60 Day Federal Register

Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules
System, which describes the application
procedure.

emcdonald on DSK2BSOYB1PROD with PROPOSALS

The Proposal
The FAA is considering an
amendment to Title 14, Code of Federal
Regulations (14 CFR) part 71 to establish
Class E airspace at Wolfeboro, NH
providing the controlled airspace
required to support the new Copter
RNAV GPS special standard instrument
approach procedures for Huggins
Hospital Heliport. Controlled airspace
extending upward from 700 feet above
the surface is required for IFR
operations within a 6-mile radius of the
point in space coordinates for the
heliport.
Class E airspace designations are
published in Paragraph 6005 of FAA
order 7400.9U, dated August 18, 2010,
and effective September 15, 2010, which
is incorporated by reference in 14 CFR
71.1. The Class E airspace designation
listed in this document will be
published subsequently in the Order.
The FAA has determined that this
proposed regulation only involves an
established body of technical
regulations for which frequent and
routine amendments are necessary to
keep them operationally current. It,
therefore, (1) Is not a ‘‘significant
regulatory action’’ under Executive
Order 12866; (2) is not a ‘‘significant
rule’’ under DOT Regulatory Policies
and Procedures (44 FR 11034; February
26, 1979); and (3) does not warrant
preparation of a Regulatory Evaluation
as the anticipated impact is so minimal.
Since this is a routine matter that will
only affect air traffic procedures and air
navigation, it is certified that this
proposed rule, when promulgated,
would not have a significant economic
impact on a substantial number of small
entities under the criteria of the
Regulatory Flexibility Act.
The FAA’s authority to issue rules
regarding aviation safety is found in
Title 49 of the United States Code.
Subtitle I, section 106 describes the
authority of the FAA Administrator.
Subtitle VII, Aviation Programs,
describes in more detail the scope of the
agency’s authority. This proposed
rulemaking is promulgated under the
authority described in subtitle VII, part
A, subpart I, section 40103. Under that
section, the FAA is charged with
prescribing regulations to assign the use
of airspace necessary to ensure the
safety of aircraft and the efficient use of
airspace. This proposed regulation is
within the scope of that authority as it
would establish Class E airspace at
Huggins Hospital, Wolfeboro, NH.

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List of Subjects in 14 CFR Part 71:
Airspace, Incorporation by reference,
Navigation (Air).
The Proposed Amendment
In consideration of the foregoing, the
Federal Aviation Administration
proposes to amend 14 CFR part 71 as
follows:
PART 71—DESIGNATION OF CLASS A,
B, C, D, AND CLASS E AIRSPACE
AREAS; AIR TRAFFIC SERVICE
ROUTES; AND REPORTING POINTS
1. The authority citation for part 71
continues to read as follows:
Authority: 49 U.S.C. 106(g); 40103, 40113,
40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–
1963 Comp., p. 389.
§ 71.1

[Amended]

2. The incorporation by reference in
14 CFR 71.1 of Federal Aviation
Administration Order 7400.9U,
Airspace Designations and Reporting
Points, dated August 18, 2010, effective
September 15, 2010, is amended as
follows:
Paragraph 6005 Class E Airspace Areas
Extending Upward from 700 Feet or More
Above the Surface of the Earth.

*

*

*

*

*

ANE NH E5 Wolfeboro, NH [New]
Huggins Hospital Heliport, NH
(Lat. 43°34′56″ N., long. 71°12′06″ W.)
Point in Space Coordinates
(Lat. 43°35′15″ N., long. 71°11′19″ W.)
That airspace extending upward from 700
feet above the surface within a 6-mile radius
of the Point in Space Coordinates (lat.
43°35′15″ N., long. 71°11′19″ W.) serving the
Huggins Hospital Heliport.
Issued in College Park, Georgia, on
December 13, 2010.
Mark D. Ward,
Manager, Operations Support Group, Eastern
Service Center, Air Traffic Organization.
[FR Doc. 2010–32581 Filed 12–27–10; 8:45 am]
BILLING CODE 4910–13–P

COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 23
RIN 3038–AC96

Confirmation, Portfolio Reconciliation,
and Portfolio Compression
Requirements for Swap Dealers and
Major Swap Participants
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:

The Commodity Futures
Trading Commission (Commission or

SUMMARY:

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CFTC) is proposing regulations to
implement new statutory provisions
established under Title VII of the DoddFrank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act).
Section 731 of the Dodd-Frank Act
added a new section 4s(i) to the
Commodity Exchange Act (CEA), which
requires the Commission to prescribe
standards for swap dealers and major
swap participants related to the timely
and accurate confirmation, processing,
netting, documentation, and valuation
of swaps. The proposed rules would
establish requirements for swap
confirmation, portfolio reconciliation,
and portfolio compression for swap
dealers and major swap participants.
DATES: Submit comments on or before
February 28, 2011.
ADDRESSES: You may submit comments,
identified by RIN number 3038–AC96
and Confirmation, Portfolio
Reconciliation, and Portfolio
Compression Requirements for Swap
Dealers and Major Swap Participants, by
any of the following methods:
• Agency Web site, via its Comments
Online process at http://
comments.cftc.gov. Follow the
instructions for submitting comments
through the Web site.
• Mail: David A. Stawick, Secretary of
the Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW.,
Washington, DC 20581.
• Hand Delivery/Courier: Same as
mail above.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
Please submit your comments using
only one method.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to http://
www.cftc.gov. You should submit only
information that you wish to make
available publicly. If you wish the
Commission to consider information
that may be exempt from disclosure
under the Freedom of Information Act,
a petition for confidential treatment of
the exempt information may be
submitted according to the established
procedures in § 145.9 of the
Commission’s regulations, 17 CFR
145.9.
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse or
remove any or all of your submission
from http://www.cftc.gov that it may
deem to be inappropriate for
publication, such as obscene language.
All submissions that have been redacted

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Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules

emcdonald on DSK2BSOYB1PROD with PROPOSALS

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:
Sarah E. Josephson, Associate Director,
202–418–5684, [email protected];
Frank N. Fisanich, Special Counsel,
202–418–5949, [email protected]; or
Jocelyn Partridge, Special Counsel, 202–
418–5926, [email protected]; Division
of Clearing and Intermediary Oversight,
Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
I. Background
On July 21, 2010, President Obama
signed the Dodd-Frank Act.1 Title VII of
the Dodd-Frank Act 2 amended the
Commodity Exchange Act (CEA) 3 to
establish a comprehensive regulatory
framework to reduce risk, increase
transparency, and promote market
integrity within the financial system by,
among other things: (1) Providing for the
registration and comprehensive
regulation of swap dealers and major
swap participants; (2) imposing clearing
and trade execution requirements on
standardized derivative products; (3)
creating rigorous recordkeeping and
real-time reporting regimes; and (4)
enhancing the Commission’s
rulemaking and enforcement authorities
with respect to all registered entities
and intermediaries subject to the
Commission’s oversight.
Section 731 of the Dodd-Frank Act
amends the CEA by adding a new
Section 4s, which sets forth a number of
requirements for swap dealers and
major swap participants. Specifically,
section 4s(i) of the CEA establishes
swap documentation standards for those
registrants.
Section 4s(i)(1) requires swap dealers
and major swap participants to
‘‘conform with such standards as may be
prescribed by the Commission by rule or
regulation that relate to timely and
accurate confirmation, processing,
netting, documentation, and valuation
of all swaps.’’ Under section 4s(i)(2), the
Commission is required to adopt rules
1 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (2010). The text of the Dodd-Frank Act
may be accessed at http://www.cftc.gov/
LawRegulation/OTCDERIVATIVES/index.htm.
2 Pursuant to Section 701 of the Dodd-Frank Act,
Title VII may be cited as the ‘‘Wall Street
Transparency and Accountability Act of 2010.’’
3 7 U.S.C. 1 et seq.

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‘‘governing documentation standards for
swap dealers and major swap
participants.’’ The Commission is
proposing the regulations on swap
confirmation, portfolio reconciliation,
and portfolio compression 4 discussed
below, pursuant to the authority granted
under sections 4s(h)(1)(D), 4s(h)(3)(D),
4s(i), and 8a(5) of the CEA. 5 The DoddFrank Act requires the Commission to
promulgate these provisions by July 15,
2011.
The proposed regulations reflect
consultation with staff of the following
agencies: (i) The Securities and
Exchange Commission; (ii) the Board of
Governors of the Federal Reserve
System; (iii) the Office of the
Comptroller of the Currency; and (iv)
the Federal Deposit Insurance
Corporation. Staff from each of these
agencies has had the opportunity to
provide oral and/or written comments
to the proposal, and the proposed
regulations incorporate elements of the
comments provided.
II. Proposed Regulations
The proposed regulations would
prescribe standards for the timely and
accurate confirmation of swaps and
would require the reconciliation and
compression of swap portfolios.
Confirmation, portfolio reconciliation,
and portfolio compression have been
recognized as important post-trade
processing mechanisms for reducing
risk and improving operational
efficiency by both current market
participants and their regulators.
With respect to confirmation, prudent
practice requires that, after coming to an
agreement on the terms of a transaction,
parties document the transaction in a
complete and definitive written record
so there is legal certainty about the
terms of their agreement. Through
portfolio reconciliation, counterparties
are able to resolve any discrepancies or
disputes as early as possible and arrive
at an understanding of their overall risk
exposure to one another. Portfolio
compression allows for a reduction in
outstanding trade count and outstanding
gross notional value by replacing
redundant trades with a smaller number
of trades and reduced gross notional
value. This process reduces operational
risk and increases operational efficiency
because there are fewer trades to
4 The Commission may propose additional rules
related to documentation provisions under section
4s(i) of the CEA.
5 Section 8a(5) of the CEA authorizes the
Commission to promulgate such regulations as, in
the judgment of the Commission, are reasonably
necessary to effectuate any of the provisions or to
accomplish any of the purposes of the CEA.

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maintain, and results in a more accurate
expression of market size.
In the past few years, market
participants and regulators have paid
particular attention to the post-trade
processing of swaps. For example,
operational issues associated with the
over-the-counter (OTC) derivatives
market have been the focus of reports
and recommendations by the President’s
Working Group on Financial Markets
(PWG).6 In response to the financial
crisis in 2008, the PWG called on the
industry to improve trade matching and
confirmation and to promote portfolio
reconciliation.
Since 2005, the Federal Reserve Bank
of New York (FRBNY) has led a
targeted, supervisory effort to enhance
operational efficiency and performance
in the OTC derivatives market, by
increasing automation in processing and
by promoting the timely confirmation of
trades. Known as the OTC Derivatives
Supervisors’ Group (ODSG), the FRBNY
leads an on-going effort with OTC
derivatives dealers’ primary supervisors,
trade associations, industry utilities,
and private vendors, through which
market participants (including buy-side
participants) regularly set goals and
commitments to bring infrastructure,
market design, and risk management
improvements to all OTC derivatives
asset classes. Over the years, the ODSG
has expanded its focus from credit
derivatives to include interest rate
derivatives, equity derivatives, foreign
exchange derivatives, and commodity
derivatives. Along with this expanded
focus has come increased engagement
with market participants on cross-asset
class issues. Specifically, the ODSG
encouraged the industry to commit itself
to a number of reforms, including
improved operational performance with
respect to the OTC derivatives
confirmation process, portfolio
reconciliation, and portfolio
compression. The regulations proposed
by the Commission would build upon
the ODSG’s work.
It is important to note at the outset,
that the Commission expects that swap
dealers and major swap participants
would be able to comply with each of
the proposed rules by executing a swap
on a swap execution facility (SEF) or on
a designated contract market (DCM), or
by clearing the swap through a
derivatives clearing organization (DCO).
For swaps executed on a SEF or a DCM,
the SEF or DCM will provide the
counterparties with a definitive written
6 See, e.g., Press Release, ‘‘President’s Working
Group on Financial Markets, Progress Summary on
OTC Derivatives Operational Improvements’’ (Nov.
2008).

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emcdonald on DSK2BSOYB1PROD with PROPOSALS

Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules
record of the terms of their agreement,
which will serve as a confirmation of
the swap. Similarly, if a swap is
executed bilaterally, but subsequently
submitted to a DCO for clearing, the
DCO will require a definitive written
record of all terms to the counterparties’
agreement prior to novation by the DCO;
this too would serve as a confirmation
of the swap.
When a swap is cleared by a central
counterparty, the problems that
portfolio reconciliation is designed to
solve (agreement on all terms and the
valuation of the swap) no longer exist
because the clearinghouse (1) requires a
definitive written record of all terms of
the swap; and (2) arrives at a settlement
price for all cleared swaps on a daily
basis. Additionally, the Commission is
considering a proposed regulation that
would require DCOs to offer portfolio
compression exercises on a regular
basis. The proposed rule for swap
dealers and major swap participants has
been designed to complement the
proposed DCO rule.
In designing these rules, the
Commission has taken care to minimize
the burden on those parties that will not
be registered with the Commission as
swap dealers or major swap
participants. To the extent that market
participants believe that additional
measures should be taken to reduce the
burden or increase the benefits of
confirmation, reconciliation, and
compression for the swaps market, the
Commission welcomes all comments.
The Commission requests comment
on all aspects of proposed §§ 23.500
(definitions), 23.501 (confirmation),
23.502 (portfolio reconciliation), and
23.503 (portfolio compression), as well
as comment on the specific provisions
and issues highlighted in the discussion
below. The Commission further requests
comment on an appropriate effective
date for final regulations, including
comment on whether it would be
appropriate to have staggered or delayed
effective dates for some regulations
based on the nature or characteristics of
the activities or entities to which they
apply. The Commission recognizes that
there will be differences in the size and
scope of the business of particular swap
dealers and major swap participants.
Therefore, comments are solicited on
whether certain provisions of the
proposed regulations should be
modified or adjusted to reflect the
differences among swap dealers and
major swap participants or differences
among asset classes.

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1. Background
Over the past several years, OTC
derivatives market participants and
their regulators have paid particular
attention to the timely confirmation of
swaps. The Government Accountability
Office (GAO) found that the rapid
expansion of trading volume of swaps,
such as credit derivatives since 2002,
caused stresses on the operational
infrastructure of market participants.
These stresses in turn caused the
participants’ back office systems to fail
to confirm the increased volume of
trades for a period of time.7 The GAO
found that the lack of automation in
trade processing and the purported
assignment of positions by transferring
parties to third parties without notice to
their counterparties were factors
contributing to this backlog. If
transactions, whether newly executed or
recently transferred to another party, are
left unconfirmed, there is no definitive
written record of the contract terms.
Thus, in the event of a dispute, the
terms of the agreement must be
reconstructed from other evidence, such
as e-mail trails or recorded trader
conversations. This process is
cumbersome and may not be wholly
accurate. Moreover, if purported
transfers of swaps, in whole or in part,
are made without giving notice to the
remaining parties and obtaining their
consent, disputes may arise as to which
parties are entitled to the benefits and
subject to the burdens of the transaction.
As the work of the ODSG
demonstrates, the industry is capable of
swift movement to contemporaneous
execution and confirmation. A large
back-log of unexecuted confirmations in
the credit default swap (CDS) market
created by prolonged negotiations and
inadequate confirmation procedures
were the subject of the first industry
commitments made by participating
dealers to ODSG.8 In October 2005, the
participating dealers committed to
reduce by 30% the number of
confirmations outstanding more than 30
days within four months. In March
2006, the dealers committed to reduce
the number of outstanding
confirmations by 70% by June 30, 2006.
By September 2006, the industry had
reduced the number of all outstanding

CDS confirmations by 70%, and the
number of CDS confirmations
outstanding more than 30 days by 85%.
The industry achieved these targets
largely by moving 80% of total trade
volume in CDS to confirmation on
electronic platforms, eliminating
backlogs in new trades. Today, over
90% of ‘‘electronically eligible’’ 9 CDS
trades are confirmed electronically, the
majority on the day of execution and up
to 98% within two days.10
The ODSG has established a
supervisory goal for all transactions to
be confirmed as soon as possible after
the time of execution. Ideally, this
would mean that there would be a
written or electronic document executed
by the parties to a swap for the purpose
of evidencing all of the terms of the
swap, including the terms of any
termination (prior to its scheduled
maturity date), assignment, novation,
exchange, or similar transfer or
conveyance of, or extinguishing of rights
or obligations.
In the case of electronically processed
transactions, all such transactions
should be matched and confirmed, at a
minimum, on the same day the trade
was executed. For electronically
processed transactions, confirmation
typically is effected by a third-party
‘‘matching’’ process. If transactions are
not confirmed in a timely manner,
backlogs of outstanding unconfirmed
trades develop, increasing risk. Timely
and accurate confirmation of
transactions is critical for all
downstream operational and risk
management processes, including the
correct calculation of cash flows and
discharge of settlement obligations as
well as accurate measurement of
counterparty credit exposures. Timely
confirmation also allows any rejections,
exceptions, and/or discrepancies to be
identified and resolved more quickly.
Another ODSG objective is a
marketplace that electronically
processes as many transactions as
possible in as many parts of the
processing life cycle as possible, but
particularly in the ‘‘upstream’’ parts of
the life cycle, where transaction
information is first entered into the
system (trade capture). To achieve this
objective, as many transactions as
possible and practicable should be
executed on electronic platforms, such

7 U.S. Government Accountability Office, ‘‘Credit
Derivatives: Confirmation Backlogs Increased
Dealers’ Operational Risks, But Were Successfully
Addressed After Joint Regulatory Action,’’ GAO–07–
716 (2007) at pages 3–4.
8 See October 4, 2005 industry commitment letter
to the Federal Reserve Bank of New York, available
at http://www.newyorkfed.org/newsevents/
news_archive/markets/2005/an050915.html.

9 It remains unclear precisely how much of the
total CDS market is not ‘‘electronically eligible,’’ as
eligibility is determined by the OTC derivatives
market participants.
10 See March 1, 2010 Summary of OTC
Derivatives Commitments provided to the Federal
Reserve Bank of New York, available at http://
www.newyorkfed.org/newsevents/news/markets/
2010/100301_table.pdf.

A. Swap Confirmation

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Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules

as SEFs, in order to approach the ideal
of ‘‘straight-through processing.’’
Otherwise, transactions should be keyed
into electronic systems as soon as
possible after execution.

emcdonald on DSK2BSOYB1PROD with PROPOSALS

2. Proposed Confirmation Rule
To promote the efficient operation of
the swap market, and to facilitate
market participants’ overall risk
management, the Commission is
proposing confirmation § 23.501.
For the purposes of proposed
§ 23.501, proposed § 23.500 would
provide certain critical definitions
pertaining to confirmation. An
acknowledgment would be defined as a
written or electronic record of all the
terms of a swap signed and sent by one
party to another. When one party
acknowledges the terms of a swap and
its counterparty verifies it, the result is
the issuance of a confirmation that
reflects the terms of the swap between
the parties. A confirmation thus would
be defined as a written or electronic
record of a swap that has been signed
and sent by one party and verified by
the other where that record has been
manually, electronically, or by some
other legally equivalent means, signed
by the receiving counterparty. Finally,
proposed § 23.500 would define
execution to be a legally-binding oral,
written, or electronic agreement by the
parties. For the purposes of the
confirmation rule, the term swap
transaction is defined to include any
event that would result in a new swap
or a change in the terms of a swap,
including execution, termination,
assignment, novation, exchange,
transfer, amendment, conveyance, or
extinguishing of rights or obligations
under a swap.
With regard to both acknowledgments
and confirmations, the Commission
intends that all the terms of a swap
transaction be provided for
acknowledgment and confirmation. The
objective is that parties have full written
agreement on all terms as soon as
practicable after execution and also
upon any ownership event during the
life of the swap. Such life cycle events
would include any termination (prior to
the scheduled maturity date of the
swap), assignment, novation, exchange,
transfer, amendment, or conveyance of,
or extinguishing of rights or obligations
under the swap.11 For each of these
events, the parties should have written
documentation evidencing all the terms
of the transaction, as soon as possible
11 Life cycle events would also include corporate
actions affecting a security or securities on which
the swap is based (e.g., a merger, dividend, stock
split or bankruptcy).

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after the transaction occurs. This
approach to documenting ‘‘life cycle
event data’’ is consistent with the
Commission’s proposed rules for
reporting swap data to a swap data
repository.12
The timely and accurate confirmation
of all swaps and life cycle events for
existing swaps would ensure that the
parties know the terms of their executed
transactions and the identities of their
counterparties at all times. Confirming
all swap transactions on the day of
execution should be standard for all
market participants. However, the
Commission recognizes some entities
that will not be registered as swap
dealers or major swap participants may
not have the operational capacity to
confirm their swap transactions as
quickly as swap dealers and major swap
participants. Accordingly, the
Commission is proposing a bifurcated
approach for confirmations. Swap
dealers and major swap participants
entering into swap transactions with
other swap dealers or major swap
participants would be required to obtain
a confirmation on the same calendar day
as execution (i.e., no later than T+0).
On the other hand, swap dealers and
major swap participants entering into
swap transactions with counterparties
that are not swap dealers or major swap
participants would be required to send
an acknowledgment for each swap on
the same calendar day as execution (i.e.,
no later than T+0). Swap dealers and
major swap participants would then
have policies and procedures in place to
confirm the swap with financial entities
as defined in proposed § 23.500 13 on
the same calendar day as execution and
with all other entities not later than the
next business day following execution.
The Commission also is proposing
that the times prescribed for achieving
12 The Notice of Proposed Rulemaking for Swap
Data Recordkeeping and Reporting Requirements is
available on the Commission’s Web site: http://
comments.cftc.gov/FederalRegister/Proposed.aspx.
13 This definition is taken from the end user
exception to the clearing requirement under section
2(h)(7)(C)(i) of the CEA. The term financial entity
includes the following eight entities: (i) A swap
dealer; (ii) a security-based swap dealer; (iii) a
major swap participant; (iv) a major security-based
swap participant; (v) a commodity pool as defined
in section 1a(10) of the CEA; (vi) a private fund as
defined in section 202(a) of the Investment Advisers
Act of 1940 (15 U.S.C. 80–b–2(a)); (vii) an employee
benefit plan as defined in paragraphs (3) and (32)
of section 3 of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1002); or (viii) a
person predominantly engaged in activities that are
in the business of banking or financial in nature, as
defined in section 4(k) of the Bank Holding
Company Act of 1956. See 7 U.S.C. 2(h)(7)(C)(i).
The definition would include the statutory
exclusion and limitation as contained in section
2(h)(7)(C) and also would include any Commission
regulations promulgated pursuant to the statutory
section.

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swap acknowledgment and
confirmation vary depending upon
whether transactions are electronically
executed or electronically processed.
Under proposed § 23.501(a)(1), all swap
dealers and major swap participants
entering into swap transactions with
other swap dealers or major swap
participants would be required to
confirm their swap transactions
according to the following timeframe:
• For any swap transaction that has
been executed and processed
electronically, within 15 minutes of
execution;
• For any swap transaction that is not
electronically executed, but that will be
processed electronically, within 30
minutes of execution; or
• For any swap transaction that
cannot be processed electronically by
the swap dealer or major swap
participant, within the same calendar
day as execution.
Under proposed § 23.501(a)(2), swap
dealers and major swap participants
entering into swap transactions with
counterparties that are not swap dealers
or major swap participants would be
required to send an acknowledgment of
each swap transaction according to the
following timeframe:
• For any swap transaction that has
been executed and processed
electronically, within 15 minutes of
execution;
• For any swap transaction that is not
executed electronically, but that will be
processed electronically, within 30
minutes after execution; or
• For any swap transaction that
cannot be processed electronically by
the swap dealer or major swap
participant, within the same calendar
day as execution.
For those swap transactions entered
into with counterparties that are not
swap dealers or major swap
participants, under proposed
§ 23.501(a)(3), swap dealers and major
swap participants would be required to
establish written policies and
procedures reasonably designed to
ensure confirmation with financial
entities on the same calendar day as
execution and with all other entities by
the next business day after the swap
transaction is executed. These
procedures must include a requirement
that, prior to entering into any swap
transaction, the swap dealer or major
swap participant furnish to a
prospective counterparty, or receive
from a prospective counterparty, a draft
acknowledgment specifying all terms of
the swap transaction other than pricing
and terms to be definitively agreed to at
execution. As is currently the custom in
many swap markets, including credit

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and equity derivative markets, the
parties may rely on a standard
confirmation agreement.
Under proposed § 23.501(b), a swap
dealer or major swap participant would
be required to keep records regarding
the processing of swap
acknowledgments and confirmations.
These records would include the time
and date of transmission or receipt of
any acknowledgment or confirmation,
the length of time between transmission
of any acknowledgment to a
counterparty and receipt of the signed
confirmation, and the length of time
between execution and confirmation of
the swap.
In order to retain flexibility for all
market participants, the proposed rules
do not prescribe a particular venue or
platform for confirmation. As noted
above, currently many swap
transactions are electronically processed
by third-party ‘‘matching’’ services.
While the Commission encourages the
continued use and expansion of these
services, the approach taken in the
proposed rule would allow parties the
ability to confirm bilaterally through
whatever means they select, so long as
they are able to meet the schedule laid
out in the rule.
In a similar effort to retain flexibility,
at this time, the Commission is not
prescribing the acknowledgment or
confirmation documentation that market
participants must use. The Commission
encourages the use of master
confirmation agreements and other
standardized documentation that has
been developed by the industry in an
effort to reduce confirmation backlogs,
among other things. However, the most
critical aspect of the confirmation rule
is that all the terms of the swap are
agreed to in writing and in a timely
manner.
The proposed rules would apply to all
new swaps and to all swap transactions,
as that term is defined in the rules,
entered into after the effective date of
the regulation.
3. Comments Requested
The Commission requests comment
on all aspects of proposed § 23.501. In
particular, the Commission requests
comment on the following questions:
• Does the proposed rule
appropriately allocate the responsibility
for providing the swap
acknowledgments?
• Is it feasible to require that all
acknowledgments be provided
electronically?
• Should the proposed rule require
swap dealers and major swap
participants to provide a swap
acknowledgment or confirmation more

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quickly, particularly for transactions
that are executed or processed
electronically?
• Does the proposed rule provide
sufficient time for swap dealers and
major swap participants to provide
swap acknowledgments to their
counterparties?
• Are there swap transactions for
which all of the terms required to be
included on an acknowledgment or in a
confirmation would not be known on
the same calendar day as execution? If
so, please describe these swap
transactions and include the terms that
would not be known on the same
calendar day as execution, as well as the
reason these terms would not be known.
• Is it necessary to clarify further that
the confirmation rule would apply to
life cycle events, such as termination,
assignment, novation, exchange,
transfer, amendment, or conveyance?
• Are there other post-execution
events for which a confirmation should
be executed?
• Should counterparties be permitted
to agree expressly that certain life cycle
events (such as assignment of payable
rights), do not require subsequent
confirmations? Are there life cycle
events that can be carved out of the rule
while still achieving the purpose of the
rule? Should more time be permitted for
confirmation of certain life cycle events,
such as transfers resulting from a
merger, consolidation, or transfer of all
assets to another entity?
• Should the Commission require that
electronic matching services or
confirmation platforms be used where
reasonably practicable?
• Does the term ‘‘processed
electronically’’ require more
clarification? If so, what definition
would be effective and flexible enough
to accommodate future market
innovation?
• Should the Commission require that
all swaps be processed electronically?
• Are there circumstances where
swap dealers and major swap
participants have the ability to process
a transaction electronically, but should
not be required to do so?
• Has the Commission properly
accounted for current industry practice
with respect to the time necessary to
confirm swap transactions?
• Would the proposed rule unduly
restrict the types of swaps that swap
dealers and major swap participants
may enter into or the persons that may
be their counterparties?
• Should executing a swap on a SEF
or DCM be deemed to satisfy the
confirmation requirement?

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• Should clearing a swap through a
DCO be deemed to satisfy the
confirmation requirement?
• Should the terms calendar day and
business day be further defined and has
the rule properly accounted for
counterparties in different time zones
executing swaps?
B. Swap Portfolio Reconciliation
1. Background
Section 4s(i) of the CEA directs the
Commission to prescribe regulations for
the timely and accurate confirmation,
processing, documentation, and
valuation of all swaps entered into by
swap dealers and major swap
participants. Disputes related to
confirming the terms of a swap, as well
as swap valuation disputes,14 have long
been recognized as a significant problem
in the OTC derivatives market. Portfolio
reconciliation is considered an effective
means of identifying and resolving these
disputes. Specifically, portfolio
reconciliation is a post-execution
processing and risk management
technique that is designed to:
(1) 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; (2) ensure effective
confirmation of all the terms of the
swap; and (3) identify and resolve
discrepancies between the
counterparties regarding the valuation
of the swap. In some instances, portfolio
reconciliation also may facilitate the
identification and resolution of
discrepancies between the
counterparties with regard to valuations
of collateral held as margin.
The Commission recognizes that the
industry has made significant progress
in adopting the use of portfolio
reconciliation to decrease the number of
swap disputes.15 In December 2008, the
ODSG’s group of 14 major dealers
committed to execute daily portfolio
reconciliations for collateralized
portfolios in excess of 500 trades
between participating dealers by June of
2009.16 As of May 2009, all participating
dealers were satisfying this
commitment. In October 2009, the
14 See ISDA Collateral Committee, ‘‘Commentary
to the Outline of the 2009 ISDA Protocol for
Resolution of Disputed Collateral Calls,’’ June 2,
2009 (stating ‘‘Disputed margin calls have increased
significantly since late 2007, and especially during
2008 have been the driver of large (sometimes > $1
billion) un-collateralized exposures between
professional firms.’’).
15 The Commission also recognizes and
encourages the industry practice of immediately
transferring undisputed collateral amounts.
16 See June 2, 2009 summary of industry
commitments, available at http://www.isda.org/
c_and_a/pdf/060209table.pdf.

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ODSG committed to publishing a
feasibility study on market-wide
portfolio reconciliation that would set
forth how regular portfolio
reconciliation could be extended
beyond the ODSG dealers to include
smaller banks, buy-side participants,
and derivative end users. Consistent
with this publication, the ODSG dealers
expanded their portfolio reconciliation
commitment in March 2010 to include
monthly reconciliation of collateralized
portfolios in excess of 1,000 trades with
any counterparty. Most recently, the
industry has been preparing a new
‘‘Convention on the Investigation of
Disputed Margin Calls’’ and a new
‘‘Formal Market Polling Procedure’’ that
are intended to ‘‘create a consistent and
predictable process * * * that
eliminates present uncertainties and
delays.’’ 17
Accordingly, the Commission is
proposing § 23.502, which would
require swap dealers and major swap
participants to reconcile their portfolios
with one another and provide
counterparties who are not registered as
swap dealers or major swap participants
with regular opportunities for portfolio
reconciliation. In order for the
marketplace to realize the full risk
reduction benefits of portfolio
reconciliation, the Commission is
proposing to expand portfolio
reconciliation to all transactions,
whether collateralized or
uncollateralized. For the swap market to
operate efficiently and to reduce
systemic risk, portfolio reconciliation
should be a proactive process that
delivers a consolidated view of
counterparty exposure down to the
transaction level. By identifying and
managing mismatches in key economic
terms and valuation for individual
transactions across an entire portfolio,
overall risk can be identified and
reduced.
2. Proposed Portfolio Reconciliation
Rule
For the purposes of proposed
§ 23.502, swap portfolio reconciliation
would be defined in proposed § 23.500
as a process by which the two parties to
one or more swaps: (1) Exchange the
terms of all swaps in the portfolio
between the parties; (2) exchange each
party’s valuation of each swap in a
portfolio between the parties as of the
close of business on the immediately
preceding business day; and (3) resolve
any discrepancy in material terms and
valuations. Valuation would be defined
17 See ‘‘ISDA 2010 Convention on the
Investigation of Disputed Margin Calls’’ and ‘‘ISDA
2010 Formal Market Polling Procedure.’’

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in proposed § 23.500 as the current
market value or net present value of a
swap, and material terms would be
defined as all terms of a swap required
to be reported in accordance with part
45 of this chapter.
Proposed § 23.502(a) would require
swap dealers and major swap
participants to reconcile swap portfolios
with other swap dealers or major swap
participants with the following
frequency: Daily for portfolios
consisting of 300 or more swaps, at least
weekly for portfolios consisting of 50 to
300 swaps, and at least quarterly for
portfolios consisting of fewer than 50
swaps. Swap dealers and major swap
participants would be required to
resolve immediately any discrepancy in
a material term identified as part of a
portfolio reconciliation process. The
Commission is proposing an immediate
resolution requirement for material
terms for the same reasons that
necessitate timely confirmation—parties
need to know the terms of their
executed agreements with one another.
A discrepancy in the terms of a swap
likely indicates that the parties have
failed to confirm the swap in
accordance with Commission
regulations, and, therefore, the parties
should take immediate action to resolve
the discrepancy. This requirement
would support and ensure compliance
with proposed § 23.501, which requires
a confirmation of all terms of a swap.
The Commission believes that
requiring reconciliation of all swap
portfolios among swap dealers and
major swap participants (rather than
only collateralized portfolios, as
contemplated by the ODSG work) is
appropriate because CEA section 4s(e)
requires that swap dealers and major
swap participants will be subject to
minimum capital and margin
requirements. As a result, the
Commission anticipates that most, if not
all, swaps entered by swap dealers and
major swap participants will be subject
to some form of collateralization. The
Commission also believes that requiring
more frequent reconciliation of smaller
portfolios is appropriate because section
2(a)(13)(G) of the CEA requires all swaps
to be reported to a registered swap data
repository, and, therefore, the
Commission anticipates that swap
dealers and major swap participants
will be able to efficiently reconcile their
internal records with their
counterparties electronically by
reference to data in the repositories. The
threshold of 300 swaps for daily
reconciliation is intended to capture
swap portfolios where there is a high
likelihood that the swap dealer or major
swap participant’s counterparty will

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have the technological capacity to
perform reconciliation processes
electronically.
Under proposed § 23.502(a)(5), swap
dealers and major swap participants
would be required to resolve any
discrepancy in a valuation identified as
part of a portfolio reconciliation process
within one business day. The
Commission recognizes that there may
be reasonable grounds for some
variation in the calculation of swap
valuation at any given time.
Consequently, the proposed rule would
not require that swap dealers and major
swap participants expend resources to
resolve all discrepancies in the
valuation of the swap, but only if the
difference between the lower valuation
and the higher is greater than 10%.
In addition, given that there are a
number of services and industry-led
initiatives that may facilitate resolution
of valuation disputes, at this time the
Commission is not proposing to
mandate that swap dealers and major
swap participants implement any
specific procedure for resolution of a
discrepancy in the valuation of a swap.
Rather, it is only proposing a deadline
for dispute resolution of one business
day following discovery of such
discrepancy.
For swap portfolios with entities other
than swap dealers or major swap
participants, proposed § 23.502(b)
would require swap dealers and major
swap participants to establish written
policies and procedures to perform
reconciliation, but would not prescribe
the manner in which the reconciliation
must be performed. For example, the
exchange of terms and valuations
between the counterparties may consist
of one party reviewing the details and
valuations delivered by the other party
and either affirming or objecting to such
details and valuations. The frequency
parameters of portfolio reconciliation
would be similar to those for swap
portfolios between swap dealers or
major swap participants.18 There are
some important distinctions in the
proposed treatment of swap portfolios
between a swap dealer or major swap
participant and others that promote
flexibility for those entities that will not
be registered with the Commission.
Swap dealers and major swap
participants would be required simply
to establish written procedures
reasonably designed to resolve any
discrepancies in the material terms or
valuation of each swap identified as part
18 The frequency thresholds are similar: Daily for
portfolios consisting of 500 or more swaps, at least
weekly for portfolios consisting of 100–500 swaps,
and at least quarterly for portfolios consisting of
less than 100 swaps.

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of a portfolio reconciliation process in a
timely fashion. Again, differences in
valuation of a swap need not be deemed
a discrepancy unless the difference
between the lower valuation and the
higher valuation is greater than 10% of
the higher valuation.
Proposed § 23.502(c) would create a
safe harbor for cleared swaps because
portfolio reconciliation is needed
primarily for uncleared swaps. When
swaps are cleared, the clearinghouse
requires that each swap be matched
prior to novation by the clearinghouse.
Moreover, once cleared, clearinghouses
determine daily settlement prices,
which preclude any valuation disputes.
The proposed rule would apply to all
swaps within a swap portfolio as of the
effective date of the regulation.
Finally, proposed § 23.502(d) would
require that swap dealers and major
swap participants maintain records of
each discrepancy identified during
portfolio reconciliation and the length
of time taken to resolve that
discrepancy.
3. Comments Requested
The Commission requests comment
on all aspects of proposed § 23.502(d).
In particular, the Commission requests
comment on the following questions:
• Are the proposed deadlines for
swap portfolio discrepancy resolution in
the proposed regulation appropriate?
• Are the reconciliation thresholds
and frequency requirements
appropriate?
• Are swap dealers and major swap
participants likely to have a large
number of counterparties with whom
they would be required to perform daily
reconciliation that do not have the
technological capacity to perform
reconciliation processes electronically?
• Is the proposal that a valuation
difference of less than 10% not be
deemed to be a discrepancy
appropriate? If not, please provide a
suggested valuation discrepancy
threshold.
• Should the proposed rule include a
provision that requires discrepancy
resolution if the aggregate of valuation
differences of less than 10% across a
portfolio exceeds a certain threshold? If
so, please provide a suggested
threshold.
• How would the requirement to
resolve valuation discrepancies in one
day for swaps among swap dealers and
major swap participants affect the very
detailed and complex industry
initiatives currently being considered
for resolving valuation disputes?
• Should all terms of a swap
transaction be reconciled or just the key
economic terms?

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• Should all discrepancies in swap
transaction terms be resolved or just the
material ones?
• Should the definition of material
terms be clarified?
• Should financial entities as defined
in proposed § 23.500 be required to
participate in portfolio reconciliation
under proposed § 23.502(a)?
C. Portfolio Compression
1. Background
Section 4s(i) of the CEA directs the
Commission to prescribe regulations for
the timely and accurate processing and
netting of all swaps entered into by
swap dealers and major swap
participants. Portfolio compression is an
important, post-trade processing and
netting mechanism that can be an
effective and efficient tool for the timely
and accurate processing and netting of
swaps by market participants.
Accordingly, the Commission is
proposing § 23.503, which would
require swap dealers and major swap
participants to engage in certain
bilateral and multilateral portfolio
compression exercises.
Portfolio compression is a mechanism
whereby substantially similar
transactions among two or more
counterparties are terminated and
replaced with a smaller number of
transactions of decreased notional value
in an effort to reduce the risk, cost, and
inefficiency of maintaining unnecessary
transactions on the counterparties’
books. In many cases, these redundant
or economically-equivalent positions
serve no useful business purpose, but
can create unnecessary risk,19 as well as
operational and capital inefficiencies. In
a portfolio compression exercise, swap
market participants whose combined
portfolios include outstanding
transactions that contain substantially
similar economic terms and/or that
would result in redundant payments
wholly or partially net their swaps by
terminating the original swaps and
replacing them with a smaller number
of new transactions that have a lower
gross notional value.
Market vendors assert that as many as
40,000 trades can be terminated in a
single portfolio compression cycle.20
Because portfolio compression
participants are permitted to establish
their own credit, market, and cash
payment risk tolerances and to establish
their own mark-to-market values for the
transactions to be compressed, the
19 Federal Reserve Bank of New York Staff Report
No. 424: ‘‘Policy Perspectives on OTC Derivatives
Market Infrastructure,’’ Jan. 2010 (revised Mar.
2010).
20 See http://www.trioptima.com.

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process does not alter the risk profiles
of the individual participants beyond a
level acceptable to the participant.
Portfolio compression exercises can
be performed on a bilateral or
multilateral basis. Multilateral
compression exercises are preferable
because the larger number of
participants significantly increases the
number of trades that can be eliminated
and removes the need for bilateral
negotiation between counterparties. In a
multilateral portfolio compression
exercise, the replacement swaps may be
with the same or different
counterparties.
The benefits of portfolio compression
to both individual market participants
and to the market as a whole are
considerable. The reduced transaction
count decreases operational risk
generally as there are fewer trades to
maintain, process, and settle.21 The
reduction in the outstanding gross
notional value of the swaps also allows
for increased capital liquidity and
efficiency. Firms can set aside less
capital for their positions while
maintaining their desired risk positions
in the market. The diminished
operational risk for the individual
market participants achieved by
portfolio compression, in turn, may
lessen systemic risk and enhance the
overall stability of the financial markets.
Compression also may provide a more
accurate expression of overall market
size and composition, and provide
market participants with a more precise
picture of their exposures.
The usefulness of portfolio
compression as a risk management tool
has been acknowledged widely. In 2008,
the PWG identified frequent portfolio
compression of outstanding trades as a
key policy objective in the effort to
strengthen the OTC derivatives market
infrastructure.22 Similarly, the 2010
staff report outlining policy perspectives
on OTC derivatives infrastructure issued
by the FRBNY identified trade
compression as an element of strong risk
management and recommended that
market participants engage in regular,
market-wide portfolio compression
exercises.23
The value of portfolio compression
also is illustrated by existing market
participation in compression exercises.
21 See ‘‘ISDA 2009 A Yearbook of ISDA
Activities,’’ International Swaps and Derivatives
Association, Inc. (2009).
22 ‘‘Policy Objectives for the OTC Derivatives
Markets,’’ President’s Working Group on Financial
Markets (Nov. 14, 2008).
23 Federal Reserve Bank of New York Staff Report
No. 424: ‘‘Policy Perspectives on OTC Derivatives
Market Infrastructure,’’ Jan. 2010 (revised Mar.
2010).

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In March 2010, the Depository Trust and
Clearing Corporation (DTCC) explicitly
attributed the reduction in the gross
notional value of the contracts in its
warehouse to industry supported
portfolio compression.24 TriOptima,
which offers the TriReduce portfolio
compression service, estimates that it
has terminated $106.3 trillion gross
notional of interest rate swaps and $66.9
trillion gross notional of credit swaps
since its inception in 2003.25 Similarly,
Creditex and Markit, which offer
portfolio compression exercises in
single name credit default swaps, have
enabled participating institutions to
eliminate $4.5 trillion in notional
between late 2008 through 2009.26

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2. Proposed Compression Rule
Based upon these considerations, the
Commission is proposing § 23.503,
which would impose certain portfolio
compression requirements upon swap
dealers and major swap participants.
Specifically, swap dealers and major
swap participants would be required to
participate in multilateral compression
exercises that are offered by those DCOs
or self-regulatory organizations of which
the swap dealer or major swap
participant is a member. The
Commission would encourage swap
dealers and major swap participants to
work with the DCOs and self-regulatory
organizations of which they are
members to develop portfolio
compression opportunities.
The portfolio compression obligation
would be limited to swaps in which the
counterparty is also a swap dealer or
major swap participant and swaps that
are eligible for inclusion in the exercise,
as determined by those conducting the
compression exercise and agreed to by
those participating in the exercise. A
swap dealer or major swap participant
would be permitted to exclude swaps
from a compression exercise if
including the swap would be reasonably
likely to increase significantly the risk
exposure of the swap dealer or major
24 DTCC Press Release, ‘‘DTCC Trade Information
Warehouse Completes Record Year Processing OTC
Credit Derivatives’’ (Mar. 11, 2010). Notably,
beginning in August 2008, ISDA encouraged
compression exercises for credit default swaps by
selecting the service provider and defining the
terms of service.
25 See http://www.trioptima.com. Between 2007
and 2008, TriOptima reduced $54.7 trillion gross
notional of interest rate swaps and $49.1 trillion
gross notional of credit swaps. In March of 2010,
the staff of the Federal Reserve Bank of New York
estimated that since 2008 nearly $50 trillion gross
notional of credit default swap positions has been
eliminated through portfolio compression. Federal
Reserve Bank of New York Staff Report No. 424:
‘‘Policy Perspectives on OTC Derivatives Market
Infrastructure,’’ Jan. 2010 (revised Mar. 2010).
26 See http://www.isdacdsmarketplace.com.

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swap participant. A swap dealer or
major swap participant also would be
permitted to establish counterparty,
market, cash payment, and other risk
tolerances and to exclude potential
counterparties from the compression
exercise, provided that the swap dealer
or major swap participant is not using
the risk tolerances or counterparty
exclusions to evade the compression
requirements.
In recognition that portfolio
compression currently is not available
for all asset classes and all transactions
within an asset class,27 the Commission
also is proposing that swap dealers and
major swap participants be required to
terminate bilaterally all fully offsetting
swaps between them by the close of
business on the business day following
the day the parties entered into the
offsetting swap transaction and to
engage annually in bilateral portfolio
compression exercises with
counterparties that are also swap dealers
or major swap participants. Swap
dealers and major swap participants
need not engage in bilateral portfolio
compression exercises, however, to the
extent that the counterparties have
mutually participated in a multilateral
exercise involving the swaps between
them during the same year.
The Commission anticipates that
portfolio compression exercises will be
offered by additional vendors and will
encompass additional products and
asset classes as the industry progresses
toward increased product
standardization and centralized
clearing. To afford the Commission the
flexibility to react to the expected future
availability and need for portfolio
compression exercises, proposed
§ 23.503 also would require swap
dealers and major swap participants to
participate in all multilateral portfolio
compression exercises required by
Commission regulation or order.
Proposed § 23.503 would not mandate
portfolio compression exercises for
swaps outstanding between a swap
dealer or a major swap participant and
counterparties that are neither swap
dealers nor major swap participants.
Instead, swap dealers and major swap
participants would be required to
27 At the present time, the principal portfolio
compression vendors offer compression exercises
for limited types of trades in a limited number of
asset classes. Compression currently is available for
certain interest rate swaps and credit default swaps
and, to a lesser degree, specific energy products. For
example, TriOptima’s TriReduce service provides
portfolio compression services for: (1) Interest rate
swap transactions in twenty-three currencies; (2)
credit default swaps (index, single name, and
tranches); and (3) a more limited number of energy
products. Markit and Creditex offer portfolio
compression for credit default swaps.

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maintain written policies and
procedures for periodically terminating
all fully offsetting swaps and
periodically engaging in compression
exercises.
The proposed rule would apply to all
swaps within a swap portfolio as of the
effective date of the regulation.
3. Comments Requested
The Commission is requesting
comment on all aspects of the portfolio
compression rule, and specifically
requests comment on the following
questions:
• Should the Commission require
swap dealers and major swap
participants to engage in bilateral and
multilateral compression exercises,
particularly with respect to transactions
where the counterparty is not a swap
dealer or major swap participant?
• Should the compression
requirement be restricted to particular
asset classes?
• With what frequency should
bilateral or multilateral compression be
required?
• What are the costs associated with
engaging in bilateral and multilateral
compression and are such costs a barrier
to participation?
• Should the Commission expressly
define the transactions that are eligible
for inclusion in a portfolio compression
exercise or leave that determination to
those conducting the compression
exercise and/or to those participating in
the exercise?
• What factors (e.g., sufficiently
standardized terms) would render a
particular swap eligible or ineligible for
inclusion in a bilateral or multilateral
compression exercise?
• Should the Commission provide
specific risk management, accounting,
regulatory, and other rationale under
which a swap dealer or major swap
participant may exclude particular
swaps transactions from a multilateral
portfolio compression exercise?
• How much time would be sufficient
to allow swap dealers and major swap
participants to come into compliance
with the proposed portfolio
compression requirements?
• Should the Commission require
participation in compression exercises
conducted only by registered derivatives
clearing organizations or by all central
counterparties of which the swap dealer
or major swap participant may be a
member?
• Should financial entities as defined
in proposed § 23.500 be subject to the
provisions of § 23.503(a), (b), and (c)?

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III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
requires that agencies consider whether
the rules they propose will have a
significant economic impact on a
substantial number of small entities.28
The Commission previously has
established certain definitions of ‘‘small
entities’’ to be used in evaluating the
impact of its regulations on small
entities in accordance with the RFA.29
The proposed rules would affect swap
dealers and major swap participants.
Swap dealers and major swap
participants are new categories of
registrants. Accordingly, the
Commission has not previously
addressed the question of whether such
persons are, in fact, small entities for
purposes of the RFA. However, the
Commission previously has determined
that futures commission merchants
should not be considered to be small
entities for purposes of the RFA.30 The
Commission’s determination was based,
in part, upon the obligation of futures
commission merchants to meet the
minimum financial requirements
established by the Commission to
enhance the protection of customers’
segregated funds and protect the
financial condition of futures
commission merchants generally.31 Like
futures commission merchants, swap
dealers will be subject to minimum
capital and margin requirements and are
expected to comprise the largest global
financial firms. The Commission is
required to exempt from swap dealer
designation any entities that engage in
a de minimis level of swaps dealing in
connection with transactions with or on
behalf of customers. The Commission
anticipates that this exemption would
tend to exclude small entities from
registration. Accordingly, for purposes
of the RFA for this rulemaking, the
Commission is hereby proposing that
swap dealers not be considered ‘‘small
entities’’ for essentially the same reasons
that futures commission merchants have
previously been determined not to be
small entities and in light of the
exemption from the definition of swap
dealer for those engaging in a de
minimis level of swap dealing.
The Commission also has previously
determined that large traders are not
‘‘small entities’’ for RFA purposes.32 In
that determination, the Commission
considered that a large trading position
28 5

U.S.C. 601 et seq.
FR 18618, Apr. 30, 1982.
30 Id. at 18619.
31 Id.
32 Id. at 18620.
29 47

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was indicative of the size of the
business. Major swap participants, by
statutory definition, maintain
substantial positions in swaps or
maintain outstanding swap positions
that create substantial counterparty
exposure that could have serious
adverse effects on the financial stability
of the United States banking system or
financial markets. Accordingly, for
purposes of the RFA for this
rulemaking, the Commission is hereby
proposing that major swap participants
not be considered ‘‘small entities’’ for
essentially the same reasons that large
traders have previously been
determined not to be small entities.
Moreover, the Commission is carrying
out Congressional mandates by
proposing this regulation. Specifically,
the Commission is proposing these
regulations to comply with the DoddFrank Act, the aim of which is to reduce
systemic risk presented by swap dealers
and swap market participants through
comprehensive regulation. The
Commission does not believe that there
are regulatory alternatives to those being
proposed that would be consistent with
the statutory mandate. Accordingly, the
Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C.
605(b) that the proposed rules will not
have a significant economic impact on
a substantial number of small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act
(PRA) 33 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.
This proposed rulemaking would result
in new collection of information
requirements within the meaning of the
PRA. The Commission therefore is
submitting this proposal to the Office of
Management and Budget (OMB) for
review in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11. The title for
this collection of information is
‘‘Confirmation, Portfolio Reconciliation,
and Portfolio Compression
Requirements for Swap Dealers and
Major Swap Participants.’’ 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. The OMB has not yet assigned
this collection a control number.
The collection of information under
these proposed rules is necessary to
implement certain provisions of the
CEA, as amended by the Dodd-Frank
Act. Specifically, it is essential to
33 44

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ensuring that swap dealers and major
swap participants document the terms
of all of their swaps, reconcile their
swap portfolios to resolve any
discrepancies or disputes, and wholly or
partially terminate some or all
outstanding swaps through regular
compression exercises. Commission
staff would use the information related
to each of these important risk-reducing
activities when conducting the
Commission’s examination and
oversight program with respect to the
registrants.
If the proposed regulations are
adopted, responses to this collection of
information would be mandatory. The
Commission will protect proprietary
information according to the Freedom of
Information Act and 17 CFR part 145,
‘‘Commission Records and Information.’’
In addition, section 8(a)(1) of the CEA
strictly prohibits the Commission,
unless specifically authorized by the
CEA, from making public ‘‘data and
information that would separately
disclose the business transactions or
market positions of any person and
trade secrets or names of customers.’’
The Commission also is required to
protect certain information contained in
a government system of records
according to the Privacy Act of 1974, 5
U.S.C. 552a.
1. Information Provided by Reporting
Entities/Persons
Proposed §§ 23.501, 23.502, and
23.503 would require swap dealers and
major swap participants to make and
retain records of confirmations,
portfolio reconciliations, and portfolio
compression exercises. The proposed
regulations do not impose any reporting
requirements. The proposed regulations
will be an important part of the
Commission’s regulatory program for
swap dealers and major swap
participants. The information required
to be preserved would be used by
representatives of the Commission and
any examining authority responsible for
reviewing the activities of the swap
dealer or major swap participant to
ensure compliance with the CEA and
applicable Commission regulations.
The annual burden associated with
these proposed regulations is estimated
to be 1,282.5 hours, at an annual cost of
$1,282,250 for each swap dealer and
major swap participant. Burden means
the total time, effort or financial
resources expended by persons to
generate, maintain, retain, disclose, or
provide information to or for a Federal
agency. Specifically, the Commission
anticipates that swap dealers and major
swap participants will spend an average
of 40 hours per year drafting and

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updating the policies and procedures
required by the proposed regulations;
252 hours per year making and retaining
the acknowledgment and confirmation
records required by proposed § 23.501;
812 hours per year making and retaining
the portfolio reconciliation records
required by proposed § 23.502; and
178.5 hours per year making and
retaining the bilateral offset and
portfolio compression records required
by proposed § 23.503.
It is not currently known how many
swap dealers and major swap
participants will become subject to
these rules, and this will not be known
to the Commission until the registration
requirements for these entities become
effective after July 16, 2011, the date on
which the Dodd-Frank Act becomes
effective. While the Commission
believes there will be approximately 200
swap dealers and 50 major swap
participants, it has taken a conservative
approach, for PRA purposes, in
estimating that there will be a combined
number of 300 swap dealers and major
swap participants who will be required
to comply with the recordkeeping
requirements of the proposed rules. The
Commission estimated the number of
affected entities based on industry data.
According to recent Bureau of Labor
Statistics findings, the mean hourly
wage of an employee under occupation
code 11–3031, ‘‘Financial Managers,’’
(which includes operations managers)
that is employed by the ‘‘Securities and
Commodity Contracts Intermediation
and Brokerage’’ industry is $74.41.34
Because swap dealers and major swap
participants include large financial
institutions whose operations
management employees’ salaries may
exceed the mean wage, the Commission
has estimated the cost burden of these
proposed regulations based upon an
average salary of $100 per hour.
Accordingly, the estimated burden
was calculated as follows:
Drafting and Updating Policies and
Procedures. This hourly burden arises
from the time necessary to develop and
periodically update the policies and
procedures required by the proposed
regulations.
Number of registrants: 300.
Frequency of collection: Initial
implementation, updating as needed.
Estimated number of annual
responses per registrant: 1.
Estimated aggregate number of
annual responses: 300.
Estimated annual hour burden per
registrant: 40 hours.
34 http://www.bls.gov/oes/current/oes113031.htm.

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Estimated aggregate annual hour
burden: 12,000 burden hours [300
registrants × 40 hours per registrant].
Acknowledgment and Confirmation
Recordkeeping. This hourly burden
arises from the proposed requirement
that swap dealers and major swap
participants make and maintain records
of the date and time of transmission to,
or receipt from, a counterparty of an
acknowledgment or confirmation; the
length of time between the
acknowledgment and confirmation of
each swap; and the length of time
between execution and confirmation of
each swap.
Number of registrants: 300.
Frequency of collection: daily.
Estimated number of annual
responses per registrant: 252 [252
trading days].
Estimated aggregate number of
annual responses: 75,600 [300
registrants × 252 trading days].
Estimated annual hour burden per
registrant: 252 [252 trading days × 1
hour per day].
Estimated aggregate annual hour
burden: 75,600 burden hours [300 × 252
hours].
Portfolio Reconciliation
Recordkeeping. This hourly burden
arises from the proposed requirement
that swap dealers and major swap
participants make and maintain records
of the portfolio reconciliation exercises
in which they engage. Registrants would
be required to reconcile portfolios with
counterparties that are swap dealers and
major swap participants on a daily,
weekly, or quarterly basis, depending
upon the size of the portfolio. They also
would be required to maintain policies
and procedures for conducting portfolio
reconciliation with other counterparties
with similar frequency.
Number of registrants: 300.
Frequency of collection: daily,
weekly, or quarterly.
Estimated number of annual
responses per registrant: 8,120.35
35 Due to the absence of prior experience in
regulating swap dealers and major swap
participants and with regulations similar to the
proposed rules, the actual, average number of
counterparties that a swap dealer or major swap
participant is likely to have and the average size of
its portfolio with particular counterparties is
uncertain. The estimate of 5,600 portfolio
reconciliation records is based upon the assumption
that each swap dealer and major swap participant
engages in swap transactions with approximately
one third (100) of the other swap dealers or major
swap participants and that 10% of such portfolios
would require daily reconciliation; 20% would
require weekly reconciliation; and 70% would
require quarterly reconciliation. The estimate also
is based upon the assumption that a swap dealer or
major swap participant has an average of 440 other
counterparties and that all of the portfolios with
those counterparties generally would be limited to
quarterly reconciliation. Consistent with other

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Estimated aggregate number of
annual responses: 2,436,000 [300
registrants × 8,120 responses].
Estimated annual hour burden per
registrant: 812 hours [8,120 × .10 hours
per response].
Estimated aggregate annual hour
burden: 243,600 burden hours [300
registrants × 812 hours per registrant].
Portfolio Compression Recordkeeping.
This hourly burden results from the
proposed requirement that swap dealers
and major swap participants make and
maintain records of the bilateral offsets
and portfolio compression exercises in
which they participate, including the
beginning and completion dates; the
swaps that were included and excluded;
the applicable risk tolerance levels; and
the results of the particular exercise.
The proposed regulations would require
that each swap dealer and major swap
participant terminate fully offsetting
swaps; participate in certain multilateral
compression exercises; and participate
in annual bilateral portfolio
compression exercises with each
counterparty that is also a swap dealer
or major swap participant (except to the
extent that the counterparties
participate in multilateral compression
exercises for the same swaps). Swap
dealers and major swap participants
also would be required to maintain
policies and procedures for periodically
engaging in portfolio compression
exercises with other counterparties.
Number of registrants: 300.
Frequency of collection: As needed.
Estimated number of annual
responses per registrant: 1,029 [24
multilateral compression records 36] +
[465 bilateral compression exercise

proposed rulemakings, the Commission has
estimated that each of the 14 major swap dealers
has an average 7,500 counterparties and the other
286 swap dealers and major swap participants have
an average of 200 counterparties per year, for an
average of 540 total counterparties per registrant.
The Commission estimates that 440 of those
counterparties would not be other swap dealers or
major swap participants.
36 This estimate assumes that swap dealers and
major swap participants would engage in
multilateral compression exercises for 2 asset
classes at an average rate of 12 multilateral
compression exercises per year (approximately 1
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records 37] + [540 bilateral offset
records 38].
Estimated aggregate number of
annual responses: 308,700 [300
registrants × 1,029 responses per year].
Estimated annual hour burden per
registrant: 178.5 hours [24 multilateral
compression records × .5 hours per
records] + [465 bilateral compression
exercise records × .3 hours per records]
+ [540 bilateral offset records × .05
hours per record].
Estimated aggregate annual hour
burden: 53,550 burden hours [300
registrants × 178.5 hours per registrant].
Based upon the above, the aggregate
hourly burden for all registrants is
334,350 hours and $33,435,000 [334,350
× $100 per hour].
In addition to the per hour burden
discussed above, the Commission
anticipates that swap dealers and major
swap participants may incur minimal
start-up costs in connection with the
proposed recordkeeping obligations.
Such costs would include the
expenditures related to developing and
installing new recordkeeping
technology or re-programming or
updating existing recordkeeping
technology and systems to enable the
swap dealer or major swap participant
to collect, maintain, and re-produce any
newly required records. The
Commission believes that swap dealers
and major swap participants generally
could adapt their current infrastructure
to accommodate the new or amended
technology and thus, no significant
infrastructure expenditures would be
needed. The Commission estimates the
programming burden hours associated
with technology improvements to be 40
hours.
According to recent Bureau of Labor
Statistics findings, the mean hourly
wages of computer programmers under
37 As with other approximations set forth in this
proposal, the estimate of 465 bilateral compression
exercise records is based upon the assumption that
each swap dealer and major swap participant
engages in swap transactions with approximately
one third (100) of the other swap dealers or major
swap participants. Because it is anticipated that
most swaps between swap dealers and major swap
participants would be eligible for multilateral
portfolio compression exercises, the Commission
expects that a swap dealer or major swap
participant would need to engage in annual
bilateral compression with only one quarter of (25)
such counterparties. The estimate also is based
upon the assumption that the average swap dealer
or major swap participant has an average of 440
non-swap dealer or major swap participant
counterparties and would engage in 1 bilateral
portfolio compression exercise with each. This
would result in a total of 465 bilateral portfolio
compression records (25 + 440).
38 This estimate is based upon the assumption
that each swap dealer and major swap participant
will have an average of 1 set of swaps that is eligible
for annual bilateral offset with each of its estimated
540 counterparties per year.

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occupation code 15–1021 and computer
software engineers under program codes
15–1031 and 1032 are between $34.10
and $44.94.39 Because swap dealers and
major swap participants generally will
be large entities that may engage
employees with wages above the mean,
the Commission has conservatively
chosen to use a mean hourly
programming wage of $60 per hour.
Accordingly, the start-up burden
associated with the required
technological improvements would be
$2,400 [$60 × 40 hour per affected
registrant] or $720,000 in the aggregate.
2. Information Collection Comments
The Commission invites the public
and other Federal agencies to comment
on any aspect of the recordkeeping
burdens discussed above. The
Commission specifically requests
comment on the variables used in the
above-referenced hourly burden
calculations. For example, the
Commission requests comment on the
following:
• What is the total number of swap
dealers and major swap participants in
the marketplace?
• What is the average number of
counterparties that a swap dealer or
major swap participant is likely to have?
• What percentage of those
counterparties are other swap dealers or
major swap participants?
• What is the average size (number of
swaps) of a portfolio that a swap dealer
or major swap participant is likely to
have with a particular type of
counterparty?
• What is the average number of
acknowledgment and confirmation
records that a swap dealer or major
swap participant would likely be
required to make under the proposed
regulations?
Pursuant to 44 U.S.C. 3506(c)(2)(B),
the Commission solicits comments in
order to: (i) 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; (ii) evaluate the
accuracy of the Commission’s estimate
of the burden of the proposed collection
of information; (iii) determine whether
there are ways to enhance the quality,
utility, and clarity of the information to
be collected; and (iv) minimize 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.
39 http://www.bls.gov/oes/current/oes113031.htm.

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Comments may be submitted directly
to the Office of Information and
Regulatory Affairs, by fax at (202) 395–
6566 or by e-mail 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 statements
for the collections of information
discussed above may be obtained by
visiting 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. Cost-Benefit Analysis
Section 15(a) of the CEA40 requires
the Commission to consider the costs
and benefits of its actions before issuing
a rulemaking under the CEA. By its
terms, Section 15(a) does not require the
Commission to quantify the costs and
benefits of a new regulation or to
determine whether the benefits of the
rule outweigh its costs; rather, it
requires that the Commission ‘‘consider’’
the costs and benefits of its actions.
Section 15(a) further specifies that
costs and benefits of a proposed
rulemaking shall be evaluated in light of
five broad areas of market and public
concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. The
Commission may, in its discretion, give
greater weight to any one of the five
enumerated considerations and could,
in its discretion, determine that,
notwithstanding its costs, a particular
regulation was necessary or appropriate
to protect the public interest or to
effectuate any of the provisions or to
accomplish any of the purposes of the
CEA.
Summary of proposed requirements.
The proposed regulations would
implement new section 4s(i) of the CEA
which was added by section 731 of the
Dodd-Frank Act. The proposed
regulations would set forth certain
requirements for swap confirmations,
portfolio reconciliation, and portfolio
compression applicable to swap dealers
40 7

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Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules

and major swap participants and related
recordkeeping requirements.
Costs. With respect to costs, the
Commission has determined that the
nominal cost that would be borne by
swap dealers and major swap
participants to institute the policies and
procedures and recordkeeping systems
necessary to satisfy the new regulatory
requirements are far outweighed by the
benefits that would accrue to the
financial system as a whole as a result
of the implementation of the rules. It is
expected that any additional cost
imposed by the confirmation, portfolio
reconciliation, and portfolio
compression requirements of proposed
§§ 23.501, 23.502, and 23.503 would be
minimal because the confirmation,
reconciliation, and compression
processes required under the rules are
already part of a prudent operational
processing regime that many, if not
most, swap dealers and major swap
participants already undertake as part of
their ordinary course of business.
Moreover, most swap dealers and
major swap participants have adequate
resources and existing back office
operational systems that are capable of
adjusting to the new regulatory
framework without material diversion of
resources away from commercial
operations. As discussed in the
preamble, there are also numerous
third-party vendors that provide
confirmation, compression, and
reconciliation services. Some of these
providers charge fees based on results
achieved (such as number of swaps
compressed) and, thus, the cost would
be necessarily proportionate to the
benefit.
Benefits. With respect to benefits, the
Commission has determined that the
proposed regulations would require a
swap dealer or major swap participant
to confirm, reconcile, and compress
their swaps in a manner that will result
in reduced risk, increased transparency,
and greater market integrity in the
swaps market. The proposed swap
confirmation, portfolio reconciliation,
and portfolio compression rules would
further the goal of avoiding market
disruptions and financial losses to
market participants and the general
public. Among other benefits, the
proposed rules would promote levels of
operational scalability and resilience
that are most evident in periods of
sustained high volume and market
volatility. Therefore, the Commission
believes it is prudent to prescribe these
proposed regulations.
Public Comment. The Commission
invites public comment on its costbenefit considerations. Commentators
are also invited to submit any data or

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(d) Execution means, with respect to
a swap transaction, an agreement by the
counterparties (whether orally, in
writing, electronically, or otherwise) to
the terms of the swap transaction that
List of Subjects in 17 CFR Part 23
legally binds the counterparties to such
Antitrust, Commodity futures,
terms under applicable law.
Conduct standards, Conflict of Interests,
(e) Financial entity has the meaning
Major swap participants, Reporting and
given to the term in section 2h(7)(C) of
recordkeeping, Swap dealers, Swaps.
the Act and any Commission regulations
promulgated thereunder, provided that
For the reasons stated in this release,
the term shall not include a swap dealer
the Commission proposes to amend 17
CFR part 23, as proposed to be added in or major swap participant.
(f) Fully offsetting swaps means swaps
FR Doc. 2010–XXXX, published on
of equivalent terms where no net cash
XXXX (75 FR XXXX), as follows:
flow would be owed to either
PART 23—SWAP DEALERS AND
counterparty after the offset of payment
MAJOR SWAP PARTICIPANTS
obligations thereunder.
(g) Material terms means all terms of
1. The authority citation for part 23 to
a swap required to be reported in
read as follows:
accordance with part 45 of this chapter.
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1,
(h) Multilateral portfolio compression
6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a, exercise means an exercise in which
18, 19, 21.
multiple swap counterparties wholly or
partially terminate some or all of the
2. Subpart I, (consisting of §§ 23.500,
swaps outstanding among those
23.501, 23.502, and 23.503) is added to
counterparties and replace the swaps
read as follows:
with a smaller number of swaps whose
Subpart I—Swap Documentation
combined notional value is less than the
Sec.
combined notional value of the original
23.500 Definitions.
swaps included in the exercise. The
23.501 Swap confirmation.
replacement swaps may be with the
23.502 Portfolio reconciliation.
same or different counterparties.
23.503 Portfolio compression.
(i) Portfolio reconciliation means any
process by which the two parties to one
Subpart I—Swap Documentation
or more swaps:
§ 23.500 Definitions.
(1) Exchange the terms of all swaps in
For purposes of subpart I, the
the swap portfolio between the
following terms shall be defined as
counterparties;
provided.
(2) Exchange each counterparty’s
(a) Acknowledgment means a written
valuation of each swap in the swap
or electronic record of all of the terms
portfolio between the counterparties as
of a swap signed and sent by one
of the close of business on the
counterparty to the other.
immediately preceding business day;
(b) Bilateral portfolio compression
and
exercise means an exercise in which two
(3) Resolve any discrepancy in
swap counterparties wholly or partially
material terms and valuations.
terminate some or all of the swaps
(j) Processed electronically means to
outstanding between those
be entered into a swap dealer or major
counterparties and replace those swaps
swap participant’s computerized
with a smaller number of swaps whose
processing systems to facilitate
combined notional value is less than the clearance and settlement.
(k) Prudential regulator has the
combined notional value of the original
meaning given to the term in section
swaps included in the exercise.
1a(39) of the Commodity Exchange Act
(c) Confirmation means the
and includes the Board of Governors of
consummation (electronically or
the Federal Reserve System, the Office
otherwise) of legally binding
documentation (electronic or otherwise) of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation,
that memorializes the agreement of the
the Farm Credit Association, and the
counterparties to all of the terms of a
Federal Housing Finance Agency, as
swap transaction. A confirmation must
applicable to the swap dealer or major
be in writing (whether electronic or
swap participant. The term also
otherwise) and must legally supersede
includes the Federal Deposit Insurance
any previous agreement (electronically
or otherwise). A confirmation is created Corporation, with respect to any
financial company as defined in section
when an acknowledgment is manually,
201 of the Dodd-Frank Wall Street
electronically, or by some other legally
Reform and Consumer Protection Act or
equivalent means, signed by the
any insured depository institution
receiving counterparty.
other information that they may have
quantifying or qualifying the costs and
benefits of the proposed rules with their
comment letters.

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under the Federal Deposit Insurance
Act, and with respect to each affiliate of
any such company or institution.
(l) Swap portfolio means all swaps
currently in effect between a particular
swap dealer or major swap participant
and a particular counterparty.
(m) Swap transaction means any
event that results in a new swap or in
a change to the terms of a swap,
including execution, termination,
assignment, novation, exchange,
transfer, amendment, conveyance, or
extinguishing of rights or obligations of
a swap.
(n) Unwind proposal means a
proposal offered by the sponsor of a
multilateral portfolio compression
exercise which, if accepted, would
wholly or partially terminate some or all
of the original swaps included in the
exercise.
(o) Valuation means the current
market value or net present value of a
swap.

emcdonald on DSK2BSOYB1PROD with PROPOSALS

§ 23.501

Swap confirmation.

(a) Confirmation.
(1) Each swap dealer and major swap
participant entering into a swap
transaction with a counterparty that is a
swap dealer or major swap participant
shall execute a confirmation for the
swap transaction according to the
following schedule:
(i) For any swap transaction that has
been executed and processed
electronically, within 15 minutes of
execution;
(ii) For any swap transaction that is
not executed electronically, but that will
be processed electronically, within 30
minutes of execution; or
(iii) For any swap transaction that
cannot be processed electronically by
the swap dealer or major swap
participant, within the same calendar
day as execution.
(2) Each swap dealer and major swap
participant entering into a swap
transaction with a counterparty that is
not a swap dealer or a major swap
participant shall send an
acknowledgment of such swap
transaction according to the following
schedule:
(i) For any swap transaction that has
been executed and processed
electronically, within 15 minutes of
execution;
(ii) For any swap transaction that is
not executed electronically, but that will
be processed electronically, within 30
minutes of execution; or
(iii) For any swap transaction that
cannot be processed electronically by
the swap dealer or major swap
participant, within the same calendar
day as execution.

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(3) Each swap dealer and major swap
participant shall establish, maintain,
and enforce written policies and
procedures reasonably designed to
ensure that it executes a confirmation
for each swap transaction that it enters
into with a counterparty that is a
financial entity within the same
calendar day as execution and with a
counterparty that is not a swap dealer,
major swap participant, or a financial
entity not later than the next business
day after execution. Such procedures
shall include a requirement that, prior
to execution of any such swap, the swap
dealer or major swap participant furnish
to a prospective counterparty, or receive
from a prospective counterparty, a draft
acknowledgment specifying all terms of
the swap transaction other than the
applicable pricing and other relevant
terms that are to be expressly agreed at
execution.
(b) Recordkeeping. (1) Each swap
dealer and major swap participant shall
make and retain a record of:
(i) The date and time of transmission
to, or receipt from, a counterparty of any
acknowledgment;
(ii) The date and time of transmission
to, or receipt from, a counterparty of any
confirmation;
(iii) The length of time between
acknowledgment and confirmation of
each swap; and
(iv) The length of time between
execution and confirmation of each
swap.
(2) All records required to be
maintained pursuant to this section
shall be maintained in accordance with
§ 1.31 and shall be made available
promptly upon request to any
representative of the Commission or any
applicable prudential regulator, or with
regard to swaps defined in section
1a(47)(A)(v), to any representative of the
Commission, the Securities and
Exchange Commission, or any
applicable prudential regulator.
§ 23.502

Portfolio reconciliation.

(a) Swaps with swap dealers or major
swap participants. Each swap dealer
and major swap participant shall engage
in portfolio reconciliation as follows for
all swaps in which its counterparty is
also a swap dealer or major swap
participant.
(1) Each swap dealer or major swap
participant shall agree in writing with
each of its counterparties on the terms
of the portfolio reconciliation.
(2) The portfolio reconciliation may
be performed on a bilateral basis by the
counterparties or by a qualified third
party.
(3) The portfolio reconciliation shall
be performed no less frequently than:

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81531

(i) Once each business day for each
swap portfolio that includes 300 or
more swaps;
(ii) Once each week for each swap
portfolio that includes more than 50 but
fewer than 300 swaps on any business
day during any week; and
(iii) Once each calendar quarter for
each swap portfolio that includes no
more than 50 swaps at any time during
the calendar quarter.
(4) Each swap dealer and major swap
participant shall resolve immediately
any discrepancy in a material term of a
swap identified as part of a portfolio
reconciliation.
(5) Each swap dealer and major swap
participant shall resolve any
discrepancy in a valuation identified as
part of a portfolio reconciliation within
one business day. A difference between
the lower valuation and the higher
valuation of less than 10% of the higher
valuation need not be deemed a
discrepancy.
(b) Swaps with entities other than
swap dealers or major swap
participants. Each swap dealer and
major swap participant shall establish,
maintain, and enforce written policies
and procedures for engaging in portfolio
reconciliation as follows for all swaps in
which its counterparty is neither a swap
dealer nor a major swap participant.
(1) Each swap dealer or major swap
participant shall agree in writing with
each of its counterparties on the terms
of the portfolio reconciliation.
(2) The portfolio reconciliation may
be performed on a bilateral basis by the
counterparties or by a qualified third
party.
(3) The portfolio reconciliation shall
be performed no less frequently than:
(i) Once each business day for each
swap portfolio that includes 500 or
more swaps;
(ii) Once each week for each swap
portfolio that includes more than 100
but fewer than 500 swaps on any
business day during any week; and
(iii) Once each calendar quarter for
each swap portfolio that includes no
more than 100 swaps at any time during
the calendar quarter.
(4) Each swap dealer or major swap
participant shall establish, maintain,
and enforce written procedures
reasonably designed to resolve any
discrepancies in the material terms or
valuation of each swap identified as part
of a portfolio reconciliation process in a
timely fashion. A difference between the
lower valuation and the higher
valuation of less than 10% of the higher
valuation need not be deemed a
discrepancy.
(c) Reconciliation of cleared swaps.
Nothing in this section shall apply to a

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Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules

swap that is cleared by a derivatives
clearing organization.
(d) Recordkeeping. A record of each
swap portfolio reconciliation, including
a record of each discrepancy and the
length of time for resolution of each
discrepancy not resolved within one
business day, shall be maintained in
accordance with § 1.31 and shall be
made available promptly upon request
to any representative of the Commission
or any applicable prudential regulator,
or with regard to swaps defined in
section 1a(47)(A)(v) of the Act, to any
representative of the Commission, the
Securities and Exchange Commission,
or any applicable prudential regulator.

emcdonald on DSK2BSOYB1PROD with PROPOSALS

§ 23.503

Portfolio compression.

(a) Bilateral offset. Each fully
offsetting swap between a swap dealer
or major swap participant and another
swap dealer or major swap participant
shall be terminated no later than the
close of business on the business day
following the day on which the
counterparties entered into the fully
offsetting swap.
(b) Bilateral compression. Each swap
dealer and major swap participant shall
engage in a bilateral portfolio
compression exercise for each swap in
which the counterparty is also a swap
dealer or major swap participant at least
once per calendar year, except to the
extent that the swap dealer or major
swap participant and the counterparty
have participated in a multilateral
compression exercise involving such
swap during the same calendar year.
(c) Multilateral compression. Each
swap dealer and major swap participant
shall engage in the following portfolio
compression exercises for each swap in
which its counterparty is also a swap
dealer or major swap participant:
(1) Each swap dealer and major swap
participant shall participate in all
multilateral portfolio compression
exercises required by Commission
regulation or order.
(2) Each swap dealer and major swap
participant shall participate in all
multilateral portfolio compression
exercises that are initiated, offered, or
sponsored by any of the following
entities to the extent that any swap in
the portfolio of the swap dealer or major
swap participant is eligible for inclusion
in the exercise:
(i) Any derivatives clearing
organization of which the swap dealer
or major swap participant is a member;
or
(ii) Any self-regulatory organization of
which the swap dealer or major swap
participant is a member.
(3) Each swap dealer and major swap
participant shall comply with the

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following with respect to each
multilateral portfolio compression
exercise in which it participates:
(i) Transactions included. Each swap
dealer and major swap participant shall
include in the multilateral portfolio
compression exercise all swaps in
which its counterparty is also a swap
dealer or major swap participant that are
eligible to be included in the particular
exercise, unless including the swap
would be reasonably likely to
significantly increase the risk exposure
of the swap dealer or major swap
participant.
(ii) Counterparty, market, and cash
payment risk tolerances.
Notwithstanding § 23.503(c)(3)(i), a
swap dealer or a major swap participant
may establish counterparty, market,
cash payment, or other risk tolerances or
exclude specific potential
counterparties, provided that the swap
dealer or major swap participant does
not use such risk tolerances or
counterparty exclusions to evade the
requirements of this regulation.
(iii) Acceptance of unwind proposal.
No swap dealer or major swap
participant shall unreasonably
withhold, delay, or condition consent to
an unwind proposal.
(d) Policies and procedures.
(1) Each swap dealer and major swap
participant shall establish, maintain,
and enforce written policies and
procedures for engaging in the bilateral
and multilateral portfolio compression
exercises required by this section with
respect to all swaps in which its
counterparty is also a swap dealer or
major swap participant.
(2) Each swap dealer and major swap
participant shall establish, maintain,
and enforce written policies and
procedures for periodically terminating
fully offsetting swaps and for
periodically engaging in portfolio
compression exercises with respect to
swaps in which its counterparty is an
entity other than a swap dealer or major
swap participant, to the extent that the
outstanding swaps are able to be
terminated through a portfolio
compression exercise.
(e) Recordkeeping. (1) Each swap
dealer and major swap participant shall
make and maintain a record of each
bilateral offset and each bilateral or
multilateral portfolio compression
exercise in which it participates,
including the beginning and completion
dates of the offset or exercise; the
included swaps and counterparties
thereto; the swaps that were eligible for
inclusion in the exercise, but were
excluded by the swap dealer or major
swap participant and the reason for the
exclusion; the counterparty, market,

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cash payment, or other risk tolerance
levels set by the swap dealer or major
swap participant; and the results of the
compression, including the
identification of the swaps that were
terminated and any new swaps and the
counterparties thereto that resulted from
the exercise.
(2) All records required to be
maintained pursuant to this section
shall be maintained in accordance with
§ 1.31 and shall be made available
promptly upon request to any
representative of the Commission or any
applicable prudential regulator, or with
regard to swaps defined in section
1a(47)(A)(v) of the Act, to any
representative of the Commission, the
Securities and Exchange Commission,
or any applicable prudential regulator.
Issued in Washington, DC on December 16,
2010, by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Confirmation, Portfolio
Reconciliation, and Portfolio
Compression Requirements for Swap
Dealers and Major Swap Participants—
Commissioners Voting Summary and
Statements of Commissioners
Note: The following appendices will not
appear in the Code of Federal Regulations.

Appendix 1—Commissioners Voting
Summary
On this matter, Chairman Gensler and
Commissioners Dunn, Sommers, Chilton and
O’Malia voted in the affirmative. No
Commissioner voted in the negative.

Appendix 2—Statement of Chairman
Gary Gensler
I support the proposed rulemaking that
establishes essential business conduct
standards for swap dealers and major swap
participants. Today’s rule establishes
confirmation, portfolio reconciliation and
portfolio compression requirements for such
parties. The proposed regulations are
consistent with Congress’s direction through
the Dodd-Frank Act to prescribe standards
for the timely and accurate confirmation,
processing, netting and valuation of swap
transactions. One of the primary goals of
Dodd-Frank Act was to establish a
comprehensive regulatory framework that
would reduce risk, increase transparency and
promote market integrity. The proposed
regulations accomplish this goal by
establishing procedures that will promote
legal certainty regarding swap transactions,
early resolutions of valuation disputes,
enhanced understanding of one
counterparty’s risk exposure to another,
reduced operational risk and increased
operational efficiency.
[FR Doc. 2010–32264 Filed 12–27–10; 8:45 am]
BILLING CODE 6351–01–P

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