and children from aggregate exposure to the pesticide chemical residue. . . .”

Consistent with FFDCA section 408(b)(2)(D), and the factors specified in FFDCA section 408(b)(2)(D), EPA has reviewed the available scientific data and other relevant information in support of this action. EPA has sufficient data to assess the hazards of and to make a determination on aggregate exposure for imazapyr including exposure resulting from the tolerances established by this action. EPA's assessment of exposures and risks associated with imazapyr follows.

In 2003, EPA quantitatively assessed the risk of imazapyr tolerances in connection with the final rule published in the Federal Register of September 26, 2003 (68 FR 55475) (FRL-7321-4) establishing tolerances for imazapyr in or on grass, forage; grass, hay; fish; shellfish; fats of cattle, sheep, goats, and horses; kidney of cattle, sheep, goats, and horses; meat byproducts (except kidney) of cattle, sheep, goats, and horses; meat of cattle, sheep, goats, and horses; and milk. At that time, EPA determined that the aggregate risks from exposure to imazapyr were minimal. In reviewing the current tolerance petition, EPA determined that the toxicity database for imazapyr is complete and no additional studies are needed. EPA also determined that the toxicity data identified no hazard from imazapyr regardless of the route of exposure or the species tested. In the absence of evidence of neurotoxicity, immunotoxicity, genotoxicity, carcinogenicity, or other acute or chronic toxicity in conjunction with no adverse developmental or reproductive effects, the Agency concluded that a quantitative risk assessment for imazapyr was no longer needed and that EPA could determine based on a qualitative assessment of the imazapyr database that the proposed import tolerances are safe. This conclusion is supported by the findings in the last risk assessment, which were based on conservative (protective) toxicity endpoints showing only negligible aggregate exposures and risks identified from dietary, residential, and swimming and occupational routes. As previously indicated, EPA has determined that this prior quantitative assessment overstated risk because the current toxicology database shows no evidence of adverse effects from exposure to imazapyr. Because EPA is not quantitatively assessing the risk of imazapyr based on a reliance on the use of safety factors, EPA has not retained the additional safety factor described in FFDCA section 408(b)(2)(C) for the protection of infants and children.

Therefore, based on EPA's qualitative assessment of the imazapyr risk and the prior quantitative risk assessment discussed in the final rule published in the Federal Register of September 26, 2003 (68 FR 55475) (FRL-7321-4), EPA concludes that there is a reasonable certainty that no harm will result to the general population, or to infants and children from aggregate exposure to imazapyr and its metabolites or degradates.

Adequate enforcement methodology (liquid chromatography with tandem mass spectrometric detection (LC/MS/MS)) is available to enforce the tolerance expression.

The method may be requested from: Chief, Analytical Chemistry Branch, Environmental Science Center, 701 Mapes Rd., Ft. Meade, MD 20755-5350; telephone number: (410) 305-2905; email address: residuemethods@epa.gov .

In making its tolerance decisions, EPA seeks to harmonize U.S. tolerances with international standards whenever possible, consistent with U.S. food safety standards and agricultural practices. EPA considers the international maximum residue limits (MRLs) established by the Codex Alimentarius Commission (Codex), as required by FFDCA section 408(b)(4). The Codex Alimentarius is a joint United Nations Food and Agriculture Organization/World Health Organization food standards program, and it is recognized as an international food safety standards-setting organization in trade agreements to which the United States is a party. EPA may establish a tolerance that is different from a Codex MRL; however, FFDCA section 408(b)(4) requires that EPA explain the reasons for departing from the Codex level. The Codex has not established MRLs for imazapyr on rapeseed, sunflower, or lentils.

EPA is revising the tolerance expressions for plant and livestock commodities to clarify the chemical moieties that are covered by the tolerances and specify how compliance with the tolerances is to be measured. The revised tolerance expression makes clear that the tolerances cover “residues of imazapyr, including its metabolites and degradates,” as specified in FFDCA section 408(a)(3), and that compliance with the tolerance levels is to be determined by measuring only the residues of imazapyr [2-[4,5-dihydro-4-methyl-4-(1-methylethyl)-5-oxo-1 H -imidazol-2-yl]-3-pyridinecarboxylic acid]. EPA has determined that it is reasonable to make this change final without prior proposal and opportunity for comment because public comment is not necessary, in that the change has no substantive effect on the tolerance, but rather incorporates statutory requirements and is merely intended to clarify the existing tolerance expression.

Therefore, tolerances are established for residues of imazapyr [2-[4,5-dihydro-4-methyl-4-(1-methylethyl)-5-oxo-1H-imidazol-2-yl]-3-pyridinecarboxylic acid], in or on lentil at 0.2 ppm; rapeseed subgroup 20A and sunflower subgroup 20B at 0.05 ppm.

This final rule establishes tolerances under FFDCA section 408(d) in response to a petition submitted to the Agency. The Office of Management and Budget (OMB) has exempted these types of actions from review under Executive Order 12866, entitled “Regulatory Planning and Review” (58 FR 51735, October 4, 1993). Because this final rule has been exempted from review under Executive Order 12866, this final rule is not subject to Executive Order 13211, entitled “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001) or Executive Order 13045, entitled “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997). This final rule does not contain any information collections subject to OMB approval under the Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq. ), nor does it require any special considerations under Executive Order 12898, entitled “Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations” (59 FR 7629, February 16, 1994).

Since tolerances and exemptions that are established on the basis of a petition under FFDCA section 408(d), such as the tolerance in this final rule, do not require the issuance of a proposed rule, the requirements of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq. ), do not apply.

This final rule directly regulates growers, food processors, food handlers, and food retailers, not States or tribes, nor does this action alter the relationships or distribution of power and responsibilities established by Congress in the preemption provisions of FFDCA section 408(n)(4). As such, the Agency has determined that this action will not have a substantial direct effect on States or tribal governments, on the relationship between the national government and the States or tribal governments, or on the distribution of power and responsibilities among the various levels of government or between the Federal Government and Indian tribes. Thus, the Agency has determined that Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999) and Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000) do not apply to this final rule. In addition, this final rule does not impose any enforceable duty or contain any unfunded mandate as described under Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1501 et seq. ).

This action does not involve any technical standards that would require Agency consideration of voluntary consensus standards pursuant to section 12(d) of the National Technology Transfer and Advancement Act of 1995 (NTTAA) (15 U.S.C. 272 note).

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq. ), EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register . This action is not a “major rule” as defined by 5 U.S.C. 804(2).

Therefore, 40 CFR chapter I is amended as follows:

I. Background

In FR Doc. 2013-04902 (78 FR 15410), the final rule entitled, “Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2014” there were technical and typographical errors that are identified and corrected in the regulations text of this correcting amendment. The effective date of the final rule was April 30, 2013.

On page 15421, in our discussion of factors included in the HHS risk adjustment models, we inadvertently omitted language regarding how an enrollee's age for risk score calculation will be determined.

On page 15493, in our discussion of limiting the definition of cost sharing to Essential Health Benefits, we inadvertently included the incorrect section reference to the Affordable Care Act.

On page 15495, in our discussion of estimating the value of cost-sharing reductions to be provided under the limited cost sharing plan variation open to Indians regardless of household income, we made typographical errors.

On pages 15503 and 15504 in our discussion regarding determining employer size for purposes of participation in the Small Business Health Option Program, we made inadvertent minor errors. On page 15505, in our discussion of the medical loss ratio formula, a phrase was erroneously included.

On page 15506, in our discussion of the technical correction to § 158.232(d), we made an inadvertent technical error.

On page 15526, in the regulation text of—

• Section153.220(c)(2), we inadvertently used the term “if” instead of the term “of;” and

• Section 153.230(a), we inadvertently omitted the term “collected” after the phrase “for reinsurance payments from contributions.”

On page 15529, in the regulations text of § 153.405(b), we inadvertently omitted references to paragraphs (f) and (g) of this section.

On page 15540, in the regulation text of § 158.232(d), we inadvertently used the term “and” instead of the term “an.”

1. On page 15421, first column, second full paragraph, lines 4 through 10, the sentence “To align with model calibration, an enrollee's age for risk score calculation will be the age as of the enrollee's last day of enrollment in a risk adjustment covered plan in the applicable benefit year will be used for enrollees in program operation.” is corrected to read “To align with model calibration, an enrollee's age for risk score calculation for all enrollment periods will be based on the enrollee's age in years on the last date of enrollment in the applicable benefit year in any risk adjustment covered plan for the issuer”.

2. On page 15493, third column, fourth full paragraph, line 2, “section 1301(c)” is corrected to read “section 1302(c)(3).”

3. On page 15495, third column, first full paragraph, lines 1 through 15, the sentences “We are finalizing both our proposal for annual rulemaking in the notice of benefits and payment provisions to establish a methodology for advance payments for cost-sharing reductions under the limited cost sharing plan variation, and our proposal of a specific methodology for the 2014 benefit year. As in the case of the other plan variation, we plan to review the methodology for calculating the advance payments once more data is available, and future notices of benefits and payment parameters may include different methodologies.” is corrected to read “We are finalizing both our proposal for annual rulemaking in the HHS notice of benefit and payment parameters provisions to establish a methodology for advance payments for cost-sharing reductions under the limited cost sharing plan variation, and our proposal of a specific methodology for the 2014 benefit year. As in the case of the other plan variations, we plan to review the methodology for calculating the advance payments once more data is available, and future HHS notices of benefit and payment parameters may include different methodologies.”

4. On page 15503, third column,

a. Second full paragraph, line 10 “IRC” is corrected to read “Code.”

b. Third full paragraph,

(1) Line 6, “IRC” is corrected to read “Code.”

(2) Line 8, “IRC” is corrected to read “Code.”.

5. On page 15504, first column,

a. First full paragraph, line 3, “this Notice” is corrected to read “this final rule”.

b. Second full paragraph, line 3, “IRC” is corrected to read “Code”.

6. On page 15505, second column, last paragraph, lines 1 through 4, the sentence “Issuers must provide rebates to enrollees if their MLRs fall short of the applicable MLR standard for the reporting year.” is corrected to read “Issuers must provide rebates if their MLRs fall short of the applicable MLR standard for the reporting year.”.

7. On page 15506, third column, last paragraph, line 9, the phrase “50 percent—n” is corrected to read “50 percent ^ n”.

8. On page 15540, second column, second paragraph, line 3, the sentence “Beginning with the 2013 MLR reporting year, the credibility adjustment for and MLR based on partially credible experience is zero if both of the following conditions are met:” is corrected to read “Beginning with the 2013 MLR reporting year, the credibility adjustment for an MLR based on partially credible experience is zero if both of the following conditions are met:”

We ordinarily publish a notice of proposed rulemaking in the Federal Register to provide a period for public comment before the provisions of a rule take effect in accordance with section 553(b) of the Administrative Procedure Act (APA) (5 U.S.C. 553(b)). However, we can waive this notice and comment procedure if the Secretary finds, for good cause, that the notice and comment process is impracticable, unnecessary, or contrary to the public interest, and incorporates a statement of the finding and the reasons therefore in the notice.

Section 553(d) of the APA ordinarily requires a 30-day delay in effective date of final rules after the date of their publication in the Federal Register . This 30-day delay in effective date can be waived, however, if an agency finds there is good cause to do so, and the agency incorporates a statement of the findings and its reasons in the rule issued.

This document merely corrects technical and typographic errors in the Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2014 final rule that was published on March 11, 2013 and became effective on April 30, 2013. The changes are not substantive changes to the standards set forth in the final rule. Therefore, we believe that undertaking further notice and comment procedures to incorporate these corrections and delay the effective date for these changes is unnecessary. In addition, we believe it is important for the public to have the correct information as soon as possible, and believe it is contrary to the public interest to delay when they become effective. For the reasons stated previously, we find there is good cause to waive notice and comment procedures and the 30-day delay in the effective date for this correction notice.

As noted in section I of this correcting amendment, the Department of Health and Human Services is making the following correcting amendments to 45 CFR parts 153 and 158.

Table of Contents I. UTQGS and the Treadwear Test Course II. Change to the Treadwear Test Course III. Request for Comment IV. Public Participation V. Regulatory Analyses and Notices I. UTQGS and the Treadwear Test Course

The Uniform Tire Quality Grading Standards (UTQGS) require motor vehicle and tire manufacturers and tire brand name owners to provide information indicating the relative performance of passenger car tires in the areas of treadwear, traction, and temperature resistance. This information aids consumers in making informed choices in the purchase of passenger car tires.

Treadwear grades are expressed, in multiples of 20, as a percentage of a nominal treadwear value of 100. 1 For example, a treadwear grade of 160 means the candidate tire tread life should be 1.6 times longer compared to NHTSA's “control tire.”  2 Although treadwear grades do not predict the actual mileage that a particular tire will achieve, they are sufficiently accurate to help consumers choose among tires based on their relative tread life.

To ensure the uniformity of treadwear grades, Appendix A of 49 CFR 575.104 specifies a 400-mile treadwear test course. Two or four-vehicle convoys equipped with candidate tires travel along this course to evaluate the tire treadwear performance. The test course consists of three loops in the geographical vicinity of Goodfellow Air Force Base near San Angelo, Texas. The first loop (“Southern Loop”) runs south 143 miles through the cities of Eldorado, Sonora, and Juno, Texas to the Camp Hudson Historical Marker, and returns by the same route. The second loop (“Eastern Loop”) runs east over Farm and Ranch Roads and returns to its starting point. The third loop (“Northwestern Loop”) runs northwest to Water Valley, northeast toward Robert Lee and returns via Texas 208 to the vicinity of Goodfellow AFB. 3

As a result of recent overflow of the Devils River, the treadwear testing convoys cannot access Texas 189 due to road washout and cannot cross at least one of the several water crossings along Texas 163 and, therefore, cannot safely use a portion of the Southern Loop. Specifically, FM 189 and several low water crossings along Texas 163, located between US 277 and the Camp Hudson Historical Marker, are impassable or submerged under several inches of water.

Because the affected portion of the Southern Loop will be inaccessible for an indeterminate time and there is an immediate need for testing, the agency is adding an alternate test course route that substitutes different sections of the course for the flooded portion of the Southern Loop. Test convoys will have the option of using this alternate route to conduct treadwear testing. As explained above, the regular course route consists of the Southern Loop, the Eastern Loop, and the Northwestern Loop, in that order. Test convoys using the alternate route will travel on portions of the Southern Loop and then continue on the Eastern Loop and the Northwestern Loop. After completing the Northwestern Loop, the convoys will repeat the Eastern Loop, travel on the Northwestern Loop (including travel on portions of the Northwestern Loop in the reverse direction), and then complete the Eastern Loop a third time. Making the additional trips on the Eastern Loop and the Northwestern Loop will make up the distance that is usually traveled on Texas 163 and FM 189.

Specifically, instead of traveling south on FM 189 and Texas 163, each test convoy will travel south from Sonora on US 277 as normal for approximately 5.5 miles to a picnic area on right. At this location the test convoy will reverse course and proceed to the completion of the Southern Loop. After completing this modified Southern Loop, the Eastern Loop and Northwestern Loop to the intersection of Loop 306 and FM 388, the test convoy will turn left on FM 388 and run the Eastern Loop a second time. On completion of the second Eastern Loop at FM 388 and Loop 306, the convoys will turn right to travel on the Northwestern Loop a second time with the following modification: The convoys will follow the normal Northwestern Loop until they reach the intersection of FM 2105 and Texas 208, where the convoys will turn right onto Texas 208. The convoys will travel on Texas 208 until the intersection with FM 2034. The convoys will turn left onto FM 2034 and travel on FM 2034 to the intersection with US 87, where they will turn left onto US 87. At the intersection of US 87 and FM 2105, the convoys will turn left onto FM 2105 and continue to the intersection with US 277. The convoys will then turn right onto US 277 and continue to the intersection of Loop 306 and FM 388. At this point the convoy will turn left and run the Eastern Loop a third and final time, returning to the intersection of Loop 306 and FM 388. This will be the completion of the full route.

The distance between the picnic area on US 277 and the Camp Hudson Historical Marker is approximately equivalent to the combined distance of the modified Northwestern Loop and two trips on the Eastern Loop. Accordingly, the agency has concluded that using the alternative treadwear course route will not compromise the reliability of the treadwear grades and will not impose or relax any substantive requirements or burdens on manufacturers. The agency has further determined that the impact of this interim final rule is so minimal as to not warrant the preparation of a full regulatory evaluation.

Although this interim final rule is effective immediately, in order to benefit from comments which interested parties and the public may have, the agency is requesting that comments be submitted to the docket for this notice. Following the close of the comment period, the agency will publish a notice responding to the comments and, if appropriate, the agency will amend the provisions of this rule.

Your comments must be written and in English. To ensure that your comments are correctly filed in the Docket, please include the docket number of this document in your comments.

Your comments must not be more than 15 pages long. (49 CFR 553.21). We established this limit to encourage you to write your primary comments in a concise fashion. However, you may attach necessary additional documents to your comments. There is no limit on the length of the attachments.

Comments may be submitted to the docket electronically by logging onto the Docket Management System Web site at http://www.regulations.gov. Follow the online instructions for submitting comments.

You may also submit two copies of your comments, including the attachments, to Docket Management at the address given above under ADDRESSES .

Please note that pursuant to the Data Quality Act, in order for substantive data to be relied upon and used by the agency, it must meet the information quality standards set forth in the OMB and DOT Data Quality Act guidelines. Accordingly, we encourage you to consult the guidelines in preparing your comments. OMB's guidelines may be accessed at http://www.whitehouse.gov/omb/fedreg/reproducible.html. DOT's guidelines may be accessed at http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/subject_areas/statistical_policy_and_research/data_quality_guidelines/index.html.

If you wish Docket Management to notify you upon its receipt of your comments, enclose a self-addressed, stamped postcard in the envelope containing your comments. Upon receiving your comments, Docket Management will return the postcard by mail.

If you wish to submit any information under a claim of confidentiality, you should submit three copies of your complete submission, including the information you claim to be confidential business information, to the Chief Counsel, NHTSA, at the address given above under FOR FURTHER INFORMATION CONTACT . In addition, you should submit two copies, from which you have deleted the claimed confidential business information, to Docket Management at the address given above under ADDRESSES . When you send a comment containing information claimed to be confidential business information, you should include a cover letter setting forth the information specified in our confidential business information regulation. (49 CFR part 512.)

We will consider all comments that Docket Management receives before the close of business on the comment closing date indicated above under DATES . To the extent possible, we will also consider comments that Docket Management receives after that date. If Docket Management receives a comment too late for us to consider, we will consider that comment as an informal suggestion for future rulemaking action.

You may read the comments received by Docket Management at the address given above under ADDRESSES . The hours of the Docket are indicated above in the same location. You may also see the comments on the Internet. To read the comments on the Internet, go to http://www.regulations.gov. Follow the online instructions for accessing the dockets.

Please note that even after the comment closing date, we will continue to file relevant information in the Docket as it becomes available. Further, some people may submit late comments. Accordingly, we recommend that you periodically check the Docket for new material.

Section 553 of the Administrative Procedure Act (5 U.S.C. 553) provides that when an agency, for good cause, finds that notice and public procedure are impracticable, unnecessary, or contrary to the public interest, the agency may issue a final rule without providing notice and an opportunity for public comment (5 U.S.C. 553(b)(B)). NHTSA has determined that there is good cause to issue this interim final rule without notice and an opportunity for public comment because such notice and opportunity for comment would be impracticable. Flooding is presently making portions of the treadwear test course inaccessible, and there is an immediate need to continue testing. This testing would be unavoidably prevented by undertaking notice and comment rulemaking proceedings before specifying an alternate treadwear test course route.

Section 553 further requires that that a rule be published at least 30 days prior to its effective date unless one of three exceptions applies. One of these exceptions is when the agency finds good cause for a shorter period. For the reasons stated above, i.e., the inaccessibility of portions of the test course and the immediate need for testing, the agency finds that there is good cause to make this rule effective immediately.

Although the agency is issuing this interim final rule, which is effective immediately, without notice and opportunity for public comment, the agency is requesting that comments be submitted to the docket for this notice in order to benefit from comments which interested parties and the public may have. Following the close of the comment period, the agency will publish a notice responding to the comments and, if appropriate, the agency will amend the provisions of this rule.

Executive Order 12866, Executive Order 13563, and the Department of Transportation's regulatory policies require determinations as to whether a regulatory action is “significant” and therefore subject to OMB review and the requirements of the aforementioned Executive Orders. Executive Order 12866 defines a “significant regulatory action” as one that is likely to result in a rule that may:

(1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or Tribal governments or communities;

(2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;

(3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or

(4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order.

We have considered the potential impact of this interim final rule under Executive Order 12866, Executive Order 13563, and the Department of Transportation's regulatory policies and procedures. This interim final rule specifies an alternate route for test convoys using the treadwear test course in order to avoid portions of the course that are currently inaccessible due to flooding. The agency has determined that this rule will not impose or relax any substantive requirements or burdens on manufacturers. Accordingly, it has been determined to be not “significant” under Executive Order 12866 and the Department of Transportation's regulatory policies and procedures and was not reviewed by the Office of Management and Budget.

Pursuant to the Regulatory Flexibility Act (RFA) (codified as amended at 5 U.S.C. 601 et seq.), whenever an agency is required to publish a notice of proposed rulemaking or final rule, it must prepare and make available for public comment a regulatory flexibility analysis that describes the effect of the rule on small entities (i.e., small businesses, small organizations, and small governmental jurisdictions). No regulatory flexibility analysis is required if the head of an agency certifies that the rule would not have a significant economic impact on a substantial number of small entities. The Small Business Regulatory Enforcement Fairness Act (SBREFA) of 1996 amended the Regulatory Flexibility Act to require Federal agencies to provide a statement of the factual basis for certifying that a rule will not have a significant economic impact on a substantial number of small entities.

The interim final rule affects tire manufacturers and brand name owners. Specifically, the agency is adding an alternate route for test convoys using the treadwear test course in order to avoid portions of the course that are currently inaccessible due to flooding. The agency has concluded that specifying this alternate route will not compromise the reliability of the treadwear grades, and will not result in any additional costs to these entities. Accordingly, we certify that the interim final rule will not have a significant economic impact on a substantial number of small entities.

NHTSA has examined today's interim final rule pursuant to Executive Order 13132 (64 FR 43255, August 10, 1999) and concluded that no additional consultation with States, local governments or their representatives is mandated beyond the rulemaking process. The agency has concluded that the interim final rule does not have sufficient federalism implications to warrant consultation with State and local officials or the preparation of a federalism summary impact statement. The interim final rule, which specifies an alternate route for test convoys using the treadwear test course, would not have “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.” The agency expects that general principles of preemption law would operate so as to displace any conflicting State law or regulations.

When promulgating a regulation, Executive Order 12988 specifically requires that the agency must make every reasonable effort to ensure that the regulation, as appropriate: (1) Specifies in clear language the preemptive effect; (2) specifies in clear language the effect on existing Federal law or regulation, including all provisions repealed, circumscribed, displaced, impaired, or modified; (3) provides a clear legal standard for affected conduct rather than a general standard, while promoting simplification and burden reduction; (4) specifies in clear language the retroactive effect; (5) specifies whether administrative proceedings are to be required before parties may file suit in court; (6) explicitly or implicitly defines key terms; and (7) addresses other important issues affecting clarity and general draftsmanship of regulations.

Pursuant to this Order, NHTSA notes as follows. The preemptive effect of this interim final rule is discussed above in connection with Executive Order 13132. NHTSA notes further that there is no requirement that individuals submit a petition for reconsideration or pursue other administrative proceeding before they may file suit in court.

The Unfunded Mandates Reform Act of 1995 requires agencies to prepare a written assessment of the costs, benefits and other effects of proposed or final rules that include a Federal mandate likely to result in the expenditure by State, local or tribal governments, in the aggregate, or by the private sector, of more than $100 million annually (adjusted for inflation with base year of 1995). In 2011 dollars, this threshold is $139 million. 4 This interim final rule would not result in the expenditure by State, local, or tribal governments, in the aggregate, of more than $139 million annually, and would not result in the expenditure of that magnitude by the private sector.

NHTSA has analyzed this rulemaking action for the purposes of the National Environmental Policy Act. The agency has determined that this rulemaking will not have any significant impact on the quality of the human environment.

Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501, et. seq.), Federal agencies must obtain approval from the Office of Management and Budget for each collection of information they conduct, sponsor, or require through regulations. This rulemaking does not establish any new information collection requirements.

Executive Order 12866 requires each agency to write all rules in plain language. Application of the principles of plain language includes consideration of the following questions:

• Have we organized the material to suit the public's needs?

• Are the requirements in the rule clearly stated?

• Does the rule contain technical language or jargon that isn't clear?

• Would a different format (grouping and order of sections, use of headings, paragraphing) make the rule easier to understand?

• Would more (but shorter) sections be better?

• Could we improve clarity by adding tables, lists, or diagrams?

• What else could we do to make the rule easier to understand?

If you have any responses to these questions, please include them in your comments.

The Department of Transportation assigns a regulation identifier number (RIN) to each regulatory action listed in the Unified Agenda of Federal Regulations. The Regulatory Information Service Center publishes the Unified Agenda in April and October of each year. You may use the RIN contained in the heading at the beginning of this document to find this action in the Unified Agenda.

Anyone is able to search the electronic form of all comments received into any of our dockets by the name of the individual submitting the comment (or signing the comment, if submitted on behalf of an organization, business, labor union, etc.). You may review DOT's complete Privacy Act statement in the Federal Register published on April 11, 2000 (Volume 65, Number 70; Pages 19477-78) or you may visit http://www.dot.gov/privacy.html

In consideration of the foregoing, NHTSA is amending 49 CFR part 575 as follows: