[Federal Register Volume 80, Number 183 (Tuesday, September 22, 2015)]
[Proposed Rules]
[Pages 57129-57136]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-24021]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AE17


Proposal To Amend the Definition of ``Material Terms'' for 
Purposes of Swap Portfolio Reconciliation

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') proposes to amend a provision of the Commission's regulations 
in connection with the material terms for which counterparties must 
resolve discrepancies when engaging in portfolio reconciliation.

DATES: Comments must be received on or before November 23, 2015.

ADDRESSES: You may submit comments, identified by RIN 3038-AE17, and 
Proposal to Amend the Definition of ``Material Terms'' for Purposes of 
Swap Portfolio Reconciliation by any of the following methods:
     The agency's Web site, at http://comments.cftc.gov. Follow 
the instructions for submitting comments through the Web site.
     Mail: Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as Mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Please submit your comments using only one method.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act, a petition for confidential treatment of 
the exempt information may be submitted according to the procedures 
established in Sec.  145.9 of the Commission's regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR Chapter I.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Frank N. Fisanich, Chief Counsel, 202-
418-5949, [email protected]; Katherine S. Driscoll, Associate Chief 
Counsel, 202-418-5544, [email protected]; Gregory Scopino, Special 
Counsel, 202-418-5175, [email protected], Division of Swap Dealer and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

    On September 11, 2012, the Commission published in the Federal 
Register final rules Sec.  23.500 through Sec.  23.505 \2\ establishing 
requirements for the timely and accurate confirmation of swaps, the 
reconciliation and compression of swap portfolios, and documentation of 
swap trading relationships between swap dealers (``SDs''),\3\ major 
swap participants (``MSPs''),\4\ and their counterparties. These 
regulations were promulgated by the Commission pursuant to the 
authority granted under Sections 4s(h)(1)(D), 4s(h)(3)(D), and 4s(i) of 
the Commodity Exchange Act (the ``CEA''),\5\

[[Page 57130]]

as amended by Section 731 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the ``Dodd-Frank Act''),\6\ which, among other 
things, directed the Commission to prescribe regulations for the timely 
and accurate confirmation, processing, netting, documentation and 
valuation of all swaps entered into by SDs and MSPs,\7\ and the 
Commission's general rulemaking authority under Section 8a(5) of the 
CEA.\8\
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    \2\ Confirmation, Portfolio Reconciliation, Portfolio 
Compression, and Swap Trading Relationship Documentation 
Requirements for Swap Dealers and Major Swap Participants, 77 FR 
55904 (Sept. 11, 2012) (hereinafter, ``Portfolio Reconciliation 
Final Rule'').
    \3\ Generally, an SD is any person who, in addition to 
transacting in a notional amount of swaps in excess of specified de 
minimis thresholds, holds itself out as a dealer in swaps, makes a 
market in swaps, regularly enters into swaps with counterparties as 
an ordinary course of business for its own account, or engages in 
any activity causing it to be commonly known in the trade as a 
dealer or market maker in swaps. See 7 U.S.C. 1a(49); 17 CFR 
1.3(ggg).
    \4\ Generally, an MSP is any non-dealer that maintains a 
substantial position in swaps for any of the specified major swap 
categories, whose outstanding swaps create substantial counterparty 
exposure that could have serious adverse effects on the financial 
stability of the United States banking system or financial markets, 
or any financial entity that is highly leveraged relative to the 
amount of capital such entity holds and that is not subject to 
capital requirements established by an appropriate Federal banking 
agency and maintains a substantial position in outstanding swaps in 
any major swap category. See 7 U.S.C. 1a(33); 17 CFR 1.3(hhh).
    \5\ 7 U.S.C. 6s(h)(1)(D), 6s(h)(3)(D) and 6s(i).
    \6\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. 111-203, 124 Stat. 1376 (July 21, 2010).
    \7\ Portfolio Reconciliation Final Rule, 77 FR at 55926 
(``[P]ortfolio reconciliation involves both confirmation and 
valuation and serves as a mechanism to ensure accurate 
documentation.'').
    \8\ 7 U.S.C. 12a(5).
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    Under Sec.  23.502,\9\ SDs and MSPs must reconcile their swap 
portfolios with one another and provide non-SD and non-MSP 
counterparties with regular opportunities for portfolio 
reconciliation.\10\ Section 23.500(i) \11\ defines the term, 
``portfolio reconciliation,'' as ``any process by which the two parties 
to one or more swaps: (1) Exchange the terms of all swaps in the swap 
portfolio between the counterparties; (2) exchange each counterparty's 
valuation of each swap in the swap portfolio between the counterparties 
as of the close of business on the immediately preceding business day; 
and (3) resolve any discrepancy in material terms and valuations.'' 
Section 23.500(g) defines ``material terms'' to mean ``all terms of a 
swap required to be reported in accordance with part 45 of this 
chapter.'' \12\ Thus, portfolio reconciliation seeks to enable ``the 
swap market to operate efficiently and to reduce systemic risk'' \13\ 
by requiring counterparties periodically to (1) exchange the terms of 
their mutual swaps, and (2) locate and resolve discrepancies in 
material terms of mutual swaps. In particular, the Commission 
recognized that ``portfolio reconciliation [would] facilitate the 
identification and resolution of discrepancies between the 
counterparties with regard to valuations of collateral held as 
margin.'' \14\ The Commission also has described portfolio 
reconciliation, generally, as follows:
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    \9\ 17 CFR 23.502.
    \10\ 17 CFR 23.502; see Portfolio Reconciliation Final Rule, 77 
FR at 55926.
    \11\ 17 CFR 23.500(i).
    \12\ 17 CFR 23.500(g). Part 45 of the Commission regulations 
govern swap data recordkeeping and reporting requirements. The swap 
terms that must be reported under part 45 are found in appendix 1 to 
part 45. See 17 CFR part 45, App. 1; see also 17 CFR 45.1 (defining 
``primary economic terms'' as ``all of the terms of a swap matched 
or affirmed by the counterparties in verifying the swap,'' including 
``at a minimum each of the terms included in the most recent Federal 
Register release by the Commission listing minimum primary economic 
terms for swaps in the swap asset class in question'' and stating 
that the current list of minimum primary economic terms is in 
appendix 1); Swap Data Recordkeeping and Reporting Requirements, 77 
FR 2197 (Jan. 13, 2012) (promulgating the list of primary economic 
terms). Examples of primary economic terms include the price of the 
swap, payment frequency, type of contract (e.g., a ``vanilla 
option'' or ``complex exotic option''), execution timestamp, and, if 
the swap is a multi-asset class swap, the primary and secondary 
asset classes. 17 CFR part 45, App. 1.
    \13\ Portfolio Reconciliation Final Rule, 77 FR at 55926.
    \14\ Id. In response to comments that industry practice was only 
to resolve swap terms that lead to material collateral disputes, the 
Commission, in promulgating the final Sec.  23.502, emphasized the 
importance of both (1) resolving disputes related to the material 
terms of swaps and (2) resolving valuation disputes impacting margin 
payments. Id. at 55926-27, 55929-31.

    Portfolio reconciliation is a post-execution processing and risk 
management technique that is designed to (i) identify and resolve 
discrepancies between the counterparties with regard to the terms of 
a swap either immediately after execution or during the life of the 
swap; (ii) ensure effective confirmation of terms of the swap; and 
(iii) identify and resolve discrepancies between the counterparties 
regarding the valuation of the swap.\15\
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    \15\ Portfolio Reconciliation Final Rule, 77 FR at 55926.

    In adopting Sec.  23.502, the Commission intended to require that 
SDs, MSPs, and their counterparties engage in portfolio reconciliation 
at regular intervals. Explaining the rationale for Sec.  23.502, the 
Commission noted that portfolio reconciliation can identify and reduce 
overall risk ``[b]y identifying and managing mismatches in key economic 
terms and valuation for individual transactions across an entire 
portfolio.'' \16\ Portfolio reconciliation is not required for cleared 
swaps where a derivatives clearing organization (``DCO'') holds the 
definitive record of the trades and determines binding daily valuations 
for the swaps.\17\
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    \16\ Id.
    \17\ Id. at 55927.
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II. Proposed Regulation

    In 2013, the International Swaps and Derivatives Association, Inc. 
(``ISDA'') requested interpretive guidance from Commission staff that 
would permit certain swap data elements to be excluded from portfolio 
reconciliation as required under Sec.  23.502.\18\ Specifically, ISDA 
requested that ``the terms'' of a swap that counterparties must 
exchange during portfolio reconciliation exercises be limited to the 
``material terms'' of a swap, and that ``material terms'' have the same 
meaning as ``primary economic terms'' in Sec.  45.1. ISDA further asked 
that the following data fields (hereinafter referred to as the ``No-
Action Excluded Data Fields'') be excluded from the definition of 
``material terms'' for purposes of compliance with Sec.  23.502:
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    \18\ See CFTC Staff Letter No. 13-31 (June 26, 2013), available 
at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-31.pdf.

1. An indication that the swap will be allocated;
2. If the swap will be allocated, or is a post-allocation swap, the 
legal entity identifier \19\ of the agent;
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    \19\ A legal entity identifier is ``a 20-digit, alpha-numeric 
code, to uniquely identify legally distinct entities that engage in 
financial transactions.'' See Legal Entity Identifier Regulatory 
Oversight Committee, http://www.leiroc.org/; 17 CFR 45.6.
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3. An indication that the swap is a post-allocation swap;
4. If the swap is a post-allocation swap, the unique swap identifier; 
\20\
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    \20\ A unique swap identifier is a unique identifier assigned to 
all swap transactions which identifies the transaction (the swap and 
its counterparties) uniquely throughout the duration of the swap's 
existence. See 17 CFR 45.5.
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5. Block trade indicator;
6. Execution timestamp;
7. Timestamp for submission to swap data repository (``SDR''); \21\
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    \21\ A swap data repository is any person that collects and 
maintains information or records with respect to transactions or 
positions in, or the terms and conditions of, swaps entered into by 
third parties for the purpose of providing a centralized 
recordkeeping facility for swaps. 7 U.S.C. 1a(48); 17 CFR 1.3(qqqq).
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8. Clearing indicator;
9. Clearing venue;
10. If the swap will not be cleared, an indication of whether the 
clearing requirement exception in CEA Section 2(h)(7) \22\ has been 
elected; and
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    \22\ Generally speaking, Section 2(h)(1)(A) of the CEA 
establishes a clearing requirement for swaps, providing that ``[i]t 
shall be unlawful for any person to engage in a swap unless that 
person submits such swap for clearing to a derivatives clearing 
organization that is registered under [the CEA] or a derivatives 
clearing organization that is exempt from registration under [the 
CEA] if the swap is required to be cleared.'' 7 U.S.C. 2(h)(1)(A). 
CEA Section 2(h)(7), however, provides for several limited 
exceptions to the clearing requirement of Section 2(h)(1)(A). Id. at 
2(h)(7); see also End-User Exception to the Clearing Requirement for 
Swaps, 77 FR 42560, 42560-61 (July 19, 2012).
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11. The identity of the counterparty electing the clearing requirement 
exception in CEA Section 2(h)(7).\23\
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    \23\ CFTC Staff Letter No. 13-31 at 2-3.
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    ISDA contended generally that the definition of ``material terms'' 
in Sec.  23.500(g) is too broad to guide market participants in the 
construction of a reconciliation process, and with regard to the No-
Action Excluded Data Fields specifically, ISDA argued that these fields 
are not relevant to the portfolio reconciliation process because they 
pertain to the circumstances

[[Page 57131]]

surrounding entry into a transaction, and whether a transaction was 
intended to be cleared, and are not relevant to ongoing rights and 
obligations under swaps in a swap portfolio existing bilaterally 
between an SD and a counterparty.
    After considering ISDA's request, the Commission's Division of Swap 
Dealer and Intermediary Oversight (the ``Division'') provided SDs and 
MSPs with no-action relief on June 26, 2013, pursuant to CFTC Staff 
Letter 13-31.\24\ In such letter, the Division chose not to interpret 
the reference to ``the terms'' of a swap in Sec.  23.500(i)(1) as 
meaning the ``material terms'' or to define ``material terms'' to mean 
the ``primary economic terms'' of a swap minus the No-Action Excluded 
Data Fields. Rather, the Division merely stated that it would not 
recommend an enforcement action against an SD or MSP that omits the No-
Action Excluded Data Fields from the portfolio reconciliation process 
required under Sec.  23.502.\25\ Thus, it appears that following the 
issuance of CFTC Staff Letter 13-31, an SD that chose to take advantage 
of the relief could consider the No-Action Excluded Data Fields not to 
be terms of a swap required to be exchanged with a counterparty in a 
portfolio reconciliation exercise.
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    \24\ See id.
    \25\ Id. at 3.
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    Against this background, the Commission is now proposing to amend 
the definition of ``material terms'' in Sec.  23.500(g) to specifically 
exclude a modified version of the No-Action Excluded Data Fields. As 
amended, Sec.  23.500(g) would exclude the following data fields from 
the definition of ``material terms'' (hereinafter referred to as the 
``Proposed Excluded Data Fields''):
1. An indication that the swap will be allocated;
2. If the swap will be allocated, or is a post-allocation swap, the 
legal entity identifier \26\ of the agent;
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    \26\ A legal entity identifier is ``a 20-digit, alpha-numeric 
code, to uniquely identify legally distinct entities that engage in 
financial transactions.'' See Legal Entity Identifier Regulatory 
Oversight Committee, http://www.leiroc.org/; 17 CFR 45.6.
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3. An indication that the swap is a post-allocation swap;
4. If the swap is a post-allocation swap, the unique swap identifier; 
\27\
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    \27\ A unique swap identifier is a unique identifier assigned to 
all swap transactions which identifies the transaction (the swap and 
its counterparties) uniquely throughout the duration of the swap's 
existence. See 17 CFR 45.5.
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5. Block trade indicator;
6. With respect to a cleared swap, the execution timestamp;
7. With respect to a cleared swap, the timestamp for submission to SDR;
8. Clearing indicator; and
9. Clearing venue.
    The Proposed Excluded Data Fields modify the No-Action Excluded 
Data Fields by: (1) Amending the execution timestamp data field to be 
specific to cleared swaps; (2) amending the timestamp for submission to 
an SDR data field to be specific to cleared swaps; (3) removing the 
data field containing an indication of whether the clearing requirement 
exception in CEA Section 2(h)(7) has been elected with respect to an 
uncleared swap; and (4) removing the data field containing the identity 
of the counterparty electing the clearing requirement exception in CEA 
Section 2(h)(7). The Commission is proposing to retain these data 
fields for uncleared swaps as ``material terms'' because a discrepancy 
in this information in the records of the counterparties could mean 
that the related information is erroneous in the records of an SDR, 
which could have an impact on the Commission's regulatory mission.
    The time of execution of an uncleared swap and the time of 
submission to an SDR is of regulatory value to the Commission for 
purposes of determining the compliance of SDs and MSPs with Commission 
regulations.\28\ Similarly, the identity of a counterparty electing the 
end-user exception to clearing is important to the Commission's 
enforcement of the clearing requirement and its monitoring of systemic 
risk in the OTC markets under its jurisdiction. Thus, the Commission 
believes it is reasonable to require SDs, MSPs, and their 
counterparties to resolve any discrepancy in these data fields and, if 
necessary, correct the information reported to an SDR.\29\
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    \28\ For example, among other things, the time of execution of a 
swap between an SD and a counterparty may be relevant to determining 
the SD's compliance with the deadlines for confirmation of the swap 
set forth in Sec.  23.501. Likewise, the time of execution and the 
time of reporting to an SDR may be relevant to determining the SD's 
compliance with the reporting deadlines set forth in part 45 of the 
Commission's regulations.
    \29\ Reporting counterparties are required to correct errors and 
omissions in data previously reported to an SDR pursuant to Sec.  
45.14.
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    The Commission intends that, if and when the proposed amendment to 
the definition of ``material terms'' is adopted, it will direct the 
Division to withdraw the no-action relief provided pursuant to CFTC 
Letter 13-31. Accordingly, under this proposal, the Commission is 
maintaining the status quo of Sec.  23.502 in that SDs and MSPs and 
their counterparties would be required to exchange ``the terms'' of a 
swap as required under Sec.  23.500(i)(1) and would have to resolve 
discrepancies in ``material terms'' of swaps pursuant to Sec.  
23.502(a)(4) and (b)(4). However, ``material terms'' would not include 
the Proposed Excluded Data Fields. This requirement differs from what 
may be the current practice of SDs and MSPs that have chosen to take 
advantage of the relief provided in CFTC Staff Letter 13-31. Such SDs 
and MSPs may be omitting the No-Action Excluded Data Fields from the 
portfolio reconciliation process altogether and not exchanging such 
terms at all, or if exchanging them, choosing not to resolve 
discrepancies that may be discovered. If the Commission's proposal is 
adopted, such SDs and MSPs would be required to resume exchanging the 
terms included in the Proposed Excluded Data Fields, although they 
could continue the practice of choosing not to resolve discrepancies in 
such terms. In addition, SDs and MSPs would have to resolve 
discrepancies in execution and SDR submission timestamps for cleared 
swaps, and discrepancies in the identities of counterparties electing 
the end-user exception from clearing, which may not be the practice for 
SDs and MSPs that have been relying on CFTC Staff Letter 13-31.
    It is the intention of the Commission's proposal to alleviate the 
burden of resolving discrepancies in terms of a swap that are not 
relevant to the ongoing rights and obligations of the parties and the 
valuation of the swap, or to the Commission's regulatory mission. 
However, with respect to at least some of the No-Action Excluded Data 
Fields and the corresponding information that is included in the 
Proposed Excluded Data Fields, the Commission questions whether such 
data is actually required to be included in any ongoing portfolio 
reconciliation exercise. For example, the ``clearing indicator'' and 
``clearing venue'' items included in the Proposed Excluded Data Fields 
pertain to a swap only until it is extinguished when accepted for 
clearing by a DCO.\30\ When extinguished, the original swap would no 
longer be subject to portfolio reconciliation,\31\ and, as explained

[[Page 57132]]

above, portfolio reconciliation is not required for cleared swaps.\32\ 
As noted below, the Commission seeks comment on whether such terms 
should be included in the Proposed Excluded Data Fields.
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    \30\ See 17 CFR 23.504(b)(6) ('' . . . upon acceptance of a swap 
by a derivatives clearing organization: (i) The original swap is 
extinguished; (ii) The original swap is replaced by equal and 
opposite swaps with the derivatives clearing organization; and (iii) 
All terms of the swap shall conform to the product specifications of 
the cleared swap established under the derivative clearing 
organization's rules.'').
    \31\ The Commission notes that portfolio reconciliation only 
applies to swaps currently in effect between an SD or MSP and a 
particular counterparty, not to expired or terminated swaps. See 
Definition of ``swap portfolio,'' 17 CFR 23.500(k).
    \32\ Portfolio Reconciliation Final Rule, 77 FR at 55927.
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    Finally, the Commission notes that it is not proposing an amendment 
to Sec.  23.500(i)(1) that would exclude the Proposed Excluded Data 
Fields from portfolio reconciliation altogether. Thus the Commission is 
not proposing to change the existing requirement under Sec.  23.502 
that parties must exchange terms of all swaps in a mutual portfolio, 
but need only resolve discrepancies over material terms and valuations. 
As stated above, the Commission recognizes that the proposed amendment 
would not have the same effect as the no-action relief provided by the 
Division in CFTC Staff Letter 13-31. Nevertheless, the Commission has 
determined that it would be premature to propose to codify the staff 
relief without considering comments from the public on the nature of 
the post-Dodd-Frank-Act portfolio reconciliation process and how the 
Proposed Excluded Data Fields relate to that process.

III. Request for Comment

    To ensure that the proposed rule would, if adopted, achieve its 
stated purpose, the Commission requests comment generally on all 
aspects of the proposed rule. Specifically, the Commission requests 
comment on the following:
     Should the Commission amend its regulations to provide 
relief identical to that granted in CFTC Letter No. 13-31? 
Alternatively, should the Commission amend Sec.  23.500(i)(1) so that 
counterparties only have to exchange the ``material terms'' (which 
would not include the Proposed Excluded Data Fields) of swaps? Or, 
lastly, should the Commission adopt its current proposal which is to 
only remove the Proposed Excluded Data Fields from the definition of 
``material terms'' that counterparties must resolve for discrepancies 
pursuant to Sec.  23.500(i)(3)?
     Should the Commission's Proposed Excluded Data Fields not 
include the execution and SDR submission timestamps for uncleared 
swaps? Please explain why or why not.
     Should the Commission's Proposed Excluded Data Fields 
include an indication of the election of the clearing exception in CEA 
Section 2(h)(7) and/or the identity of the counterparty electing such 
clearing requirement exception? Please explain why or why not.
     Are there other items in the Proposed Excluded Data Fields 
that may have material regulatory value to the Commission or that may 
be relevant to the ongoing rights and obligations of the parties and 
the valuation of the swap and, thus, should not be included in the 
Proposed Excluded Data Fields? Please explain why or why not.
     Is each of the Proposed Excluded Data Fields actually 
required to be included in any ongoing portfolio reconciliation 
exercise, and, if not, should any such term be removed from the list of 
Proposed Excluded Data Fields? Please explain why or why not.
     Should any other ``material term'' as defined in Sec.  
23.500(g) be included in the list of Proposed Excluded Data Fields? 
Please explain why or why not.
     Should the Commission amend Sec.  23.500(g) so that the 
term, ``material terms,'' is defined as all terms of a swap required to 
be reported in accordance with part 45 of the Commission regulations 
other than the Proposed Excluded Data Fields, as proposed? Please 
explain why or why not.
     To what extent does the proposed amendment facilitate (or 
fail to facilitate) the policy objectives of portfolio reconciliation? 
Feel free to reference specific terms listed in the Proposed Excluded 
Data Fields in your answer.
     Where are the cost savings realized by not having to 
resolve discrepancies in the Proposed Excluded Data Fields? If any 
other alternative approach should be considered, what cost savings 
would be realized by such alternative approach? Commenters are 
encouraged to quantify these cost savings.

IV. Related Matters

A. Regulatory Flexibility Act.

    The Regulatory Flexibility Act \33\ requires that agencies consider 
whether the rules they propose will have a significant economic impact 
on a substantial number of small entities and, if so, provide a 
regulatory flexibility analysis reflecting the impact. For purposes of 
resolving any discrepancy in material terms and valuations, the 
proposed regulation would amend the definition in Sec.  23.500(g) of 
the Commission regulations so that the term ``material terms'' (which 
is used in Sec.  23.500(i)(3)) is defined as all terms of a swap 
required to be reported in accordance with part 45 of the Commission's 
regulations other than the Proposed Excluded Data Fields. As noted 
above, clause (3) of the definition of ``portfolio reconciliation'' in 
Sec.  23.500(i) requires the parties to resolve any discrepancy in 
``material terms'' and valuations. As a result of the proposed change 
to the definition of ``material terms'' in Sec.  23.500(g) of the 
Commission regulations, SDs and MSPs would not need to include the 
Proposed Excluded Data Fields \34\ in any resolution of discrepancies 
of material terms or valuations when engaging in portfolio 
reconciliation. The Commission has previously determined that SDs and 
MSPs are not small entities for purposes of the Regulatory Flexibility 
Act.\35\ Furthermore, any financial end users that may be indirectly 
\36\ impacted by the proposed rule are likely to be eligible contract 
participants, and, as such, they would not be small entities.\37\
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    \33\ 5 U.S.C. 601 et seq.
    \34\ See section II above for a list of ``Proposed Excluded Data 
Fields'' and proposed Sec.  23.500(g) of the Commission regulations.
    \35\ Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18619 (Apr. 30, 1982).
    \36\ The Regulatory Flexibility Act focuses on direct impact to 
small entities and not on indirect impacts on these businesses, 
which may be tenuous and difficult to discern. See Mid-Tex Elec. 
Coop., Inc. v. FERC, 773 F.2d 327, 340 (D.C. Cir. 1985); Am. 
Trucking Assns. v. EPA, 175 F.3d 1027, 1043 (D.C. Cir. 1985).
    \37\ See Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 25, 
2001).
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    Thus, for the reasons stated above, the Commission preliminarily 
believes that the proposal will not have a significant economic impact 
on a substantial number of small entities. Accordingly, the Chairman, 
on behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 
605(b), that the proposed regulations in this Federal Register release 
would not have a significant economic impact on a substantial number of 
small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \38\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number. This 
proposed rulemaking would result in an amendment to existing collection 
of information OMB Control Number 3038-0068 with respect to the 
collection of information entitled ``Confirmation, Portfolio 
Reconciliation, and Portfolio Compression Requirements for Swap Dealers 
and

[[Page 57133]]

Major Swap Participants.'' \39\ The Commission is therefore submitting 
this proposal to the Office of Management and Budget (OMB) for review. 
The Commission previously discussed, for purposes of the PRA, the 
burden \40\ that the regulation mandating, inter alia, portfolio 
reconciliation would impose on market participants.\41\ In particular, 
the Commission estimated the burden to be 1,282.5 hours for each SD and 
MSP, and the aggregate burden for registrants--based on a then-
projected 125 registrants--was 160,312.5 burden hours.\42\ Since the 
Commission finalized the rules for SDs and MSPs, 104 entities have 
provisionally registered as SDs and two entities have provisionally 
registered as MSPs, for a total of 106 registrants.\43\ Accordingly, 
based on the original estimate of 1,282.5 burden hours for each SD and 
MSP, the aggregate burden for all registrants is estimated at 135,945 
burden hours.
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    \38\ 44 U.S.C. 3501 et seq.
    \39\ See OMB Control No. 3038-0068, http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0068.
    \40\ ``For purposes of the PRA, the term `burden' means the 
`time, effort, or financial resources expended by persons to 
generate, maintain, or provide information to or for a Federal 
Agency.' '' Portfolio Reconciliation Final Rule, 77 FR at 55959.
    \41\ Portfolio Reconciliation Final Rule, 77 FR at 55958-60.
    \42\ Portfolio Reconciliation Final Rule, 77 FR at 55959.
    \43\ Provisionally Registered Swap Dealers as of June 17, 2015, 
http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer; 
Provisionally Registered Major Swap Participants as of March 1, 
2013, http://www.cftc.gov/LawRegulation/DoddFrankAct/registermajorswappart.
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    The proposed regulation would amend the definition in Sec.  
23.500(g) of the Commission regulations so that the term ``material 
terms'' (which is used in Sec.  23.500(i)(3)) is defined as all terms 
of a swap required to be reported in accordance with part 45 of the 
Commission's regulations other than the Proposed Excluded Data 
Fields.\44\ As noted above, clause (3) of the definition of ``portfolio 
reconciliation'' in Sec.  23.500(i) requires the parties to resolve any 
discrepancy in ``material terms'' and valuations. The proposed change 
would clarify that SDs and MSPs would not need to include the Proposed 
Excluded Data Fields in any resolution of discrepancies of material 
terms or valuations.
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    \44\ As noted earlier, the proposed rule is amending the 
definition of the term ``material terms'' at Sec.  23.500(g) to 
exclude nine data fields that would not be considered ``material 
terms'' in the definition of the term ``portfolio reconciliation'' 
of Sec.  23.500(i)(3).
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    As discussed above, the rule change proposed herein would reduce 
the number of ``material terms'' that counterparties would need to 
resolve for discrepancies in portfolio reconciliation exercises, but 
would not eliminate the portfolio reconciliation requirement itself. 
However, the Commission believes that the changes proposed to the 
regulatory definition of ``material terms'' described herein would 
reduce the time burden for portfolio reconciliation by one burden hour 
for each SD and MSP, which would reduce the annual burden to 1,281.5 
hours per SD and MSP. The Commission believes that the proposed rule 
would result in one hour of less work for computer programmers for SDs 
and MSPs because the programmers who have to match the needed data 
fields from two different databases would have fewer data fields to 
obtain and resolve for discrepancies. Given that there are 106 
provisionally registered SDs and MSPs, the proposed rule, if adopted, 
would result in an aggregate burden of 135,839 burden hours. The 
Commission welcomes comments about the potential impact that this 
proposal would have on the time and cost burden associated with 
portfolio reconciliation.
1. Information Collection Comments
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the reporting burdens discussed above. 
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments 
in order to: (1) Evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information will have practical 
utility; (2) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information; (3) determine whether 
there are ways to enhance the quality, utility, and clarity of the 
information to be collected; and (4) mitigate the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566 or by email at 
[email protected]. Please provide the Commission with a copy 
of submitted comments so that all comments can be summarized and 
addressed in the final rule preamble. Refer to the ADDRESSES section of 
this notice of proposed rulemaking for comment submission instructions 
to the Commission. A copy of the supporting statement for the 
collection of information discussed above may be obtained by visiting 
http://reginfo.gov/. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this document in the Federal Register. Therefore, a comment is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.

C. Considerations of Costs and Benefits

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing an order. Section 15(a) further specifies that 
the costs and benefits shall be evaluated in light of the following 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
section 15(a) factors.
1. Background
    The Commission believes that, while portfolio reconciliation 
generally helps counterparties to manage risk by facilitating the 
resolution of discrepancies in material terms of swaps, forcing 
entities to resolve discrepancies in the Proposed Excluded Data Fields 
does not improve the management of risks in swaps portfolios. By 
eliminating the need to resolve discrepancies over material swap terms 
that remain constant (and that do not impact the valuation of the swap 
or the payment obligations of the counterparties) and thereby reducing 
the number of data fields that parties must resolve for differences in 
portfolio reconciliation exercises, the Commission believes this 
proposal will slightly decrease the costs that its regulations impose 
on SDs and MSPs (and their counterparties) without a concomitant 
reduction in the benefits obtained from portfolio reconciliation 
exercises under the existing regulatory framework, as described below.
2. Costs
    The Commission believes this proposal will slightly decrease the 
costs that its regulations impose on SDs and MSPs (and their 
counterparties) because it would eliminate the need to verify and 
resolve discrepancies in swap terms that remain constant (or that do 
not impact the valuation of swaps or the payment obligations of the 
counterparties) and thereby reduce the number of data fields requiring 
particular attention in portfolio

[[Page 57134]]

reconciliation exercises.\45\ As mentioned previously, the Commission 
believes that this change will reduce the annual burden hours for each 
SD and MSP by one hour, resulting in a total of 1,281.5 hours, which 
leads to an aggregate number, based on 106 registrants, of 135,839 
burden hours. The Commission previously estimated that, assuming 
1,282.5 annual burden hours per SD and MSP, the financial cost of its 
regulations on each SD and MSP would be $128,250.\46\ Therefore, based 
on those prior estimates, a one-hour reduction in the annual burden 
hours for each SD and MSP would result in a financial cost of $128,150 
per registrant. Accordingly, the Commission estimates that, if the 
proposed rule is adopted, the aggregate financial burden of its 
regulations on SDs and MSPs would be $13,583,900.\47\
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    \45\ The Commission notes the existence of CFTC Staff Letter No. 
13-31 and that the Proposal, if finalized, could increase the burden 
for SDs, MSPs, and their counterparties relying on the relief in 
that letter.
    \46\ Portfolio Reconciliation Final Rule, 77 FR at 55959.
    \47\ The Commission had estimated that, if 125 entities had 
registered as SDs and MSPs, the aggregate burden would be 
$16,031,250. Id.
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    The Commission does not believe the proposed regulation would 
increase the Commission's costs or impair the Commission's ability to 
oversee and regulate the swaps markets. Portfolio reconciliation is 
designed to enable counterparties to understand the current status or 
value of swap terms. As mentioned above, the Commission is proposing to 
amend the definition of ``material terms'' in Sec.  23.500(g) so as to 
exclude the Proposed Excluded Data Fields because it preliminarily 
agrees with market participants that the Proposed Excluded Data Fields 
are not material to the ongoing rights and obligations of the 
counterparties to a swap. Because the Commission's proposal would only 
remove terms from the discrepancy resolution process for material 
terms, as opposed to the general portfolio reconciliation process or 
swaps reporting requirements, it will not negatively impact the amount 
of information available to the Commission about swaps. While the 
Commission believes that this proposal would reduce SDs', MSPs', or 
their counterparties' costs of complying with Commission regulations 
(because it would reduce the number of terms that counterparties must 
periodically resolve for discrepancies during portfolio 
reconciliations), the Commission seeks specific comment on the 
following, and encourages commenters to provide quantitative 
information in their comments where practical):
     How will the proposed regulation affect the costs of 
portfolio reconciliation for swap counterparties? Is the Commission's 
estimate of cost reductions that would result from the proposed rule a 
reasonable estimate of cost savings that would be realized from 
adopting the proposal?
     Will the proposed regulation make the portfolio 
reconciliation process more or less expensive? How so?
     How would the proposed rule affect the ongoing costs of 
compliance with Commission regulations?
     Are there other costs that the Commission should consider?
    Commenters are strongly encouraged to include quantitative 
information in their comment on this rulemaking where practical.
3. Benefits
    The Commission believes that this proposal would benefit SDs, MSPs, 
and their counterparties because it will not require them to expend the 
resources necessary to resolve discrepancies over swap terms that are 
included in the Proposed Excluded Data Fields in accordance with tight 
regulatory timeframes.\48\ The Commission requests comment on all 
aspects of its preliminary consideration of benefits and encourages 
commenters to provide quantitative information where practical. Has the 
Commission accurately identified the benefits of this proposed 
regulation? Are there other benefits to the Commission, market 
participants, and/or the public that may result from the adoption of 
the proposed regulation that the Commission should consider?
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    \48\ See Sec.  23.502(a)(4) requiring SDs and MSPs to resolve 
discrepancies in material terms immediately with counterparties that 
are also SDs or MSPs. See also Sec.  23.502(b)(4) (requiring SDs and 
MSPs to resolve discrepancies in material terms and valuations in a 
timely fashion with counterparties that are not SDs or MSPs).
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4. Section 15(a)
    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
a. Protection of Market Participants and the Public
    The Commission believes that, notwithstanding its proposal to 
remove the Proposed Excluded Data Fields from the list of material 
terms that counterparties must periodically scrutinize to resolve any 
discrepancies, its regulations will continue to protect market 
participants and the public. The Commission, however, welcomes comment 
as to how market participants and the public may be protected or harmed 
by the proposed regulation.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission believes that its proposal, which will ensure that 
the parties resolving discrepancies in material terms and valuations in 
portfolio reconciliation exercises need not concern themselves with 
terms in the Proposed Excluded Data Fields may increase resource 
allocation efficiency of market participants engaging in reconciliation 
exercises without increasing the risk of harm to the financial 
integrity of markets.
    The Commission seeks comment as to how the proposed regulation may 
promote or hinder the efficiency, competitiveness, and financial 
integrity of markets.
c. Price Discovery
    The Commission has not identified an impact on price discovery as a 
result of the proposed regulation, but seeks comment as to any 
potential impact. Will the proposed regulation impact, positively or 
negatively, the price discovery process?
d. Sound Risk Management
    The Commission believes that its proposal is consistent with sound 
risk management practices because the proposed regulatory change would 
not impair an entity's ability to conduct portfolio reconciliations. 
The Commission solicits comments on whether market participants believe 
the proposal will impact, positively or negatively, the risk management 
procedures or actions of SDs, MSPs, or their counterparties.
e. Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations, but welcomes comment on whether this proposal would 
promote public confidence in the integrity of derivatives markets by 
ensuring meaningful regulation and oversight of all SDs and MSPs. Will 
this proposal impact, positively or negatively, any heretofore 
unidentified matter of interest to the public?

List of Subjects in 17 CFR Part 23

    Authority delegations (Government agencies), Commodity futures, 
Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, the Commodity Futures

[[Page 57135]]

Trading Commission proposes to amend 17 CFR part 23 as set forth below:

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0
1. The authority citation for part 23 continues to read as follows:

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

0
2. Revise Sec.  23.500(g) to read as follows:


Sec.  23.500  Definitions.

* * * * *
    (g) Material terms means all terms of a swap required to be 
reported in accordance with part 45 of this chapter other than the 
following:
    (1) An indication that the swap will be allocated;
    (2) If the swap will be allocated, or is a post-allocation swap, 
the legal entity identifier of the agent;
    (3) An indication that the swap is a post-allocation swap;
    (4) If the swap is a post-allocation swap, the unique swap 
identifier;
    (5) Block trade indicator;
    (6) With respect to a cleared swap, execution timestamp;
    (7) With respect to a cleared swap, timestamp for submission to a 
swap data repository;
    (8) Clearing indicator; and
    (9) Clearing venue.
* * * * *

    Issued in Washington, DC, on September 17, 2015, by the 
Commission.

Christopher J. Kirkpatrick,
Secretary of the Commission.

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

Appendices to Proposal To Amend the Definition of ``Material Terms'' 
for Purposes of Swap Portfolio Reconciliation--Commission Voting 
Summary, Chairman's Statement, and Commissioner's Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Bowen and 
Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

Appendix 2--Statement of Chairman Timothy G. Massad

    I support issuing this proposal to amend the definition of 
``material terms'' for purposes of portfolio reconciliation 
performed by swap dealers and major swap participants.
    The proposed amendment would replace an existing ``no-action'' 
letter issued during the implementation of the Dodd-Frank Act. This 
gives greater certainty to affected registrants and furthers the 
Commission's ongoing process of simplifying, fine-tuning, and 
harmonizing our rules.
    The proposal not only seeks comment on the technical aspects of 
reconciling specific data fields excluded under the staff no-action 
letter, but also seeks answers to important questions regarding the 
experience of swap dealers and major swap participants in complying 
with the portfolio reconciliation requirement more generally. 
Further, it seeks comment on the relationship of portfolio 
reconciliation to the integrity of data reported to swap data 
repositories.
    The feedback of knowledgeable market participants on this 
proposal will allow the Commission to further its goal of 
continuously improving our recordkeeping, reporting, and data 
quality rules and practices. I encourage all market participants to 
join in this effort by examining the proposal and providing detailed 
comments. I look forward to reviewing them.

Appendix 3--Statement of Commissioner J. Christopher Giancarlo

    In its rush to implement the Dodd-Frank Act over the past few 
years, the Commission issued multiple rules that proved to be 
confusing, impracticable or unworkable, which in turn necessitated 
the unprecedented issuance of no-action relief, either due to 
unrealistic compliance deadlines, problematic elements of the rules 
or both. I trust that today's proposal from the Commission signals 
that the epoch of heedless rule production is drawing to a close.
    The Commission is seeking comment on a proposed rule that would 
codify a modified version of no-action relief issued in 2013 (the 
``No-Action Relief'') by the Division of Swap Dealer and 
Intermediary Oversight (``DSIO'') pursuant to a request for an 
interpretive letter from the International Swaps and Derivatives 
Association (``ISDA''). The No-Action Relief allows Swap Dealers 
(``SDs'') and Major Swap Participants (``MSPs'') to treat certain 
Part 45 data fields as non-material for purposes of portfolio 
reconciliation under Commission Regulation 23.502.\1\
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    \1\ See CFTC Letter No. 13-31 (June 26, 2013).
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    I commend the Chairman and DSIO staff for taking steps to 
replace the No-Action Relief with a rulemaking subject to a cost-
benefit analysis and the notice and comment requirements of the 
Administrative Procedure Act. Reasonable people understood at the 
height of the Dodd-Frank rulemaking frenzy that the Commission would 
and could not get everything right. That is why actions like today's 
rule proposal are necessary and appropriate.
    I urge the CFTC staff to continue down the path of bringing to 
the Commission for consideration amendments to flawed Dodd-Frank 
rulesets. It is appropriate as a matter of good government that we 
replace the hundreds of no-action, exemptive and interpretive 
letters, guidance, advisories and other communications, both written 
and unwritten, issued without a Commission vote in the wake of the 
Dodd-Frank Act with proper administrative rulemakings.
    I support issuing for public comment the proposed amendments to 
the definition of ``material terms'' for purposes of portfolio 
reconciliation. As the public reviews this rule change and 
formulates comments, I would like to draw its attention to several 
aspects of the proposal. Commission Regulation 23.502 requires SDs 
and MSPs to engage in portfolio reconciliation once each day, week 
or calendar quarter, depending on the size of the swap portfolio, 
and to resolve immediately any discrepancy in a material term. It is 
unclear why the Commission needs a daily, weekly, or quarterly 
reconciliation of data fields that will not change over time once 
established. In particular, I note that the proposed rule would 
continue to treat as material terms the execution timestamp and 
timestamp for submission to a swap data repository for uncleared 
swaps, an indication of whether the clearing requirement exception 
in section 2(h)(7) of the Commodity Exchange Act has been elected 
and the identity of the counterparty electing the clearing 
requirement exception. I am aware of the staff's concern that a 
discrepancy in these terms could negatively impact the Commission's 
regulatory mission, but question whether these terms will ever need 
to be reconciled after an initial verification.
    On the other hand, I also question what additional burden will 
be placed on market participants by including these terms in the 
portfolio reconciliation process. I note that in its request for an 
interpretive letter ISDA stated that requiring reconciliation of 
data fields that are not relevant to the ongoing rights and 
obligations of the parties to a swap unnecessarily adds to the costs 
and complexity associated with implementing and managing the 
portfolio reconciliation process.\2\ It would be most helpful if 
parties affected by the rule would submit detailed comments 
regarding these costs.
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    \2\ See ISDA Request for Interpretive Letter--Part 23 dated May 
31, 2013.
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    It is also unclear why the Commission is proposing to retain the 
requirement that SDs and MSPs exchange non-material terms throughout 
the life of a swap as part of a portfolio reconciliation exercise. 
Commission Regulation 23.500(i) defines portfolio reconciliation as 
the process by which two parties to one or more swaps: (1) Exchange 
``terms'' (meaning all terms) of all swaps between the 
counterparties; (2) exchange each counterparty's valuation of each 
swap as of the close of business on the immediately preceding 
business day; and (3) resolve any discrepancy in ``material'' terms 
and valuations. I note that ISDA requested that the Commission 
narrow the definition of ``terms'' in Rule 23.500(i)(1) to mean 
``material terms,'' but the Commission is not proposing to do so. 
Thus, counterparties will be required to exchange all terms of each 
swap on a daily, weekly, or quarterly basis throughout the life of a 
swap, but will be required to reconcile only ``material terms.'' As 
with treating the terms relating to timestamps and the clearing 
exception as ``material terms'' discussed above, I question the 
utility of including non-material terms that are not required to be 
reconciled as part of the portfolio reconciliation process. It would 
be most helpful if parties affected by

[[Page 57136]]

the rule would submit detailed comments weighing the burdens against 
benefits of continuing to include such non-material terms.
    I look forward to thoughtful comments on all aspects of the 
proposal.

[FR Doc. 2015-24021 Filed 9-21-15; 8:45 am]
BILLING CODE 6351-01-P