Final Rule

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COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 1, 3, and 23
RIN 3038–AC96

Swap Dealer and Major Swap
Participant Recordkeeping, Reporting,
and Duties Rules; Futures Commission
Merchant and Introducing Broker
Conflicts of Interest Rules; and Chief
Compliance Officer Rules for Swap
Dealers, Major Swap Participants, and
Futures Commission Merchants
Commodity Futures Trading
Commission.
ACTION: Final rule.
AGENCY:

The Commodity Futures
Trading Commission (Commission or
CFTC) is adopting regulations to
implement certain provisions of Title
VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(Dodd-Frank Act). These regulations set
forth reporting and recordkeeping
requirements and daily trading records
requirements for swap dealers (SDs) and
major swap participants (MSPs). These
regulations also set forth certain duties
imposed upon SDs and MSPs registered
with the Commission with regard to:
Risk management procedures;
monitoring of trading to prevent
violations of applicable position limits;
diligent supervision; business
continuity and disaster recovery;
disclosure and the ability of regulators
to obtain general information; and
antitrust considerations. In addition,
these regulations establish conflicts-ofinterest requirements for SDs, MSPs,
futures commission merchants (FCMs),
and introducing brokers (IBs) with
regard to firewalls between research and
trading and between clearing and
trading. Finally, these regulations also
require each FCM, SD, and MSP to
designate a chief compliance officer,
prescribe qualifications and duties of
the chief compliance officer, and require
that the chief compliance officer
prepare, certify, and furnish to the
Commission an annual report
containing an assessment of the
registrant’s compliance activities.
DATES: The rules are effective June 4,
2012. Specific compliance dates are
discussed in the supplementary
information.

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SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Frank N. Fisanich, Chief Counsel, 202–
418–5949, [email protected], Division
of Swap Dealer and Intermediary
Oversight, Ward P. Griffin, Counsel,
202–418–5425, [email protected], Office
of the General Counsel, and Hannah

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Ropp, Economist, 202–418–5228,
[email protected], Office of the Chief
Economist, Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street NW., Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Comments on the Notices of Proposed
Rulemaking
A. Regulatory Structure
B. Reporting, Recordkeeping, and Daily
Trading Records Requirements for SDs
and MSPs
C. General Records Requirement—§ 23.201
D. Daily Trading Records—§ 23.202
E. Records; Retention and Inspection—
§ 23.203
F. Duties of Swap Dealers and Major Swap
Participants
G. Risk Management Program for SDs and
MSPs—§ 23.600
H. Monitoring of Position Limits—§ 23.601
I. Diligent Supervision—§ 23.602
J. Business Continuity and Disaster
Recovery—§ 23.603
K. General Information: Availability for
Disclosure and Inspection—§ 23.606
L. Antitrust Considerations—§ 23.607
M. Conflicts of Interest Policies and
Procedures by SDs, MSPs, FCMs, and
IBs—§ 23.605, § 1.71
N. Designation of a Chief Compliance
Officer; Required Compliance Policies;
and Annual Report of an FCM, SD, or
MSP
III. Effective Dates and Compliance Dates
A. Comments Regarding Compliance Dates
B. Compliance Dates
IV. Cost Benefit Considerations
A. Introduction
B. General Considerations
C. Comments Regarding the Scope of the
Proposed Rules
D. Recordkeeping, Reporting, and Daily
Trading Records Requirements for SDs
and MSPs
E. Duties and Risk Management
Requirements of SDs and MSPs
F. Conflicts-of-Interest Policies and
Procedures for SDs, MSPs, FCMs, and
IBs
G. Designation of a Chief Compliance
Officer, Required Compliance Policies,
and Annual Report of an FCM, SD, or
MSP
H. Conclusion
V. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act

I. Background
The Commission is hereby adopting
§ 23.200 through § 23.205 1 setting forth
reporting and recordkeeping
requirements and daily trading records
requirements for SDs and MSPs, as
required under sections 4s(f) and 4s(g)
of the Commodity Exchange Act (CEA);
1 Commission regulations referred to herein are
found at 17 CFR Ch. 1.

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§ 23.600 through § 23.607 setting forth
certain duties imposed upon SDs and
MSPs with regard to: (1) Risk
management procedures; (2) monitoring
of trading to prevent violations of
applicable position limits; (3) diligent
supervision; (4) business continuity and
disaster recovery; (5) conflicts of interest
policies and procedures; (6) disclosure
and the ability of regulators to obtain
general information; and (7) antitrust
considerations, as required under
section 4s(j) of the CEA; § 3.3 requiring
FCMs, SDs, and MSPs to designate a
chief compliance officer, prescribing
qualifications and duties of the chief
compliance officer, and requiring the
chief compliance officer to prepare,
certify, and furnish to the Commission
an annual report containing an
assessment of the registrant’s
compliance activities, as required under
sections 4d(d) and 4s(k) of the CEA; and
§ 1.71 setting forth certain duties
imposed on FCMs and IBs with regard
to implementing conflicts of interest
policies and procedures, as required
under section 4d(c) of the CEA; as well
as amendments to § 3.1 to add chief
compliance officers to the definition of
‘‘principal’’ and to add a new definition
of ‘‘board of directors.’’
II. Comments on the Notices of
Proposed Rulemaking
The final rules adopted herein were
proposed in five separate notices of
proposed rulemaking.2 Each proposed
rulemaking was subject to an initial 60day public comment period and a reopened comment period of 30 days.3
The Commission received a total of
approximately 114 comment letters
directed specifically at the proposed
rules.4 The Commission considered
2 See 75 FR 76666 (Dec. 9, 2010) (Reporting,
Recordkeeping, and Daily Trading Records
Requirements for Swap Dealers and Major Swap
Participants (Recordkeeping NPRM)); 75 FR 71397
(Nov. 23, 2010) (Regulations Establishing and
Governing the Duties of Swap Dealers and Major
Swap Participants (Duties NPRM)); 75 FR 70152
(Nov. 17, 2010) (Implementation of Conflicts of
Interest Policies and Procedures by Futures
Commission Merchants and Introducing Brokers
(FCM/IB Conflicts NPRM)); 75 FR 71391 (Nov. 23,
2010) (Implementation of Conflicts of Interest
Policies and Procedures by Swap Dealers and Major
Swap Participants (SD/MSP Conflicts NPRM)); and
75 FR 70881 (Nov. 19, 2010) (Designation of a Chief
Compliance Officer; Required Compliance Policies;
and Annual Report of a Futures Commission
Merchant, Swap Dealer, or Major Swap Participant
(CCO NPRM)).
3 See 76 FR 25274 (May 4, 2011) (extending or reopening comment periods for multiple Dodd-Frank
proposed rulemakings).
4 Comment files for each proposed rulemaking
can be found on the Commission Web site,
www.cftc.gov.

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each of these comments in formulating
the final regulations.5
The Chairman and Commissioners, as
well as Commission staff, participated
in numerous meetings with
representatives of potential SDs and
MSPs, existing FCMs, trade
associations, public interest groups,
traders, and other interested parties. In
addition, the Commission has consulted
with other U.S. financial regulators
including: (i) The Securities and
Exchange Commission (SEC); (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 this adopting release, and the final
regulations incorporate elements of the
comments provided. The Commission
intends to work with the Federal
Deposit Insurance Corporation (FDIC) to
establish appropriate informationsharing arrangements to ensure that the
FDIC has the information it needs to
exercise authority under Title II of the
Dodd-Frank Act or the Federal Deposit
Insurance Act with regard to any SD or
MSP registered with the Commission.
The Commission is mindful of the
benefits of harmonizing its regulatory
framework with that of its counterparts
in foreign countries. The Commission
has therefore monitored global advisory,
legislative, and regulatory proposals,
and has consulted with foreign
regulators in developing the final
regulations.
A. Regulatory Structure
The proposed regulations did not
differentiate between SDs and MSPs
that may be a division of a larger entity
or institution, but not a separate legal
entity. The proposed regulations also
did not differentiate between SDs and
MSPs, but, rather, applied identical
rules to both types of entities. The
proposals, however, solicited comments
on whether certain provisions of the
proposed regulations should be
modified or adjusted to reflect the
differences among SDs or MSPs. In
addition, the proposed regulations
tracked the scope of the statutory text,
and did not, by their terms, apply only
to the swap activities of SDs and MSPs.
In its comment letter, Cargill,
Incorporated (Cargill) argued that the
proposed rules should recognize
Congressional intent to permit a
5 The Commission also reviewed the proposed
rule of the Securities and Exchange Commission
concerning business conduct standards for securitybased swap dealers and major security-based swap
participants. See 76 FR 42396 (July 18, 2011).

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business with a swap dealing division to
be subject to SD regulation only for the
activities of that division. Cargill
recommended that the Commission
make clear that the Commission’s
regulations only apply to the swap
dealing business of an SD that is a
division of a larger company, and not to
the other business activities of the
company.
MetLife, Inc. (MetLife), the Managed
Funds Association (MFA), BlackRock,
and the Asset Management Group of the
Securities Industry and Financial
Markets Association (AMG) each argued
that the Dodd-Frank Act does not
require that the Commission to apply
the same rules to MSPs as those applied
to SDs and that MSPs should not be
subject to the same regulations as SDs
because MSPs do not engage in marketmaking activities.
The Securities Industry and Financial
Markets Association (SIFMA) and the
Federal Home Loan Banks (FHLBs) each
recommended that the Commission’s
regulations should allow registrants that
are regulated by a prudential regulator
to comply with the Commission’s
regulations on a substituted compliance
basis by complying with comparable
regulations of their prudential regulator.
In response to Cargill’s comment, the
Commission is including a new
definition of ‘‘swaps activities’’ in the
final regulations, as follows: ‘‘Swaps
activities means a registrant’s activities
related to swaps and any product used
to hedge such swaps, including, but not
limited to, futures, options, other swaps
or security-based swaps, debt or equity
securities, foreign currency, physical
commodities, and other derivatives.’’
The Commission is using this term in
the final regulations to (i) limit the
scope of the risk management
requirements in § 23.600 to only the
swap activities of SDs and MSPs; (ii)
define the extent of the recordkeeping
requirement in § 23.201; and (iii) limit
the scope of the duties and
responsibilities of the chief compliance
officer of an SD or MSP in § 3.3 to the
swaps activities of SDs and MSPs.6
The Commission is not modifying the
regulations to differentiate between SDs
and MSPs. The Commission observes
that no provision of sections 4s(f), (g),
(j), and (k) of the CEA, as added by the
Dodd-Frank Act, differentiates between
the duties and requirements of SDs and
those of MSPs. The Commission thus
6 In addition, the Commission anticipates that
under its further definition of ‘‘swap dealer,’’ an SD
that has applied for and received a limited purpose
designation from the Commission will be subject to
these regulations only for the categories or activities
for which the limited purpose designation is
granted.

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has determined that the intent of
sections 4s(f), (g), (j), and (k) is to apply
the same requirements to MSPs and
SDs, and the Commission is taking the
same approach in the final regulations.
The Commission believes that to the
extent the final regulations are not
applicable to an MSP’s activities, the
MSP is not burdened by being subject to
the regulations.
The Commission has considered but
rejected a substituted compliance
regime with respect to the final rule for
registrants subject to regulation by a
prudential regulator. The Commission
notes that section 4s(e) of the CEA
grants prudential regulators exclusive
authority to prescribe capital and
margin requirements for SDs and MSPs
that are banks, but does not extend such
authority to any other part of section 4s.
Because SDs and MSPs will be
registrants of the Commission, the
Commission has determined that its
interest in ensuring that all registrants
are subject to consistent regulation
outweighs any burden that may be
placed on registrants that are subject to
regulation by a prudential regulator.
However, the Commission observes that
many of its final regulations are
modeled on prudential regulations and
supervision. Thus the two regimes
would be broadly consistent.
B. Reporting, Recordkeeping, and Daily
Trading Records Requirements for SDs
and MSPs
As added by section 731 of the DoddFrank Act, sections 4s(f) and 4s(g) of the
CEA established reporting and
recordkeeping requirements and daily
trading records requirements for SDs
and MSPs.
Section 4s(f)(1) requires SDs and
MSPs to ‘‘make such reports as are
required by the Commission by rule or
regulation regarding the transactions
and positions and financial condition of
the registered swap dealer or major
swap participant.’’ In the Recordkeeping
NPRM, the Commission proposed
regulations, pursuant to sections
4s(f)(1)(B)(i) and (ii) of the CEA,
prescribing the books and records
requirements of ‘‘all activities related to
the business of swap dealers or major
swap participants,’’ regardless of
whether or not the entity has a
prudential regulator.
In addition, the Commission proposed
regulations in the Recordkeeping NPRM
pursuant to section 4s(g)(1) of the CEA,
requiring that SDs and MSPs ‘‘maintain
daily trading records of the swaps of the
registered swap dealer and major swap
participant and all related records
(including related cash and forward
transactions) and recorded

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communications, including electronic
mail, instant messages, and recordings
of telephone calls.’’ The Commission
notes that section 4s(g)(3) requires that
daily trading records for each swap
transaction be identifiable by
counterparty, and section 4s(g)(4)
specifies that SDs and MSPs maintain a
‘‘complete audit trail for conducting
comprehensive and accurate trade
reconstructions.’’ The Commission
received 14 comment letters in response
to the Recordkeeping NPRM and
considered each in formulating the final
rules.

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C. General Records Requirement—
§ 23.201
Proposed § 23.201 set forth the
records that SDs and MSPs must
maintain. The records required under
the proposed rule included full and
complete swap transaction information,
including all documents on which swap
information is originally recorded.
1. Additional Types of Records To Be
Retained
In the Recordkeeping NPRM, the
Commission requested comments
regarding whether additional types of
records other than those specified in the
proposed rules should be required to be
kept by SDs and MSPs. The Commission
also requested comment regarding
whether drafts of documents should be
kept.
The Working Group of Commercial
Energy Firms (The Working Group)
commented that the current proposal is
sufficient and any additional record
retention requirements would be of little
value to the Commission. Chris Barnard,
however, recommended that drafts of
documents should also be kept, arguing
that the decision process leading up to
a final document can be very
informative. In order to regulate the use
of high-frequency and algorithmic
trading strategies, Better Markets, Inc.
(Better Markets) recommended that the
Commission require SDs and MSPs that
employ high-frequency and algorithmic
trading strategies to maintain records of
each strategy employed including a
description of the strategy and its
objectives and the algorithms employed,
and to maintain a record of every order,
cancellation, and trade that occurs in
the implementation of each strategy,
indexed to the electronic record of the
strategy description and properly time
stamped.
Having considered these comments
and the comments discussed below
regarding specific recordkeeping
requirements, the Commission has
determined that the record retention
requirements as proposed are sufficient

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and has not included any additional
requirements in the final rules. With
respect to Better Markets’ comment, the
Commission notes that pursuant to
§ 23.600(d)(9), as adopted in this release
and discussed further below, SDs and
MSPs are required to ensure that use of
trading programs is subject to policies
and procedures governing their use,
supervision, maintenance, testing, and
inspection, and that such policies and
procedures are subject to a
recordkeeping requirement pursuant to
§ 23.600(g).
2. Reliance on Records of Swap Data
Repositories
The proposed regulations did not
address whether an SD or MSP may rely
on reporting a swap to a swap data
repository (SDR) as a means of meeting
their recordkeeping requirements.
Proposed § 23.203(b)(2) required records
of any swap to be kept for the life of the
swap and for a period of five years
following the termination, maturity,
expiration, transfer, assignment, or
novation date of the swap.
The International Swaps and
Derivatives Association (ISDA) and
SIFMA (together, ISDA & SIFMA)
requested that the Commission clarify
the extent to which SDs and MSPs may
rely upon SDRs to retain records beyond
the time periods that registrants
currently retain such records. ISDA &
SIFMA did not elaborate on the current
retention periods for swaps records, nor
did they explain how this approach
would work in the absence of
established SDRs for all types of swaps.
At this time, the Commission has
determined not to permit SDs and MSPs
to rely solely on SDRs to meet their
recordkeeping obligations under the
rules. The Commission believes that
reliance on SDRs may be a cost-efficient
alternative in the future, but such
reliance would be premature at the
present time. Additionally, the
Commission believes that SDs and
MSPs must maintain complete records
of their swaps for the purposes of risk
management. The data that is required
to be reported to an SDR may not be
sufficient for these purposes.
3. Transaction Records Maintained in a
Form and Manner Identifiable and
Searchable by Transaction and
Counterparty—§§ 23.201(a)(1),
23.202(a), and 23.202(b)
Proposed § 23.201(a)(1) required SDs
and MSPs to keep transaction records in
a form identifiable and searchable by
transaction and by counterparty.
Proposed §§ 23.202(a) and 23.202(b)
also required SDs and MSPs to keep
daily trading records for each swap and

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any related cash or forward transaction
as a separate electronic file identifiable
and searchable by transaction and
counterparty.
ISDA & SIFMA recommended that the
decision whether to maintain each
transaction record as a separate
electronic file be left to the reporting
counterparties. ISDA & SIFMA argued
that SDs and MSPs routinely store data
across a number of systems, and that
aggregating transaction data from all
systems into a single electronic file
would require enormous investment
across market participants and would
require a substantial implementation
period.
The Working Group argued that tying
records of unfilled or cancelled orders,
correspondence (e.g., voice records,
email, and instant messages), journals,
memoranda, and other records required
by proposed § 23.201(a)(1) to each
individual transaction in a manner that
is identifiable and searchable by
transaction would create an enormous
technical burden, likely requiring the
review, sorting, and assignment of such
data to each transaction manually by
individual employees. The Working
Group recommended therefore that the
Commission allow SDs and MSPs to
maintain records of the required
information in the form and manner
currently employed by such firms, not
in a single comprehensive file, if such
records would be readily accessible and
could be provided to the Commission
within a reasonable amount of time
following a request.
The Commission agrees with the
comments, in part, and is modifying the
proposed rules to remove the provision
in § 23.202(a) and § 23.202(b) that
requires each transaction record to be
maintained as a separate electronic file.
The Commission believes that this
modification will make the requirement
less burdensome for SDs and MSPs
because it will allow such registrants to
maintain searchable databases of the
required records without the added cost
and time needed to compile records into
individual electronic files. The
Commission notes that the rule, as
modified, does not require the raw data
in such databases to be tagged with
transaction and counterparty identifiers
so long as the SD or MSP can readily
access and identify records pertaining to
a transaction or counterparty by running
a search on the raw data. In response to
The Working Group’s comments, the
Commission confirms that swap records
can be maintained under current market
practice so long as the records are
readily accessible, are identifiable and
searchable by transaction and
counterparty, and otherwise meet the

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requirements of § 1.31, as required
under § 23.203.
However, the Commission observes
that section 4s(g)(3) of the CEA requires
registrants to ‘‘maintain daily trading
records for each counterparty in a
manner and form that is identifiable
with each swap transaction.’’ In
accordance with this statutory
provision, the rules clarify that such
trading records should be searchable by
transaction and by counterparty.
Maintaining records in this manner may
prove costly for some SDs and MSPs,
but this approach is required by statute
and necessary for accurate audit trail
construction, which is paramount for
successful enforcement of trade practice
cases.

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4. Business Records—§ 23.201(b)
As proposed, § 23.201(b) required SDs
and MSPs to keep full, complete, and
systematic business records, including
records related to corporate governance,
financial records, complaints, and
marketing and sales materials.
The Working Group acknowledged
that market participants presently retain
records that would qualify as business
records under the proposal, although
not in a single comprehensive file. The
Working Group recommended that the
Commission permit these records to be
retained as they currently are in the
normal course of business, as long as
such records can be readily accessed
and provided to the Commission upon
request. For example, many entities
retain financial records within their
accounting departments, while
marketing and sales materials would be
retained separately within another
division. The Working Group also
recommended that the Commission
clarify that when a subsidiary is
determined to be an SD or MSP, but its
parent company is not, business records
should only be required to be retained
for the subsidiary.
In response to The Working Group’s
comments, the Commission confirms
that the rule does not require SDs and
MSPs to keep the required business
records in a single comprehensive file.
So long as SDs and MSPs are keeping
full, complete, and systematic business
records that are available for inspection
or disclosure, the requirements of
§ 23.201(b) would be met. The
Commission also notes that the rule
applies only to registered SDs and
MSPs, and, therefore, the rules would
not apply to the parent company of a
registrant unless the parent company is
also an SD or MSP.

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5. Records of Complaints Received—
§ 23.201(b)
Proposed § 23.201(b) required SDs
and MSPs to retain a record of
complaints received, certain identifying
information about the complainant, and
a record of the disposition of the
complaint.
MFA commented that the requirement
to retain a record of complaints is
inappropriate for MSPs because, except
in the event such entities are registered
as commodity trading advisors or
commodity pool operators: (a) Entities
that may be classified as MSPs would
not be members of NFA or similar
organizations; and (b) the filing of such
complaints against entities that may be
classified as MSPs is neither customary
nor consistent with such entities’
activities in the market.
Having considered MFA’s comment,
the Commission is adopting the rule as
proposed. MSPs are, by definition,
market participants that have a
substantial position in swaps, that have
outstanding swaps that create
substantial counterparty exposure that
could have serious adverse effects on
the financial stability of the U.S.
financial markets, or that are highly
leveraged. Consequently, the
Commission believes it is possible that
a record of complaints, or a pattern of
complaints, made against an MSP could
be of regulatory value to the
Commission. The Commission also
notes that pursuant to the Commission’s
MSP registration rule, each MSP
registered with the Commission is also
required to be a member of at least one
registered self-regulatory organization
(SRO).7
6. Records of Marketing and Sales
Materials—§ 23.201(b)(4)
Proposed § 23.201(b)(4) required SDs
and MSPs to retain copies of all
marketing and sales presentations,
advertisements, literature, and
communications, and a record of the
SD’s or MSP’s compliance with
applicable Federal requirements,
Commission regulations, and the rules
of any SRO related to marketing and
sales materials.
MFA commented that because MSPs
are not market makers, they do not
produce such materials for public
7 See 17 CFR 170.16 Registration of Swap Dealers
and Major Swap Participants, 77 FR 2613 (Jan. 19,
2012) (stating ‘‘Each person registered as a swap
dealer or a major swap participant must become
and remain a member of at least one futures
association that is registered under section 17 of the
Act and that provides for the membership therein
of such swap dealer or major swap participant, as
the case may be, unless no such futures association
is so registered.’’), available at www.cftc.gov.

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dissemination. Therefore, MFA felt that
the concerns about SD marketing and
sales materials that necessitate the SDs’
recordkeeping requirement are
inapplicable to MSPs.
The Commission has decided not to
remove MSPs from the relevant
provisions of the rule because MSPs
would need to comply with the
recordkeeping requirement only to the
extent that they produce such materials.
To the extent that an MSP does not
produce marketing or sales materials,
the requirements of the rule would be
inapplicable.
7. Records of Date and Time of Reports
To Swap Data Repositories and Data
Reported in Real-Time—§ 23.201(c) and
§ 23.201(d)
Proposed § 23.201(c) required SDs
and MSPs to retain a record of the date
and time the SD or MSP reported data
or information to SDRs under proposed
Part 45. Proposed § 23.201(d) required
SDs and MSPs to retain a record of the
date and time the SD or MSP reported
information for purposes of real-time
public reporting under proposed Part
43.
With regard to such records, The
Working Group requested that the
Commission clarify that the record of
the date and time of reports to SDRs and
for real-time public reporting be to the
minute, and not to the second.
The proposed rule did not specify the
form of the depiction of time in records
of reports made under parts 43 or 45,
other than to say that the record must
include the ‘‘date and time.’’ The
Commission confirms that SDs and
MSPs may record time for the purpose
of § 23.201 in their discretion, so long as
they comply with any independent
requirements under Parts 43 and 45.
8. Records of a ‘‘Rationale’’ for Certain
Swap Determinations—§ 23.201(d)(2) &
(3)
Proposed § 23.201(d)(2) and (3)
required SDs and MSPs to retain a
record of the rationale for reporting a
less specific data field than is required
under the proposed real-time public
reporting requirements in part 43, and a
record of the rationale for determining
that a swap is a large notional swap as
required under proposed part 43.
The Working Group requested
clarification as to what the Commission
is seeking with respect to a ‘‘rationale’’
for these scenarios. The Working Group
questions what purpose this information
would serve, or what benefit the
Commission hopes to derive for
purposes of carrying out its duties under
the CEA.

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The Commission has determined that
any substantive recordkeeping
requirements necessary for compliance
with Part 43 will be taken up in that part
and thus has deleted the proposed
‘‘rationale’’ requirements from § 23.201.

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D. Daily Trading Records—§ 23.202
Section 4s(g)(1) of the CEA requires
that SDs and MSPs maintain daily
trading records of their swaps and ‘‘all
related records (including related cash
and forward transactions).’’ Section
4s(g)(1) also requires that SDs and MSPs
maintain recorded communications,
including electronic mail, instant
messages, and recordings of telephone
calls. Section 4s(g)(2) provides that the
daily trading records shall include such
information as the Commission shall
require by rule or regulation. Proposed
§ 23.202 prescribed daily trading record
requirements, which would include
trade information related to preexecution, execution, and postexecution data.
1. Records of Pre-Execution Trade
Information—§ 23.202(a)(1)
Proposed § 23.202(a)(1) required SDs
and MSPs to make and keep records of
pre-execution trade information,
including records of all oral and written
communications concerning quotes,
solicitations, bids, offers, instructions,
trading, and prices that lead to the
execution of a swap, however
communicated.
The Air Transport Association of
America, Inc. (ATA) commented that
the current telephone recording systems
in use by SDs and MSPs may not meet
all of the proposed rule’s requirements,
and that implementing telephone
recording systems that are compliant
with the requirements would impose a
significant additional cost. The ATA’s
members recognized that there may be
benefits from the recording requirement,
but they are uncertain that those
benefits outweigh the costs of
purchasing new, or upgrading existing,
telephone phone recording and retrieval
systems. The ATA is concerned that the
cost of complying with all of the various
rules proposed by the Commission will
erect unnecessarily high barriers to
entry for SDs, foreclosing all but the
largest firms from acting as SDs.
MFA commented that it would be
inappropriate to impose on MSPs the
additional burden of maintaining a
record of all oral communications made
or received because the SDs with which
MSPs enter into swaps would record
such information. For the same reasons,
MFA commented that the Commission
should not require MSPs to create
records of the date and time of

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quotations received or the date and time
of execution of each swap and each
related cash or forward transaction.
The Working Group argued that even
if technology exists to record the
required data in a format searchable by
transaction and counterparty, it would
not be possible to identify pre-execution
data specified by the Commission as
being applicable to a specific trade
because traders and other commercial
employees typically engage in ongoing
dialogue with counterparties over an
extended period of time and do not
initiate communications specific to a
single trade. The Working Group
commented that it would be extremely
difficult and time consuming to review
manually each communication by a
specific trader to determine which
conversations or documents ultimately
led to the execution of a particular swap
and then assign that communication to
a unified file.
ISDA & SIFMA asserted that where
pre-execution records are maintained
today they are captured prior to the
execution of a swap and as such they
are not linked to a trade. ISDA & SIFMA
argued that while it may be possible
potentially to search by counterparty
with some investment in additional
technology, it would not be possible to
search by transaction because the
infrastructure to link to a transaction is
not in place today and the procedural
and technical feasibility to do so has not
been contemplated nor evaluated. ISDA
& SIFMA strongly recommended that
the Commission limit the rule to a
description of data required as part of a
trading record without dictating how
such data should be stored and, in
particular, that the Commission exclude
oral communications from the
electronic searchability requirement.
Having considered these comments,
the Commission is modifying the
proposed rule to remove the
requirement that each transaction record
be maintained as a separate electronic
file, which should be less burdensome
for SDs and MSPs because it will allow
these registrants to maintain searchable
databases of the required records
without the added cost and time needed
to compile the required records into
individual electronic files. The
Commission notes that section 4s(g)(3)
of the CEA requires registrants to
‘‘maintain daily trading records for each
counterparty in a manner and form that
is identifiable with each swap
transaction.’’ The rule as adopted
clarifies that such counterparty records
must be searchable by transaction and
by counterparty. Maintaining records in
this form may prove costly for some

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registrants, but such form is mandated
by the CEA.
However, in light of commenters’
concerns, the Commission is adopting
§ 23.206, which delegates to the Director
of the Division of Swap Dealer and
Intermediary Oversight the authority to
establish an alternative compliance
schedule for requirements of § 23.202
that are found to be technologically and
economically impracticable for an SD or
MSP affected by § 23.202. The purpose
of § 23.206 is to facilitate the ability of
the Commission to provide a
technologically practicable compliance
schedule for affected SDs or MSPs that
seek to comply in good faith with the
requirements of § 23.202.
In order to obtain relief under
§ 23.206, an affected SD or MSP must
submit a request for relief to the Director
of the Division of Swap Dealer and
Intermediary Oversight. SDs and MSPs
submitting requests for relief must
specify the basis in fact supporting their
claims that compliance with § 23.202
would be technologically or
economically impracticable. Such a
request may include a recitation of the
specific costs and technical obstacles
particular to the entity seeking relief
and the efforts the entity intends to
make in order to ensure compliance
according to an alternative compliance
schedule. Relief granted under § 23.206
shall not cause a registrant to be out of
compliance or deemed in violation of
any registration requirements.
Such requests for an alternative
compliance schedule shall be acted
upon by the Director of the Division of
Swap Dealer and Intermediary
Oversight or designees thereto within 30
days from the time such a request is
received. If not acted upon within the
30 day period, such request will be
deemed approved.
The Commission notes that some
commenters to a proposed Commission
rulemaking to amend § 1.35,8 which
would require voice recording for
futures and swap trading by FCMs and
other registrants, raised questions about
statements made in the preamble of the
Recordkeeping NPRM. In that preamble,
the Commission stated that proposed
§ 23.202 ‘‘would not establish an
affirmative new requirement to create
recordings of all telephone
conversations if the complete audit trail
requirement can be met through other
means, such as electronic messaging or
trading.’’ 9 For avoidance of doubt, the
Commission notes that the rule requires
8 See Comments to Adaptation of Commission
Regulations to Accommodate Swaps, 76 FR 33066,
33088–89 (June 7, 2011), available on the
Commission’s Web site: www.cftc.gov.
9 See Recordkeeping NPRM, 75 FR at 76668.

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a record of ‘‘all oral and written
communications provided or received
concerning quotes, solicitations, bids,
offers, instructions, trading, and prices,
that lead to the execution of a swap.’’
Thus, to the extent this pre-execution
trade information does not include
information communicated by
telephone, the Commission confirms
that an SD or MSP is under no
obligation to create recordings of its
telephone conversations. If, however,
any of this pre-execution trade
information is communicated by
telephone, the SD or MSP must record
such communications.
With respect to MFA’s comments,
section 4s(g)(4) of the CEA applies to
both SDs and MSPs. Consequently, the
audit trail requirements of the proposed
rules apply equally to both SDs and
MSPs because it is necessary that all
Commission registrants have complete
and accurate daily trading records.
Moreover, the Commission notes that
MFA did not provide any factual
support for its assertion that every swap
entered by an MSP would have an SD
as the counterparty.
2. Records of Source and Time of
Quotations—§ 23.202(a)(1)(ii)
Proposed § 23.202(a)(1)(ii) required
SDs and MSPs to make and keep a
record of the date and time, using
Coordinated Universal Time (UTC), by
timestamp or other timing device, for
each quotation provided to, or received
from, a counterparty prior to execution
of a swap.
The Working Group argued that the
Commission should not require a
timestamp for every quote given or
received, as the timestamp is
unnecessary, overly burdensome, and
would not assist in trade reconstruction.
Further, The Working Group argued that
most entities do not currently capture or
store this information, that it would be
difficult to do so, particularly given that
quotations may be developed by
multiple sources, and retention of the
time of quotations will add additional
compliance costs on market
participants. The Working Group also
requested clarification as to the meaning
of ‘‘reliable timing data for the
initiation’’ of a transaction.
MFA commented that the
Commission should not require MSPs to
create records of the date and time of
quotations received or the date and time
of execution of each swap and each
related cash or forward transaction.
MFA argued that since SDs should keep
such records in connection with their
market-making activities, to require an
MSP customer to maintain the same
records would be duplicative and a

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significant and unnecessary burden on
MSPs.
Having considered these comments,
the Commission is adopting the rule as
proposed. As noted above, the
Commission observes that section
4s(g)(4) of the CEA requires both SDs
and MSPs to maintain a complete audit
trail for conducting comprehensive and
accurate trade reconstructions. The
Commission therefore believes that the
audit trail requirements of the rule
should apply to both SDs and MSPs
because it is necessary that all
Commission registrants have complete
and accurate daily trading records. As
explained above, no support has been
offered for MFA’s assertion that an SD
will be the counterparty to every swap
executed with an MSP. Additionally, a
comprehensive and accurate trade
reconstruction necessarily entails a
reconstruction of the sequence of events
leading up to a trade and that this
sequence cannot be reconstructed
accurately without reliable timing
information. It is noteworthy that
commenters were unable to provide any
alternative to the timestamp
requirement. Therefore, the Commission
is retaining the timestamp requirement
in the final rule.
With respect to The Working Group’s
concern regarding the ‘‘reliable timing
data’’ requirement, the Commission
confirms that the form of ‘‘reliable
timing data’’ could be a timestamp, but
the exact form is left to the discretion of
the registrant.
3. Timestamp for Quotations Using
Universal Coordinated Time (UTC)—
§ 23.202(a)(1)(ii)
The proposed regulation required SDs
and MSPs to record the time of each
quotation provided to or received from
a counterparty prior to execution using
Universal Coordinated Time.
ISDA & SIFMA commented that the
value derived by moving the industry to
UTC appears minimal when compared
to the costs involved. ISDA & SIFMA
provided the Commission with no
quantitative data regarding these
purported additional costs.
Having considered ISDA & SIFMA’s
comment, the Commission is adopting
the rule as proposed. The use of UTC in
the rule reflects a consistent approach
taken by the Commission in this rule
and the Commission’s final rules for
real-time public reporting 10 and the
swap data reporting rule.11 By requiring
the use of UTC in § 23.202, the
10 See Real-Time Public Reporting of Swap
Transaction Data, 77 FR 1182, 1251 (Jan. 9, 2012).
11 See Swap Data Recordkeeping and Reporting
Requirements, 77 FR 2136, 2212 (Jan. 13, 2012).

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Commission is ensuring that the
requirements of Part 23, Part 43, and
Part 45 remain consistent to the extent
possible.
4. Records of Time of Execution—
§ 23.202(a)(2)(iv)
Proposed § 23.202(a)(2)(iv) required
SDs and MSPs to record the date and
time of execution of each swap to the
nearest minute.
The Working Group argued that the
proposed rule conflicts with both the
proposed real-time reporting rule and
proposed swap data recordkeeping and
reporting rule, which required that the
time of execution be displayed to the
second, rather than minute. The
Working Group requested that the
Commission be consistent in all of the
its recordkeeping and reporting rules,
and further requested that the
Commission adopt a minute
requirement, rather than displaying to
the second.
The Commission is adopting the rule
as proposed. The Commission notes that
the ‘‘nearest minute’’ standard is the
standard for futures orders under
existing § 1.35. The Commission also
notes that the final swap data
recordkeeping and reporting rule does
not require the time of execution be
displayed to the second.12 While the
proposed real-time reporting rule would
require a registrant to record the time of
execution to the second in some
instances, the Commission believes
recordkeeping to the nearest minute is
sufficient for purposes of maintaining
daily trading records and is consistent
with § 1.35.
5. Records of Reconciliation Processes—
§ 23.202(a)(3)(iii)
Proposed § 23.202(a)(3)(iii) required
SDs and MSPs to keep records of
portfolio reconciliation results,
categorized by transaction and
counterparty.
ISDA & SIFMA commented that
maintaining records of reconciliation
processes by transaction and
counterparty may be particularly
problematic because this data is not
required to be captured in other
markets, such as securities or bond
markets, and significant additional
infrastructure development would thus
be required before this data could be
captured and stored. ISDA & SIFMA
recommended an ongoing dialogue
between the Commission and the
industry to understand the requirements
for systems needed to meet the
12 See Swap Data Recordkeeping and Reporting
Requirements, 77 FR 2136, 2212, 2215 (Jan. 13,
2012).

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requirements of the proposed rule, in
particular the degree to which retained
data will need to be identifiable and
searchable.
The records of portfolio reconciliation
results required under the rule are the
minimum needed to monitor an SD’s or
MSP’s compliance with the
Commission’s proposed § 23.502 on
portfolio reconciliation.13 Thus, the
Commission is adopting the rule as
proposed.

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6. Daily Trading Records for Cash and
Forward Transactions Related to a
Swap—§ 23.202(b)
Proposed § 23.202(b) required SDs
and MSPs to keep daily trading records,
similar to those SDs and MSPs are
required to keep for swaps, for related
cash and forward transactions, defined
under proposed § 23.200 as ‘‘a purchase
or sale for immediate or deferred
physical shipment or delivery of an
asset related to a swap where the swap
and the related cash or forward
transaction are used to hedge, mitigate
the risk of, or offset one another.’’
The Working Group urged the
Commission to recognize that, although
participants in physical energy
commodity markets use swaps and
futures to hedge underlying physical
positions, they do not, as a general
matter, execute such transactions
specifically for the purpose of hedging
a specified underlying physical
position. Rather, according to The
Working Group, the predominant
practice in physical energy markets is to
hedge underlying physical positions on
a portfolio or aggregate basis. Given the
wide use of portfolio hedging in energy
markets, The Working Group believes it
would be difficult for energy market
participants to link physical positions
with arguably ‘‘related’’ swap
transactions. The Working Group
believes that compliance with proposed
§ 23.202(b) would impose a large
number of very expensive and
burdensome requirements on millions
of physical transactions that are
undertaken by commercial energy firms
that are also parties to swap
transactions.
ISDA & SIFMA commented that
hedging and risk mitigation activities
referred to in the proposed daily trading
records rule are typically not executed
with respect to specific trades; rather
they are executed against the overall
positions of business units such as
trading desks and that it would not be
13 See Confirmation, Portfolio Reconciliation, and
Portfolio Compression Requirements for Swap
Dealers and Major Swap Participants, 75 FR 81519,
81531 (Dec. 28, 2010).

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possible to link cash and forward
transactions to a specific swap. ISDA &
SIFMA also commented that the
reference to ‘‘hedge’’ also requires
clarity to know the extent to which it
comports with existing definitions in
the CEA.
Having considered these comments,
the Commission is adopting the rule as
proposed. The Commission notes that
section 4s(g)(1) of the CEA requires
registrants to ‘‘maintain daily trading
records of their swaps * * * and related
records (including related cash and
forward transactions) * * *.’’ Rule
§ 23.200 defines ‘‘related cash and
forward transactions’’ as ‘‘a purchase or
sale for immediate or deferred physical
shipment or delivery of an asset related
to a swap where the swap and the
related cash and forward transaction are
used to hedge, mitigate the risk of, or
offset one another.’’ The Commission
observes that the definition requires that
a ‘‘related cash and forward transaction’’
be related to at least one swap, but does
not prohibit such transaction from being
related to more than one swap, or a
swap from being related to more than
one related cash or forward transaction.
Therefore, the Commission believes the
commenters’ concerns that compliance
with the rule is not possible in the
context of portfolio hedging is
misplaced. In addition, in response to
the comments received, the Commission
confirms that this definition is used
solely for purposes of SD and MSP
recordkeeping and is not intended to
define hedging transactions for any
other purpose or any other Commission
regulation.
E. Records; Retention and Inspection—
§ 23.203
1. Swap and Related Cash or Forward
Record Retention Period—§ 23.203(b)(2)
Proposed § 23.203(b)(2) required SDs
and MSPs to retain records of any swap
or related cash or forward transaction
until the termination or maturity of the
transaction and for a period of five years
after such date.
MFA commented that the vast
majority of its members do not currently
keep records of transactions for five
years following the termination,
expiration, or maturity of the
transactions and compliance with this
rule would be burdensome and costly.
MFA recommended that the
Commission not impose this record
retention requirement on MSPs.
The Working Group argued that the
long-term electronic storage of
significant amounts of pre-execution
communications will prove costly over
the proposed five-year period. The

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Working Group recommended that the
Commission re-evaluate whether all
records subject to the proposed rule’s
retention requirements require a five
year retention period.
ISDA & SIFMA recommended that
further analysis and consultation be
performed on the costs and benefits of
holding records of all oral and written
communications that lead to execution
of a swap for the life of a swap plus five
years. ISDA & SIFMA commented that
they would be supportive of a voice
recording obligation aligned to the rules
of the UK Financial Services Authority,
which are to retain recordings for a
minimum period of six months.
By contrast, Chris Barnard
recommended that records should be
required to be kept indefinitely rather
than the general five years under the
proposal.
Having considered these comments,
the Commission notes that proposed
revisions to Commission regulation
§ 1.31 require retention of swap
transaction records for a period of five
years following the termination,
expiration, or maturity of a swap,14 and
that § 23.203 is consistent with retention
requirements under the final swap data
reporting rule.15 However, in response
to commenters’ concerns regarding
retention of pre-execution trade
information, the Commission is revising
the rule to require that voice recordings
need be kept for only one year. The
Commission believes that the one-year
retention period for voice recordings
will enable the Commission to execute
its enforcement responsibilities under
the CEA adequately while minimizing
the costs imposed on SDs and MSPs.
2. ‘‘Readily Accessible’’—§ 23.203(b)(1)
and (b)(2)
The proposed regulation required SDs
and MSPs to have both general records
and swaps and related cash or forward
transaction records readily accessible
for the first two years of the applicable
retention period.
The Working Group recommended
that the Commission clarify whether the
requirement that retained records be
‘‘readily accessible’’ means readily
accessible by the registrant or by the
Commission.
In response, the Commission observes
that the term ‘‘readily accessible’’ has
been the operative standard in § 1.31 of
the Commission’s regulations for several
years. Specifically, § 1.31 requires that
14 See Adaptation of Commission Regulations to
Accommodate Swaps, 76 FR 33066, 33088 (June 7,
2011).
15 See 17 CFR 45.2, Swap Data Recordkeeping and
Reporting Requirements, 77 FR 2136, 2198 (Jan. 13,
2012).

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‘‘[a]ll books and records required to be
kept by the Act or by these regulations
shall be kept for a period of five years
from the date thereof and shall be
readily accessible during the first 2
years of the 5-year period.’’ In response
to The Working Group’s request for
clarification, the Commission expects a
registrant to be able to access such
records promptly, and such records
‘‘shall be open to inspection by any
representative of the Commission or the
United States Department of Justice.’’ 16
3. Records To Be Retained in
Accordance With Commission
Regulation 1.31—§ 23.203(b)
Proposed § 23.203(b) required SDs
and MSPs to maintain records in
accordance with existing § 1.31.
The Working Group commented that
§ 1.31 appears to apply to written
documents, including electronic images
of such documents, and does not seem
suitable for electronic records such as
those in a trading system, that do not
originate from a written document. To
be made workable for purposes of
complying with the Commission’s
proposed requirements, The Working
Group recommended that § 1.31 be
revised to reflect current technologies
and industry practices relating to
digitized data storage.
The Commission has considered The
Working Group’s comment, but is
adopting the rule as proposed. The
Commission believes that The Working
Group’s concerns about § 1.31 have been
addressed by a subsequent rule proposal
to amend § 1.31 to reflect current
technologies and industry practices
related to digitized data storage.17 If
these amendments are finalized, the
Commission believes that § 1.31 will be
compatible with electronic records in a
trading system and other records that do
not originate from a written document.

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F. Duties of SDs and MSPs
As part of an overall business conduct
regime for SDs and MSPs, section 4s(j)
of the CEA, as added by section 731 of
the Dodd-Frank Act, sets forth certain
duties for SDs and MSPs, including the
duty to: (1) Monitor trading to prevent
violations of applicable position limits;
(2) establish risk management
procedures adequate for managing the
day-to-day business of the SD or MSP;
(3) disclose to the Commission and to
16 Regulation 1.31 further provides that ‘‘[a]ll
such books and records shall be open to inspection
by any representative of the Commission or the
United States Department of Justice.’’
17 See Adaptation of Commission Regulations to
Accommodate Swaps, 76 FR 33066, 33088 (June 7,
2011).

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applicable prudential regulators 18
general information relating to swaps
trading, practices, and financial
integrity; (4) establish and enforce
internal systems and procedures to
obtain information needed to perform
all of the duties prescribed by
Commission regulations; (5) implement
conflict-of-interest systems and
procedures; and (6) refrain from taking
any action that would result in an
unreasonable restraint of trade or
impose a material anticompetitive
burden on trading or clearing. In its
Duties NPRM, the Commission
proposed six regulations to implement
section 4s(j), specifically addressing risk
management, monitoring of positions
limits, diligent supervision, business
continuity and disaster recovery, the
availability of general information, and
antitrust considerations. The
Commission’s proposed conflicts of
interest policies and procedures were
the subject of the separate SD/MSP
Conflicts NPRM and are discussed
below. The Commission received 20
comment letters in response to the
Duties NPRM and considered each in
formulating the final rules.
G. Risk Management Program for SDs
and MSPs—§ 23.600
The Commission proposed § 23.600,
which required SDs and MSPs to
establish and maintain a risk
management program reasonably
designed to monitor and manage the
risks associated with their business as
an SD or MSP. Proposed § 23.600
specifically required the risk
management program established by
SDs and MSPs to consist of written
policies and procedures; to have its risk
management policies and procedures
approved by the governing body of the
SD or MSP; and to establish a risk
management unit independent from the
business trading unit to administer the
risk management program.
1. Definitions—§ 23.600(a)
The Commission proposed definitions
of ‘‘affiliate,’’ ‘‘business trading unit,’’
‘‘clearing unit,’’ ‘‘governing body,’’
‘‘prudential regulator,’’ and ‘‘senior
management.’’ 19 The definitions set
18 This term is defined for the purposes of this
rulemaking and has the same meaning as section
1(a)(39) of the CEA, which includes the Board of
Governors of the Federal Reserve System, the Office
of the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, the Farm Credit
Association, and the Federal Housing Finance
Agency.
19 No comments were received on the proposed
§ 23.600(a) definitions of ‘‘affiliate,’’ ‘‘clearing
unit,’’ or ‘‘prudential regulator.’’ With the exception
of one change to the definition of ‘‘prudential
regulator’’, the Commission has decided to adopt
those definitions as proposed.

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20135

forth in § 23.600(a) will apply only to
provisions contained in § 23.600. The
Commission is adopting the definitions
largely as proposed, with the exceptions
discussed below.
a. Business Trading Unit—§ 23.600(a)(2)
SIFMA recommended that (i) the
Commission modify the definition of
‘‘business trading unit’’ to delete the
phrase ‘‘or is involved in’’ and replace
it with ‘‘directly engaged in’’ to avoid
inclusion of risk management, legal,
credit, and operations personnel, all of
whom could be deemed to be ‘‘involved
in’’ business trading unit activities; and
(ii) the Commission clarify that
independent financial control functions
that perform price verification for
internal purposes (as opposed to
providing prices to clients) are excluded
from the business trading unit.
The Commission did not intend to
include risk management, legal, credit,
and operations personnel in the
definition and has revised the definition
to exclude such personnel. However,
the Commission does not believe that
only those personnel ‘‘directly engaged
in’’ pricing, trading, sales, marketing,
advertising, solicitation, structuring, or
brokerage activities sufficiently captures
those personnel intended to be included
by the definition for purposes of the
rule. Thus, the Commission is
modifying the proposed definition to
exclude risk management, legal, credit,
and operations personnel, but also to
include specifically personnel
exercising direct supervisory authority
over the performance of business
trading unit functions. Per SIFMA’s
recommendation, the Commission also
has modified the definition to exclude
price verification for risk management
purposes from the list of business
trading unit functions. The Commission
believes that the definition as revised
will be less burdensome for registrants,
but retains the original intent of the
definition.
b. Governing Body and Senior
Management—§ 23.600(a)(3) and (4)
Cargill recommended that the
Commission expand the definitions of
governing body and senior management
to include the governing body or senior
management of the division of a larger
company. Cargill, SIFMA, and MetLife
also recommended that the Commission
permit a management committee or
board committee to serve the function of
a governing body. SIFMA further
requested that the Commission confirm
that governing body and senior
management approvals required under
the proposed rules may occur at the
holding company level.

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SIFMA recommended that the
Commission not limit the definition of
‘‘senior management’’ to direct reports
of the chief executive officer, but
include any other officer having
supervisory or management
responsibility (including at the
consolidated group level) for any
organizational unit, department or
division. BG Americas & Global LNG
(BGA) argued that the requirement that
the risk management unit report directly
to a senior officer that reports directly
to the CEO is too rigid and does not
reflect the reality of most energy trading
companies.
In response to commenters, the
Commission is modifying the proposed
definition of ‘‘governing body’’ to allow
an SD or MSP to designate as its
governing body ‘‘(1) a board of directors;
(2) a body performing a function similar
to a board of directors; (3) any
committee of a board or body; or (4) the
chief executive officer of a registrant, or
any such board, body, committee or
officer of a division of a registrant,
provided that the registrant’s swaps
activities for which registration with the
Commission is required are wholly
contained in a separately identifiable
division.’’ The Commission believes
that under this definition the governing
body of an SD or MSP could include a
board committee or the governing body
or senior management of a division,
provided that the swaps activities of an
SD or MSP are wholly contained in a
separately identifiable division.
Likewise, in response to commenters,
the Commission is modifying the
proposed definition of ‘‘senior
management’’ to provide increased
flexibility in registrant governance
structures. The Commission is revising
the proposed definition to require only
that senior management consist of
officers of the SD or MSP that have been
‘‘specifically granted the authority and
responsibility by the registrant’s
governing body to fulfill the
requirements of senior management.’’
The Commission believes that the
increased flexibility permitted by the
revised definitions of ‘‘governing body’’
and ‘‘senior management’’ will be less
burdensome for SDs and MSPs, but
retains the Commission’s intent to have
accountability at the highest level of
management.
2. Scope of Risk Management Program—
§ 23.600(b)
The proposed regulations required
SDs and MSPs to establish, document,
maintain, and enforce a system of risk
management policies and procedures
designed to monitor and manage the
risks associated with the business of the

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SD or MSP and the Risk Management
Program to take into account risks posed
by affiliates and take an integrated
approach to risk management at the
consolidated entity level.
The Working Group, MetLife, and the
Office of the Comptroller of the
Currency argued that § 23.600 should be
limited to the risks associated with
swaps activities, and not other business
lines in which the SD or MSP may
engage. The Working Group also
recommended that the rule be revised to
require the risk management program to
take into account only swaps-related
risks posed by affiliates and take an
integrated approach to risk management
at the consolidated entity level to the
extent the SD or MSP deems necessary
to enable effective risk and compliance
oversight.
Based on these comments, the
Commission has determined that the
risk management rules will be limited in
scope to apply only to the swaps
activities of SDs and MSPs and is
modifying proposed § 23.600(b)(1) as
recommended by The Working Group.
On the other hand, the Commission
has rejected The Working Group’s
recommendation that SDs and MSPs
consider only swaps-related risks posed
by affiliates. The Commission believes
that an SD or MSP should be aware of
all risks posed by affiliates, and the rule
should require the SD’s or MSP’s Risk
Management Program to be integrated
into overall risk management
considerations at the consolidated entity
level. However, the Commission is
modifying proposed § 23.600(c)(1)(ii) to
reflect the fact that Risk Management
Programs within an SD or MSP may not
have the authority to direct other
divisions of a larger company.
Further, the Commission recognizes
that some SDs and MSPs will be part of
a larger holding company structure that
may include affiliates that are engaged
in a wide array of business activities.
The Commission understands with
respect to these entities, that in some
instances, the top level company in the
holding company structure is in the best
position to evaluate the risks that an
affiliate of an SD or MSP may pose to
the enterprise, as it has the benefit of an
organization-wide view and because an
affiliate’s business may be wholly
unrelated to swaps activities. Therefore,
to the extent an SD or MSP is part of a
holding company with an integrated
risk management program, the SD or
MSP may address affiliate risks and
comply with § 23.600(c)(1)(ii) through
its participation in a consolidated entity
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3. Flexibility To Design Risk
Management Program—§ 23.600(b)
The proposed regulation required a
registrant’s risk management program to
include certain enumerated elements:
identification of risks and risk tolerance
limits; periodic risk exposure reports; a
new product policy; policies and
procedures to monitor and manage
market risk, credit risk, liquidity risk,
foreign currency risk, legal risk,
operational risk, and settlement risk; use
of central counterparties; compliance
with margin and capital requirements;
and monitoring of compliance with risk
management program.
The Working Group and the Edison
Electric Institute (EEI) commented that
proposed § 23.600 requires a level of
detail in the Risk Management Program
not provided for in the Dodd-Frank Act,
and recommended that the final rules be
flexible enough to allow firms to adapt
their existing compliance and risk
management measures, and not cause
firms to add entirely new compliance or
risk management infrastructure.
Having considered these comments,
the Commission is adopting the rule
substantially as proposed. The
Commission believes that the
requirements of the rules represent
prudent risk management practices, but
do not prescribe rigid organizational
structures. The Commission also
believes the ‘‘policies and procedures’’
approach provides an adequate amount
of flexibility that will allow registrants
to rely upon any existing compliance or
risk management capabilities to meet
the requirements of the proposed rules.
The Commission further believes that
nothing would prevent firms from
relying upon existing compliance and
risk management programs to a
significant degree.
4. Risk Management Policies and
Procedures—§ 23.600(b)(2)
Proposed § 23.600(b)(2) required that
a registrant’s risk management program
be described in written policies and
procedures, that such policies and
procedures be approved in writing by
the registrant’s governing body, and that
such policies and procedures be
provided to the Commission upon
registration and following any material
change.
SIFMA recommended that the
Commission clarify that written risk
management policies and procedures
need not be documented in a single,
consolidated set, so long as such
policies and procedures address all of
the elements of the risk management
program required by the proposed rules.
Cargill commented that registrants

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should not be required to furnish risk
management policies and procedures to
the Commission, as such policies and
reports can be obtained by the
Commission by special call or reviewed
during examinations. By way of
contrast, Chris Barnard recommended
that the Commission expand the
reporting requirement to include public
disclosure to allow for market
participants to assess a registrant’s
approach to risk management and
increase confidence in the swap
markets.
In response to SIFMA’s and Cargill’s
comments, the Commission is
modifying the proposed rule to provide
that an SD’s or MSP’s written policies
and procedures must be provided upon
application for registration to the
Commission, or to a futures association
registered under section 17 of the CEA,
if directed by the Commission, but
thereafter only upon request of the
Commission. Additionally, the
Commission confirms that, so long as
the required policies and procedures are
maintained in a reasonably useable and
accessible fashion, the rule is not
intended to mandate the form or manner
of documentation or retention.
With respect to Mr. Barnard’s
recommendation, the Commission is not
adopting a public disclosure
requirement because registrants’ risk
management policies and procedures
may contain sensitive or proprietary
information.
5. Risk Management Unit—
§ 23.600(b)(5)
Proposed § 23.600(b)(5) required SDs
and MSPs to establish a risk
management unit that reports directly to
senior management, that is independent
from the business trading unit, and that
has sufficient authority and resources to
carry out the risk management program
required by the proposed regulations.
SIFMA recommended that the
Commission clarify that different risk
management processes may be managed
by independent control functions,
organized by relevant discipline or
specialization, and that such functions,
so long as they comply with the
independence and other requirements
applicable to the risk management unit,
need not be part of a single risk
management unit. To facilitate a
functional working relationship, The
Working Group recommended that the
Commission clarify that separation of
the risk management unit and business
trading unit requires only separate and
independent oversight of business unit
and risk management unit personnel,
but not actual physical separation of
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BGA recommends that the
Commission allow the risk and trading
units to report to a shared senior officer,
as long as the senior officer does not
participate in directing, organizing, or
executing trades. According to BGA,
this would be consistent with the
Federal Energy Regulatory
Commission’s requirement for achieving
independence between franchised
public utilities and their marketregulated power sales affiliates, and
would achieve the appropriate level of
independence without requiring
companies to overhaul their existing
management structures.
Better Markets commented that
simply requiring Risk Management Unit
independence is inadequate and
recommends that the Commission
ensure independence with rules similar
to those proposed to ensure
independence of research analysts in
proposed § 23.605, while Cargill
requested that the Commission provide
greater flexibility in how SDs arrange
monitoring and compliance of their risk
management program, rather than
rigidly requiring complete
independence from the business trading
unit.
Having considered these comments,
the Commission is adopting the rule as
proposed. While § 23.600(b)(5) does not
require a registrant’s risk management
unit to be a formal division in the
registrant’s organizational structure, the
Commission expects that an SD or MSP
will be able to identify all personnel
responsible for required risk
management activities as its ‘‘risk
management unit’’ even if such
personnel fulfill other functions in
addition to their risk management
activities. In addition, § 23.600(b)(5)
permits SDs and MSPs to establish dual
reporting lines for risk management
personnel performing functions in
addition to their risk management
duties, but the rule would not permit a
member of the risk management unit to
report to any officer in the business
trading unit for any non-risk
management activity. The Commission
believes that such dual reporting invites
conflicts of interest and would violate
the rule’s risk management unit
independence requirement.
As requested by The Working Group,
the Commission confirms that
independence of the risk management
unit from the business trading unit does
not require physical separation.
The Commission notes that per the
revised definition of ‘‘senior
management’’ discussed above, the risk
management unit will not be required to
report to an officer that reports directly
to the CEO, but to ensure the

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independence of the risk management
unit, the rule would not permit the risk
management unit and business trading
unit to report to a shared senior officer.
The Commission also believes, however,
that reporting line independence is
sufficient to ensure accountability for
the independence of the risk
management unit, and, therefore, is not
requiring firewalls of the type required
in § 23.605 to ensure research analysts
are free from conflicts of interest, as
proposed by the Better Markets
comment.
6. Risk Measurement Frequency—
§ 23.600(c)(4)
Proposed § 23.600(c)(4) required
registrants to measure their market,
credit, liquidity, and foreign currency
risk daily.
MetLife commented that the daily risk
measuring required by the proposed
rule may be excessive for some MSPs,
may require substantial information
technology and human capital
investments, and recommended that the
frequency of risk measuring should be
determined by an MSP’s risk
management unit and governing body,
rather than be mandated by the
Commission.
The Commission is adopting the rule
as proposed. MSPs are, by definition,
market participants that have a
substantial position in swaps, and have
outstanding swaps that create
substantial counterparty exposure that
could have serious adverse effects on
the financial stability of the U.S.
financial markets, or are highly
leveraged. Therefore, the Commission
believes that it is entirely appropriate to
require such market participants to
measure their market, credit, liquidity,
and foreign currency risk at least daily.
7. Approval of Exceptions to Risk
Tolerance Limits—§ 23.600(c)(1)(i)
Proposed § 23.600(c)(1)(i) required
that risk tolerance limits be approved by
an SD’s or MSP’s senior management
and governing body and that exceptions
to such limits be approved, at a
minimum, by a supervisor in the risk
management unit.
SIFMA recommended that, subject to
aggregate risk limits established for the
relevant trading supervisor’s authority,
trading supervisors, rather than risk
management personnel, should have the
authority to approve risk tolerance limit
exceptions. SIFMA argued that the
required quarterly risk exposure reports
provided to a registrant’s senior
management and governing body are an
adequate check on decision-making by
trading supervisors.

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In response to SIFMA’s comments,
the Commission is revising proposed
§ 23.600(c)(1)(i) to remove the provision
that requires risk management
personnel to approve exceptions to risk
tolerance limits. Instead, the
Commission has determined that
exceptions, along with the risk tolerance
limits, must be subject to written
policies and procedures. With this
change, SDs and MSPs are free to grant
discretion to trading supervisors to
approve risk tolerance limit exceptions
within the overall risk tolerance limits
approved by the registrant’s senior
management and governing body.
8. New Product Policy—§ 23.600(c)(3)
Proposed § 23.600(c)(3) required SDs
and MSPs to include a new product
policy in their risk management
programs. The proposed regulations
required that such policies include an
assessment of the risks of any new
product prior to engaging in
transactions and specifically required an
assessment of potential counterparties;
the product’s economic function;
pricing methodologies; legal and
regulatory issues; market, credit,
liquidity, foreign currency, operational,
and settlement risks; product risk
characteristics; and whether the product
would alter the overall risk profile of the
registrant.
The Working Group recommended
that the regulations require only that (i)
before an SD or MSP offers a new
product, it must conduct due diligence
that is commensurate with the risks
associated with such product, and (ii)
the decision to offer the product be
approved by appropriate risk
management and business unit
personnel. In addition, the Working
Group suggested that the Commission
provide that the determination as to
whether a product is ‘‘new’’ should be
left to the SD or MSP.
SIFMA recommended that (i) the
Commission clarify that a registrant may
structure its new product approval
framework so as to focus on only those
risk elements that are deemed to be
relevant to the product at issue, rather
than rigidly following the enumerated
list in § 23.600(c)(3); (ii) the
Commission allow registrants to provide
contingent or limited preliminary
approval of new products at a risk level
that would not be material to the
registrant, in order to provide registrants
with the opportunity to obtain
experience with the product and to
facilitate development of appropriate
risk management processes for such
product; and (iii) the Commission
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area from banking regulators, the SEC,
and SROs.
In response to the commenters’
suggestions, the Commission confirms
that the list of risks in § 23.600(c)(3)(ii)
only need be considered if relevant to
the new product, and the Commission is
modifying the first sentence of the
proposed rule to include the phrase ‘‘all
relevant risks associated with the new
product.’’
In response to SIFMA’s
recommendation, the Commission also
is revising the proposed rule to permit
SDs and MSPs to grant limited
preliminary approval of new products
(i) at a risk level that would not be
material to the registrant, and (ii) solely
for the purpose of facilitating
development of appropriate operational
and risk management processes for such
product.
The Commission is not making any
other changes to the rule as proposed.
The new product policy was adapted
from existing banking and SEC guidance
in this area, and the Commission
believes the rule as proposed provides
adequate guidance with respect to the
factors to be considered in determining
whether a product is ‘‘new’’ and
whether the product presents new risks
that should be addressed prior to
engaging in any transaction involving
the new product.
9. Reporting of Risk Exposure Reports to
the Commission—§ 23.600(c)(2)(ii)
Proposed § 23.600(c)(2)(ii) required
SDs and MSPs to provide their senior
management and governing body with
quarterly Risk Exposure Reports
detailing the registrant’s risk exposure
and any recommendations for changes
to the risk management program, and
copies of these reports were required to
be furnished to the Commission within
five business days of providing them to
senior management.
The Working Group recommended
that the Commission provide a standard
form of report for any report to be
required under the proposed rules, and
to clarify what the governing body or
senior management is expected to do
with information delivered under the
rules. The Working Group and Cargill
also recommended that Risk Exposure
Reports should be required to be
submitted to the Commission only upon
request so as not to drain Commission
resources.
The Commission is not modifying the
proposed rule to require SDs’ and MSPs’
periodic Risk Exposure Reports to be
submitted to the Commission only upon
request. As discussed below, the rule
will require SDs and MSPs to provide
these reports to their senior

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management and governing body no less
than quarterly, thus the Commission
believes that also furnishing the reports
to the Commission quarterly will not be
an additional burden.
In response to The Working Group,
the Commission has determined not to
provide a standard, prescriptive form for
the report; rather the form of the report
is left to the discretion of the registrant.
In response to The Working Group’s
request for clarification about what
management is supposed to do with
Risk Exposure Reports, the Commission
believes these reports will serve
important informational purposes
related to the key risks associated with
the registrants’ swaps activities and help
to ensure accountability at the highest
levels for those swap activities of
registrants.
10. Reporting to Senior Management
and/or Governing Body—
§ 23.600(c)(2)(ii)
Proposed § 23.600(c)(2)(ii) required
SDs and MSPs to provide their senior
management and governing body with
Risk Exposure Reports detailing the
registrant’s risk exposure, and any
recommendations for changes to the risk
management program, quarterly and
upon any material change in the risk
exposure of the registrant.
The Working Group and Cargill each
commented that Risk Exposure Reports
should be provided to senior
management and governing body
annually. The Working Group argued
that quarterly reporting would be too
costly and burdensome, would take
resources away from risk monitoring,
and the frequency may force firms to
disclose risk exposures before remedial
steps can be taken.
The Commission is adopting the rule
as proposed. The Commission does not
believe that provision of Risk Exposure
Reports to senior management and the
governing body of a registrant four times
a year is overly burdensome, but rather
will provide management with the
information necessary to monitor and
make adjustments to risk levels in a
timely manner.
11. Frequency of Review, Testing, and
Audit—§ 23.600(e)
Proposed § 23.600(e) required SDs
and MSPs to review and test their risk
management programs quarterly using
internal or external auditors
independent of the business trading
unit.
The Working Group, Cargill, and
MetLife each recommended that both
the frequency and the scope of audits of
the risk management program be left to
the discretion of the registrant, so long

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as such audits are effective and are
conducted at least annually. The
Working Group and Cargill argued that
this regime would provide the desired
results without the unnecessary cost
and administrative burden imposed by
the proposed rules. The Working Group
also recommended that the Commission
define or clarify what ‘‘testing’’ of the
Risk Management Program requires.
Having considered these comments,
the Commission is modifying proposed
§ 23.600(e) to require only annual
testing and audit of an SD’s or MSP’s
Risk Management Program. The
Commission has determined not to
specify testing procedures at this time,
but to leave the design and
implementation of testing procedures to
the reasonable judgment of each
registrant.

management system. The Working
Group also recommended that the
Commission clarify that models may be
verified by independent, but internal,
qualified persons.
In response to The Working Group’s
comments, the Commission clarifies
that, to the extent that an input for
measurement of market risk has a
reasonable degree of accuracy over a
period longer than one day, it would be
permissible for a registrant’s risk
management policies to reflect the
conclusion that such an input would
not need to be calculated daily for
purposes of the daily measurement of a
registrant’s market risk. The
Commission also is modifying the
proposed rule to clarify that pricing
models may be verified by qualified,
independent internal persons.

12. Risk Categories—§ 23.600(c)(4)
As proposed, § 23.600(c)(4) required
SD and MSP risk management programs
to include, at a minimum, certain
enumerated elements, including
policies and procedures to monitor and
manage market risk, credit risk,
liquidity risk, foreign currency risk,
legal risk, and operational risk.
SIFMA recommended that the
Commission clarify that so long as the
enumerated risks in § 23.600(c)(4) are
systematically monitored and managed,
the Commission does not intend to
require that each enumerated risk be
subject to distinct risk management
processes.
While the rule requires that each
enumerated risk must be the subject of
distinct risk management policies and
procedures, Commission does not
intend to mandate specific risk
management processes. The specific
methods of monitoring and managing all
risks associated with the swaps
activities of an SD or MSP are left to the
discretion of the registrant.

14. General Ledger Reconciliation—
§ 23.600(c)(4)(i)(C)
The proposed regulations required
SDs and MSPs to reconcile profits and
losses resulting from valuations with the
general ledger at least once each
business day.
The Working Group commented that,
to the extent that transaction valuations
are tracked daily, they ordinarily would
be tracked in the firm’s trading or risk
management system, not the general
ledger system. The Working Group
recommended that consolidation to the
general ledger only be required
monthly.
Having considered these comments,
the Commission has determined that the
rule need not require daily
reconciliation to the general ledger in
order to address the need to manage the
risk of a failure to account properly for
profits and losses. The Commission
therefore is revising the proposed rule to
require only that SDs and MSPs have
policies and procedures to ensure
‘‘periodic reconciliation of profits and
losses resulting from valuations with the
general ledger.’’

13. Market Risk—§ 23.600(c)(4)(i)
Proposed § 23.600(c)(4)(i) required
SDs and MSPs to measure their market
risk daily, including exposure due to
unique product characteristics,
volatility of prices, basis and correlation
risks, leverage, sensitivity of option
positions, and position concentration.
The proposed rule would require that if
valuation data is derived from pricing
models, that such models be validated
by qualified, independent persons.
The Working Group recommended
that metrics for options, particularly the
sensitivity for options, be required to be
measured on a frequency less than
daily, as metrics can require complex
calculations, some of which must be
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15. Establishment of Credit Limits Prior
to Trading—§ 23.600(d)(2)
Proposed § 23.600(d)(2) required that
SDs and MSPs have policies and
procedures requiring traders to transact
only with counterparties for whom
credit limits have been established.
The Working Group recommended
that the Commission allow discretion to
make exceptions to the requirement that
trades only be executed with
counterparties for which credit limits
have been established for certain limited
risk transactions. Arguing that some
transactions carry no counterparty
credit risk and that some SDs and MSPs
may hedge their counterparty credit

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risk, SIFMA recommended that, instead
of requiring establishment of credit
limits prior to trading, the Commission
require only that a credit risk evaluation
be made prior to trading.
The Commission is adopting the rule
as proposed. The Commission observes
that the rule does not define ‘‘credit
limit’’ and thus provides sufficient
discretion to SDs and MSPs to
implement policies addressing limited
counterparty credit risk transactions.
16. Credit Risk Measurement—
§ 23.600(c)(4)(ii)(A)
Proposed § 23.600(c)(4)(ii)(A) required
SDs and MSPs to have credit risk
policies and procedures providing for
daily measurement of overall credit
exposure to ensure compliance with
counterparty credit limits.
Better Markets argued that the
Commission’s proposal for rules relating
to credit risk are inadequate insofar as
they do not provide guidance on how
credit risk is to be measured. Better
Markets recommended that the
Commission’s rules relating to
management of credit risk require
measurement of credit risk using the
same techniques employed by
derivatives clearing organizations
(DCOs) registered with the Commission.
Better Markets also specifically
recommended that the Commission
require credit risk policies of SDs and
MSPs to address (i) the risk posed by
collateral triggers (like credit rating
downgrades) that may require
immediate funding under stressful
circumstances, and (ii) the credit risk of
futures commission merchants (FCMs)
acting for the SD or MSP as its clearing
member.
Having considered Better Market’s
comments, the Commission is adopting
the rule as proposed. The Commission
believes it need not specify a credit risk
measurement methodology because the
adequacy of a registrant’s individual
credit risk measurement methodology
will be assessed upon a review of a
registrant’s policies and procedures
during registration or upon
examination. The Commission also
believes that credit risk to FCMs would
be covered by the required monitoring
and risk management of clearing
members by DCOs and the Commission.
17. Liquidity Risk—§ 23.600(c)(4)(iii)(B)
The proposed rules required SDs and
MSPs to test their procedures for
liquidating all non-cash collateral in a
timely manner and without significant
effect on price.
SIFMA argued that firms assess the
types of collateral that they are willing
to accept based on the risk, volatility,

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liquidity, and other characteristics of
the collateral and additionally establish
conservative haircuts for the valuation
of collateral, not through testing by
actual or simulated disposition of
collateral. SIFMA therefore
recommended that the Commission not
require testing of liquidation procedures
by simulated disposition, but only
require policies and procedures for
identifying acceptable collateral and
establishing appropriate haircuts, taking
into account reasonably anticipatable
adverse price movements.
The proposed rule was not intended
to impose a requirement that registrants
test collateral liquidation procedures by
means of actual or simulated
disposition. However, to clarify this
matter, the Commission is revising the
proposed rule to require policies and
procedures that ‘‘assess’’ rather than
‘‘test’’ procedures to liquidate all noncash collateral in a timely manner
without significant effect on price.

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18. Foreign Currency Risk—
§ 23.600(c)(4)(iv)
Proposed § 23.600(c)(4) required SDs
and MSPs to measure the amount of
capital exposed to fluctuations in the
value of foreign currency daily.
The Working Group recommended
that the Commission permit the
frequency of measurement of capital
exposed to fluctuations in the value of
foreign currency to be left to the
discretion of the firm, rather than
mandating daily measurement.
The Commission believes that the
foreign exchange markets are fluid and
quick moving, and, therefore, the
requirement for daily measurement is
not excessive. Accordingly, the
Commission is adopting the rule as
proposed with respect to foreign
currency risk.
19. Legal Risk—§ 23.600(c)(4)(v)
Proposed § 23.600(c)(4)(v) required
SDs’ and MSPs’ risk management
policies and procedures to address
determinations that transactions and
netting arrangements entered into by the
registrant have a sound legal basis and
documentation tracking to ensure
completeness of transaction
documentation.
SIFMA recommended that the
Commission require only policies and
procedures to identify and evaluate the
legal risks arising in connection with
the registrant’s business.
The Commission is making no
changes to the rule as proposed. The
Commission believes that the two
enumerated requirements with respect
to legal risk are of special importance
with respect to trade processing and risk

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measurement, but are by no means
exhaustive of the legal risks arising in
connection with a registrant’s business,
all of which must be identified by the
registrant’s risk management policies
and procedures.
20. Operational Risk—§ 23.600(c)(4)(vi)
Proposed § 23.600(c)(4)(vi) required
SDs and MSPs to establish policies and
procedures for managing operational
risks, including procedures accounting
for reconciliation of all operating and
information systems.
The Working Group and SIFMA
recommended that the Commission
clarify what is meant by ‘‘reconciliation
of operating and information systems,’’
as information contained in systems
may be reconciled, but systems
themselves may not be.
Chris Barnard recommended that the
proposed rule be expanded and be more
specific about the types of operational
risk to be monitored and controlled,
arguing that operational risk failures
effectively allow other types of risk,
such as credit risk and market risk to be
excessive. Mr. Barnard also
recommended that the proposed rule be
expanded to require management for the
increased risks inherent in using
programs or models from external
providers or vendors to avoid using
‘‘black boxes’’ without controls and
review.
The Commission agrees with
commenters that data within operating
and information systems should be
reconciled, rather than the systems
themselves. Consequently, the
Commission is modifying the proposed
rule to refer to reconciliation of data
within operating and information
systems. As modified, the Commission
believes that the rule is sufficiently
specific to enable SDs and MSPs to
establish policies and procedures for
adequately managing operational risks,
and as such, the Commission is making
no changes to the rule based on Mr.
Barnard’s comments. Nonetheless, the
Commission notes that Mr. Barnard’s
concern about black boxes is addressed,
in part, by the requirement to have
policies and procedures governing the
use and supervision of trading programs
under proposed § 23.600(d)(9), as
discussed further below.
21. Use of Central Counterparties—
§ 23.600(c)(5)
Proposed § 23.600(c)(5) required SDs
and MSPs to establish policies and
procedures related to central clearing of
swaps, including policies that require
the use of clearing when a swap is
subject to a mandatory clearing
determination issued by the

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Commission, policies setting forth
conditions for the voluntary use of
central clearing as a means of mitigating
counterparty credit risk, and policies
requiring diligent investigation into the
adequacy of financial resources and risk
management procedures of any central
counterparty through which the
registrant clears.
The Working Group argued that the
adequacy of resources and risk
management at CCPs registered with the
Commission should be monitored by the
Commission, not individual firms. EEI
requested that the Commission clarify
that proposed § 23.600(c)(5) is not
seeking to require SDs to use central
clearing to mitigate risk if clearing is not
required under a valid exemption.
The Commission is adopting the rule
regarding use of central counterparties
as proposed. The Commission’s
registration of a central counterparty as
a DCO is based on a determination that
the applicant meets core principles
under the Commodity Exchange Act and
Commission regulations. It does not,
however, serve as a substitute for the
due diligence of registrants who must
evaluate the use of a central
counterparty in light of their own
circumstances. In addition, SDs and
MSPs may elect to clear swaps that are
not required to be cleared on a
voluntary basis through central
counterparties that are not registered
with the Commission. In those
instances, an SD or MSP engaging in
some manner of due diligence prior to
submitting a swap for clearing would be
part of a prudent risk management
program. In response to EEI’s comment,
the Commission observes that the rule
would require only that registrants
evaluate the use of central clearing as a
means of mitigating counterparty credit
risk and as part of their overall risk
management strategy. Moreover, the
rule expressly notes the exception from
mandatory clearing that is provided for
under section 2(h)(7) of the CEA.
22. Business Trading Unit—§ 23.600(d)
As proposed, § 23.600(d) required SDs
and MSPs to establish policies and
procedures that require all trading
policies to be approved by the governing
body of the registrant.
The Working Group recommended
that the governing body of an SD or
MSP be permitted to delegate approval
of trading policies to those with
expertise.
The revisions to the definition of
governing body discussed above, which
allows for a governing body to consist
of a committee or the CEO, sufficiently
address the Working Group’s concerns.

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The Commission thus has made no
changes to the rule.
23. Transaction Entry by Traders—
§ 23.600(d)(5)
Proposed § 23.600(d)(5) required SDs
and MSPs to establish policies and
procedures that require each trader to
follow established policies and
procedures for executing and
confirming all transactions. Further, in
a discussion about the independence of
the risk management unit in the
preamble to the proposal, the
Commission stated that ‘‘personnel
responsible for recording transactions in
the books of the swap dealer or major
swap participant cannot be the same as
those responsible for executing
transactions.’’
The Working Group requested
clarification about requirements for
transaction entry based on the
statements made in the preamble to the
proposal. The Working Group argued
that if the reference to recording
transactions in the books of a firm is
intended to refer to entries into the
general ledger system, then the Working
Group agreed that this process should
be subject to the usual segregation of
duties requirements that protect the
general ledger system, but that there is
no reasonable basis to prohibit
individuals who execute transactions
from entering the information regarding
such transactions into a firm’s trading or
risk management system.
BGA commented that typical practice
is for traders to enter the trade into the
deal monitoring system, and then the
risk control group performs a daily
review of all new and amended trading
activity. BGA explained that the midoffice risk control review is followed by
a second review of the trade activity
performed by the back-office
confirmations group, which generates
confirmations and performs portfolio
reconciliations to match key trade
attributes with counterparties. BGA
requested clarification that the reference
to ‘‘recording transactions in the books’’
in the proposal preamble is not
intended to restrict the initial recording
of the trade into the deal capture system
by the trader, but refers to the daily
review and confirmation and portfolio
reconciliation processes performed by
the mid and back offices.
SIFMA requested that the
Commission confirm that compliance
with the rule would not preclude
trading personnel from entering the
trades they execute into a registrant’s
trade capture system, provided that the
registrant has appropriate policies and
procedures reasonably designed to
identify the entry of fictitious trades or

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the failure to accurately enter actual
trades.
In response to these comments, the
Commission confirms that the rule is
not intended to restrict the initial
recording of trades into a trade capture
system by the trader. Rather, the rule
requires traders to follow established
policies and procedures governing trade
execution and confirmation.
24. Monitoring of Trading—
§ 23.600(d)(4) & (d)(9)
As proposed, § 23.600(d)(4) required
SDs and MSPs to establish policies and
procedures designed to monitor each
trader throughout the trading day to
prevent the trader from exceeding any
limit to which the trader is subject, or
from otherwise incurring undue risk.
The proposed regulations also require
registrants to ensure that trade
discrepancies are brought to the
immediate attention of senior
management and are documented.
The Working Group, with respect to
internal limits, recommended that daily
monitoring should be at the product
desk level, not the trader level, as
market practice is to set internal limits
at the desk level. Also, the Working
Group and SIFMA requested that the
Commission clarify that ‘‘monitor each
trader throughout the trading day’’ does
not mean continuous monitoring, and
recommended that the Commission
remove the requirement that firms
monitor traders to prevent traders from
‘‘incurring undue risk’’ because the
meaning of the phrase is ambiguous.
The Working Group also recommended
that the Commission define ‘‘trade
discrepancies’’ and add a materiality
standard to the escalation requirement.
MetLife commented that intraday
monitoring of traders may be excessive
for some MSPs, especially MSPs that
use swaps only for hedging purposes.
MetLife recommended that the
Commission allow the type of
monitoring and its frequency to be
determined by an MSP’s risk
management unit and governing body.
Having considered these comments,
the Commission is revising the
proposed rule to require monitoring be
performed to prevent the incurrence of
‘‘unauthorized risk’’ rather than ‘‘undue
risk.’’ The Commission believes this
formulation better reflects the intent of
the rule, which is to ensure that SDs and
MSPs have instituted safeguards against
the risk of losses to the firm due to
rogue trading.
In response to The Working Group’s
comment requesting a definition of
‘‘trade discrepancies,’’ the Commission
notes that the term ‘‘trade
discrepancies’’ is intended to refer to

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any discrepancies between the SD or
MSP and its counterparties and to any
discrepancies in records or systems of
the SD or MSP. Also in response to The
Working Group’s recommendation that
the proposed rule be modified to add a
materiality standard for reporting of
trade discrepancies to management, the
Commission is modifying the rule to
require that only trade discrepancies
that are not immaterial, clerical errors
be brought to the immediate attention of
management of the business trading
unit. The rule continues to require that
all trade discrepancies be documented.
The Commission has made no other
changes to the rule based on the
comments received. The Commission
believes that prudent risk management
requires intraday monitoring of traders
to detect prohibited activity that may be
otherwise undetectable. The
Commission notes that the rule requires
monitoring of traders to prevent traders
from ‘‘exceeding any limit to which the
trader is subject’’ but does not specify
the types of limits to be monitored.
Thus, the Commission observes that the
setting of limits requiring intraday
monitoring is left to the discretion of
each SD and MSP.
In addition, the Commission is
finalizing the requirement that SDs and
MSPs have policies and procedures
governing the use and supervision of
trading programs under proposed
§ 23.600(d)(9), but deleting the term
‘‘algorithmic’’ from the rule text. This
rule is an important measure for
ensuring that SDs and MSPs monitor
their trading activities. In addition to
the risk management requirements
under this rule, the Commission notes
that the use of trading programs would
be subject to, among other things, any
applicable prohibitions on disruptive
trading practices under the CEA and
Commission regulations. The
Commission also anticipates addressing
the related issues of testing and
supervision of electronic trading
systems and mitigation of the risks
posed by high frequency trading.
25. Brokers—§ 23.600(d)(8)
Proposed § 23.600(d)(8) required SDs
and MSPs to establish policies and
procedures to ensure that the risk
management unit reviews broker’s
statements, reconciles brokers’ charges
to estimates, reviews and monitors
broker’s commissions, and initiates
payment to brokers.
The Working Group, SIFMA, and
MetLife each recommended that the risk
management unit not be tasked with
reviewing brokers’ statements,
monitoring commissions or initiating
broker payments, as these functions are

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currently handled by operations or other
control units.
The Commission agrees with
commenters that review of brokers’
statements, monitoring commissions or
initiating broker payments need not be
performed by risk management
personnel. The Commission is revising
the proposed rule to replace this
requirement with a requirement that
risk management policies and
procedures include periodic audit of
broker’s statements and payments by
persons independent of the business
trading unit. This change provides the
relief requested by commenters while
maintaining the requirement that risks
connected to the use of brokers are
adequately monitored and managed.

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H. Monitoring of Position Limits—
§ 23.601
To implement section 4s(j)(1) of the
CEA, the Commission proposed § 23.601
in the Duties NPRM, which required
SDs and MSPs to establish policies and
procedures to monitor, detect, and
prevent violations of applicable position
limits established by the Commission, a
designated contract market (DCM), or a
swap execution facility (SEF), and to
monitor for and prevent improper
reliance upon any exemptions or
exclusions from such position limits.
Proposed § 23.601 also required SDs and
MSPs to: (i) Convert all swap positions
into equivalent futures positions using
the methodology set forth in
Commission regulations; (ii) provide
training to all relevant personnel on
applicable position limits on an annual
basis and promptly upon any change to
applicable position limits; (iii) test its
procedure for monitoring and
preventing position limit violations for
adequacy and effectiveness each month;
(iv) audit its position limit procedures
annually; (v) implement an early
warning system designed to alert senior
management when position limits are in
danger of being breached; and (vi) report
any detected violation of applicable
position limits to the registrant’s
governing body and to the Commission.
Only four market participants and trade
groups provided comments on the
Commission’s proposal.
1. Monitoring for Violations of Position
Limits—§ 23.601(a)
The Working Group argued that it is
not possible to determine whether
transactions that individual traders
enter into violate position limits
without placing the transactions in the
context of an entire portfolio and any
relevant hedge exemptions. The
Working Group requested clarification
that the requirement for intraday

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monitoring of traders under proposed
§ 23.600(d)(4) does not require
monitoring of individual traders for
violations of position limits, and that
monitoring for violations of position
limits is only required in the context of
aggregate swaps and futures portfolios.
The Commission believes that The
Working Group’s request for
clarification is outside the scope of
these rules. The level at which
monitoring for violations of position
limits will be required is subject to the
final position limit rules,20 and the
Commission directs SDs and MSPs to
review new § 151.7 of the final position
limit rules for guidance when
establishing the Position Limit
Procedures required by this rule.
BGA expressed concern about the
requirement that an SD or MSP ‘‘prevent
violations’’ of position limits
established by the Commission. BGA
argued that despite having a robust
compliance program, it is impossible for
an SD or MSP to ‘‘prevent violations’’
because a company cannot before-thefact prevent a trader from entering a
deal that causes a position limit
violation. Thus, BGA recommended that
the Commission clarify that as long as
an SD or MSP provides training on the
position limits and establishes and
enforces policies for monitoring,
detecting, and curing violations, they
will have met the obligation to ‘‘prevent
violations.’’
The Commission agrees with BGA
that SDs and MSPs should be held to a
standard of reasonableness in regard to
efforts to prevent violations of position
limits. The Commission therefore is
revising the proposed rule to state that
‘‘[e]ach swap dealer and major swap
participant shall establish and enforce
written policies and procedures that are
reasonably designed to monitor for and
prevent violations of applicable position
limits * * *’’ (modification to rule text
in italics).
2. Training on Applicable Position
Limits—§ 23.601(c)
SIFMA recommended that the
Commission revise § 23.601(c) to
provide that a change in position limit
levels will not trigger ‘‘training,’’ but
only require effective notification. The
Commission agrees with SIFMA’s view
and is revising the proposed rule
accordingly.
20 See 17 CFR 151.7, Position Limits for Futures
and Swaps, 76 FR 71626, 71692 (Nov. 18, 2011)
(adopting 17 CFR 151.7 pertaining to the
aggregation of positions).

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3. Diligent Monitoring and Diligent
Supervision To Ensure Compliance—
§ 23.601(d)
SIFMA recommended that the
Commission clarify that monitoring for
compliance with position limits need
not be performed by risk management
personnel, but may be performed by
independent compliance, operations, or
supervisory personnel.
The rule does not require that
position limit monitoring be performed
by risk management personnel, nor was
such a requirement intended. The
Commission confirms that monitoring
procedures may be conducted at the
discretion of the SD or MSP.
4. Reporting Violations to the Governing
Body and the Commission—§ 23.601(e)
The Working Group and MetLife
doubted the utility of alerting the
governing body of nonmaterial
violations of position limits as required
under proposed § 23.601(e), and
recommended that the Commission
require alerting the governing body only
when a violation is material and allow
registrants to define escalation
procedures based on materiality in their
Position Limit Procedures.
The Commission does not believe that
reporting of position limit violations to
the governing body of the registrant
should be subject to a materiality
standard and is adopting the rule as
proposed. The Commission intends the
reporting rule to ensure accountability
for compliance with position limits at
the highest levels of management and
believes applying a materiality standard
to such reporting would undermine the
intention of the rule and introduce
unnecessary complication for registrants
trying to determine how much of a
breach would amount to a material
breach. However, the Commission
observes that a registrant’s governing
body could take into account the
magnitude of the breach and other facts
and circumstances in remediating its
monitoring program. For instance, a
governing body would respond
differently to small, inadvertent
breaches that are promptly corrected
than larger, repeated violations.
With respect to reporting of position
limit violations to the Commission, The
Working Group argued that the
reporting of on-exchange violations of
position limits to the Commission is
already done by DCMs and will likely
be the responsibility of SEFs as well, so
SDs and MSPs should not be required
to report on-exchange violations to
avoid inundating the Commission with
redundant information. The Working
Group conceded, however, that if

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position limit rules require the
aggregation of exchange-traded swaps
and over-the-counter swaps, then SDs
and MSPs should be required to report
position limit violations that occur
because of over-the-counter swaps, but
recommended that such reporting
requirement be subject to a materiality
standard.
The Commission agrees that onexchange position limit violations need
not be reported to the Commission by
registrants, as they will be reported by
DCMs or SEFs and has modified the
final rule accordingly.

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5. Testing and Audit of Position Limit
Procedures—§ 23.601(f) and (h)
With respect to monthly testing of
Position Limit Procedures required
under proposed § 23.601(f) and annual
audit required under proposed
§ 23.601(h), SIFMA recommended that
testing and audit of Position Limit
Procedures be required only annually
and not be required to be done all at the
same time, The Working Group
recommended that testing only be
required on a semi-annual basis (or on
a more frequent basis as the firm might
determine to be effective), and MetLife
requested that the Commission permit
the frequency of testing to be
determined by an MSP based on the
extent of its swap activities. MetLife
also recommended that there be a clear
exemption from testing requirements for
MSPs that do not trade in swaps for
which position limits have been
established. SIFMA requested that the
Commission clarify that testing should
consist of testing for accurate capture of
all relevant desk positions by position
reporting systems and that § 23.601(h)
be revised to allow for ‘‘agreed upon
procedures’’ for external auditors.
Having considered these comments,
the Commission has determined that
monthly testing of Position Limit
Procedures by registrants may be
unduly burdensome, but believes that
only annual or semi-annual testing
would be inadequate as such could
allow violations to remain undetected
for long periods. The Commission
therefore is modifying the proposed rule
to require quarterly testing, and, in
response to the comment of MetLife,
only if the registrant trades in swaps for
which position limits have been
established. The annual audit
requirement is being adopted as
proposed. In response to the request of
SIFMA, the Commission confirms that
testing of Position Limit Procedures is
expected to entail testing of the
accuracy of capture of all relevant desk
positions by position reporting systems.

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6. Quarterly Reporting of Compliance
With Position Limits—§ 23.601(g)
With respect to quarterly reporting of
compliance with position limits to the
chief compliance officer, senior
management, and governing body under
proposed § 23.601(g), The Working
Group recommended that the proposed
rule should be revised to require only
annual reports to the entity’s senior
management and governing body.
As stated above, the Commission
intends the reporting rule to ensure
accountability for compliance with
applicable position limits at the highest
levels of management. The Commission
believes that the burden of quarterly
reporting is outweighed by the benefit of
timely notification to decision makers
within the SD and MSP of the entity’s
record of compliance with applicable
position limits, thus providing a timely
opportunity to adjust or revise Position
Limit Procedures to prevent future
violations, if necessary.
I. Diligent Supervision—§ 23.602
Proposed § 23.602 was intended to
implement section 4s(h)(1)(B) of the
CEA, which requires each SD and MSP
to conform with Commission
regulations related to diligent
supervision of the business of the SD
and MSP. The proposed regulations
required SDs and MSPs to establish a
system to supervise all activities relating
to its business performed by its partners,
members, officers, employees, and
agents, that such system be reasonably
designed to achieve compliance with
the CEA and Commission regulations,
that such system designate a person
with authority to carry out the
supervisory responsibilities of the SD or
MSP, and that all such supervisors meet
qualification standards that the
Commission finds necessary or
appropriate.
The Working Group recommended
that the Commission not require
designation of a single individual with
responsibility for supervision, but
should allow for designation of a
reporting line and that designated
supervisors should be permitted to
delegate supervisory authority. The
Working Group also recommended that
SDs and MSPs be given discretion to
determine supervisor qualifications,
rather than meet ‘‘qualification
standards as the Commission finds
necessary or appropriate.’’
MFA recommended that the
Commission clarify that the rules do not
impose any new (a) fiduciary
obligations or duties (i.e., duties beyond
those to which participants in the
futures and derivatives markets would

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otherwise be subject to by agreement or
by operation of common law), or (b)
supervisory duties on market
participants. MFA argued that proposed
§ 23.602 (Diligent Supervision) is
similar to the NFA’s supervision rule for
FCMs (Compliance Rule 2–9), and MFA
is concerned that § 23.602 may impose
fiduciary and supervisory obligations on
registrants similar to those that the NFA
imposes on FCMs with respect to third
parties.
In response to The Working Group’s
first comment, the Commission is
revising the proposed rule to require ‘‘at
least one person’’ rather than ‘‘a person’’
be designated with authority to carry
out supervisory responsibilities, which
should permit SDs and MSPs more
flexibility in designing and
implementing the required supervisory
system. With respect to the remaining
comments of The Working Group, the
Commission believes that full
accountability for compliance with the
CEA and Commission regulations is best
served by requiring designation of
individuals with supervisory
responsibility and that reporting line
responsibility is not adequate.
With respect to MFA’s comments, the
Commission observes that the rule
relates generally to the supervision
necessary to achieve compliance with
the CEA and Commission regulations by
the registrant. Many of the specific
activities to be supervised are subject to
the CEA and other Commission rules
that are outside the scope of this
rulemaking. The Commission does not
intend that § 23.602 impose a fiduciary
duty on SDs or MSPs beyond that which
would otherwise exist.
Other than the foregoing, the
Commission has adopted the rule as
proposed.
J. Business Continuity and Disaster
Recovery—§ 23.603
Proposed § 23.603 required SDs and
MSPs to establish a business continuity
and disaster recovery plan that includes
procedures for and the maintenance of
back-up facilities, systems,
infrastructure, personnel, and other
resources to achieve the timely recovery
of data and documentation and to
resume operations generally within the
next business day. The proposed
regulations also required SDs and MSPs
to have their business continuity and
disaster recovery plan tested annually
by qualified, independent internal audit
personnel or a qualified third party
audit service.
Tellefsen and Company, L.L.C.
(Tellefsen) commented that most, if not
all, of potential SDs have the technology
and network infrastructure in place to

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achieve a next day recovery time
objective. However, Tellefsen
recommended that the Commission
carefully evaluate the business
continuity management capabilities of
MSPs before establishing a hard date by
which these metrics must be in place, as
the Commission may have greatly
underestimated the time and scope of
work for firms to develop, implement
and test their business continuity
management capabilities (Tellefsen
estimates 68–200 person days). The
Working Group also argued that the
Commission should not require next
business day recovery for nonsystemically important SDs or MSPs,
but should only require recovery
‘‘reasonably promptly.’’
The Working Group argued that the
Commission should not require staffing
of back-up facilities to avoid the burden
of requiring two persons for the same
job. The Working Group also
recommended that the Commission
should not require annual testing of the
business continuity and disaster
recovery plan by independent auditors
because independent audits would be
too costly.
SIFMA recommended that the
Commission clarify that an SD’s or
MSP’s business continuity and disaster
recovery plan may be part of a
consolidated plan established for the
various entities in a holding company
group if they share common personnel,
premises, resources, systems, and
infrastructure. SIFMA also
recommended that the Commission
permit SDs and MSPs subject to the
business continuity and disaster
recovery requirements of a prudential
regulator, or other regulator determined
to be comparable by the Commission, to
comply with § 23.603 on a substituted
compliance basis.
The Commission believes that
Tellefsen’s concerns regarding the
ability of MSPs to comply with the
required recovery period will be
addressed through the phased
implementation of the rule, discussed
below.
In response to The Working Group’s
comment regarding staffing of back-up
facilities, the Commission is modifying
the proposed rule to clarify that, so long
as prompt recovery is reasonably
ensured, SDs and MSPs may provide for
alternative staffing of back-up facilities
as required under the circumstances.
The Commission also agrees with the
Working Group that annual testing may
be performed by qualified internal
personnel and is modifying the
proposed rule accordingly. However,
the Commission believes that
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ensure that business continuity and
disaster recovery plans remain in
compliance with the rule, but that
annual audits would be unnecessary
and unduly burdensome and costly.
Therefore, the Commission is revising
the proposed rule to require
independent audits only every three
years.
The Commission believes that all SDs
and MSPs may be critically important to
the proper functioning of the swaps
market. SDs are critical participants in
the swap market and MSPs may, by
definition, have exposures that could
have serious adverse effects on the
financial stability of the United States.
Therefore, the Commission continues to
believe that a one business day recovery
period is the necessary objective for
SDs’ and MSPs’ business continuity and
disaster recovery plans. Accordingly,
the Commission is not modifying the
final rule in this respect.
In response to SIFMA’s comments,
the Commission confirms that so long as
a consolidated business continuity and
disaster recovery plan established for
the various entities in a holding
company group that includes an SD or
MSP, or any such plan that is required
by a prudential regulator of the SD or
MSP, meets the requirements of the
rule, such SD or MSP would be in
compliance with the Commission’s rule.
The Commission believes that this
result is contemplated by the rule as
proposed and so is not modifying the
rule in this respect.
K. General Information: Availability for
Disclosure and Inspection—§ 23.606
Proposed § 23.606 required SDs and
MSPs to make available for disclosure
and inspection by the Commission and
the SD’s or MSP’s prudential regulator,
all information required by, or related
to, the CEA and Commission
regulations.
The Working Group recommended
that the Commission clarify what is
meant by ‘‘available for disclosure’’ if
such is different from ‘‘available for
inspection.’’ The Working Group also
argued that SDs and MSPs should not be
required to revise information systems
to store information specifically
required by each Commission rule,
because storage would require extensive
investigation that is unnecessary to
ensure compliance with the rule.
Having considered The Working
Group’s comments, the Commission is
adopting the rule as proposed. The
Commission does not believe the rule
specifies or requires any particular
storage medium or methodology, but
rather only requires SDs and MSPs to
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producing the required information
promptly. The Commission also has
determined not to define further
‘‘available for disclosure’’ or ‘‘available
for inspection’’ because it believes these
terms as employed in the rule have their
plain meanings.
L. Antitrust Considerations—§ 23.607
Proposed § 23.607 prohibited SDs and
MSPs from adopting any process or
taking any action that results in any
unreasonable restraint of trade or
imposes any material anticompetitive
burden on trading or clearing, unless
necessary or appropriate to achieve the
purposes of the CEA. The proposed rule
also required SDs and MSPs to adopt
policies and procedures to prevent such
actions.
SIFMA agreed with the Commission’s
proposed policies and procedures
approach. SIFMA argued however that
§ 23.607(a) goes further, by imposing a
blanket prohibition on a registrant
adopting any process or taking any
action that results in any unreasonable
restraint of trade, or imposes any
material anticompetitive burden on
trading or clearing (unless necessary or
appropriate to achieve the purposes of
the CEA). SIFMA expressed concern
that, given the counterparty rescission
and private right of action provisions of
the CEA, this prohibition could
introduce additional private liability
that is unnecessary in light of the
enforcement authority of the
Commission and antitrust authorities
and existing private rights of action
under the antitrust laws. SIFMA
therefore recommended that the
Commission delete § 23.607(a) and
instead rely upon the policies and
procedures requirement included in
§ 23.607(b).
Having considered SIFMA’s
comments, the Commission is adopting
the rule as proposed. The blanket
prohibition in § 23.607(a) is taken
directly from the statutory provision
and appropriately implements the
prohibition in section 4s(j)(6) of the
CEA.
M. Conflicts of Interest Policies and
Procedures by SDs, MSPs, FCMs, and
IBs—§ 23.605, § 1.71
As discussed above, section 4s(j) of
the CEA, as added by section 731 of the
Dodd-Frank Act, sets forth certain
duties for SDs and MSPs, including the
duty to implement conflict-of-interest
systems and procedures. Specifically,
section 4s(j)(5) mandates that SDs and
MSPs implement conflict-of-interest
systems and procedures that ‘‘establish
structural and institutional safeguards to
ensure that the activities of any person

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within the firm relating to research or
analysis of the price or market for any
commodity or swap or acting in a role
of providing clearing activities or
making determinations as to accepting
clearing customers are separated by
appropriate informational partitions
within the firm from the review,
pressure, or oversight of persons whose
involvement in pricing, trading, or
clearing activities might potentially bias
their judgment or supervision and
contravene the core principles of open
access and the business conduct
standards described in this Act.’’
Section 4s(j)(5) further requires that
such systems and procedures ‘‘address
such other issues as the Commission
determines to be appropriate.’’ Proposed
§ 23.605, as set forth in the SD/MSP
Conflicts NPRM, addressed the statutory
mandate of section 4s(j)(5).
In relevant part, section 732 of the
Dodd-Frank Act amended section 4d of
the CEA by creating a new subsection
(c), which mandates that the
Commission ‘‘require that futures
commission merchants and introducing
brokers implement conflict-of-interest
systems and procedures.’’ New section
4d(c) mandates that such systems and
procedures ‘‘establish structural and
institutional safeguards to ensure that
the activities of any person within the
firm relating to research or analysis of
the price or market for any commodity
are separated by appropriate
informational partitions within the firm
from the review, pressure, or oversight
of persons whose involvement in
trading or clearing activities might
potentially bias the judgment or
supervision of the persons.’’ New
section 4d(c) further requires that such
systems and procedures ‘‘address such
other issues as the Commission
determines to be appropriate.’’ Proposed
§ 1.71, as set forth in the FCM/IB
Conflicts NPRM, addressed the statutory
mandate of section 4d(c).
As proposed, §§ 23.605 and 1.71 were
identical in all material respects. The
Commission received 29 comment
letters to the SD/MSP Conflicts NPRM
and 26 comment letters to the FCM/IB
Conflicts NPRM. Many commenters
provided comments addressing
identical provisions or issues in both
proposed rules. The discussion below
thus addresses comments to both
proposed rules unless otherwise
indicated.
1. Compliance Oversight by SelfRegulatory Organizations (SROs)
Although proposed §§ 23.605 and
1.71 prescribed the implementation of
conflict-of-interest policies and
procedures by SDs, MSPs, FCMs, and

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IBs, the proposal did not address
compliance oversight by SROs.
Nonetheless, the Commission received
comments on whether the conflict-ofinterest policies and procedures
mandated under sections 4s(j)(5) and
4d(c) of the CEA should be prescribed
by the Commission or by an SRO.
The Futures Industry Association
(FIA), ISDA, and SIFMA, in a joint
comment, argued that an SRO should
oversee and enforce the conflict-ofinterest requirements on SDs, MSPs,
FCMs, and IBs. FIA, ISDA, and SIFMA
stated that SROs would be in a better
position than the Commission to
address the likely need for future
amendments to the rule. The comment
suggested that the Commission establish
a framework governing the
implementation of conflict-of-interest
policies and procedures, and instruct
the appropriate SRO to write detailed
compliance requirements within that
framework, including the execution of
audit and compliance functions, and the
issuance of specific guidance that would
be subject to the Commission’s review
and approval. In a separate comment, JP
Morgan expressed a general agreement
with the points raised in the FIA/ISDA/
SIFMA letter.
Michael Greenberger and UNITE
HERE commented that the monitoring
and enforcement of the implementation
of conflict-of-interest policies and
procedures for SDs and MSPs should be
carried out by the Commission, as
opposed to SROs.
Having considered the comments, the
Commission is adopting the rule as
proposed on this issue. Unlike section
15D of the Securities Exchange Act of
1934, which mandated that conflict-ofinterest rules be adopted either by the
SEC, or by a registered securities
association or national securities
exchange, sections 4s(j)(5) and 4d(c) of
the CEA as added by sections 731 and
732 of the Dodd-Frank Act, respectively,
direct the CFTC to promulgate such
rules. The Commission will continue to
collaborate with SROs on conflict-ofinterest policies and procedures,
particularly with respect to their
effectiveness.
2. Exemptive Relief
The Commission’s proposal in the
FCM/IB NPRM did not expressly
address issues surrounding the
Commission’s exemptive authority.
Nonetheless, the Committee on Futures
and Derivatives Regulation of the New
York City Bar Association argued that,
due to the unprecedented scope and
breadth of the Commission’s
rulemakings, the Commission will
encounter situations it had not

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previously considered, rules that do not
operate in the manner intended, or
unintended consequences when the
rules are applied in a specific context.
In such situations, exemptive relief
would be appropriate and the
Commission should prepare for such
situations by providing Commission
staff with the authority to grant
exemptive relief in each rule. Having
considered the comment, the
Commission does not believe it
appropriate to address exemptive relief
in this rule. Rather, any person may
submit a request for an exemptive, noaction or interpretive letter, in
accordance with the procedures set
forth in Commission Regulation
140.99.21 Further, should any person, in
the future, believe that an amendment to
a Commission regulation is warranted,
such person may petition the
Commission for an amendment in
accordance with the procedures set
forth in Commission Regulation 13.2.22
3. Consistent Conflicts-of-Interest
Treatment Between FCMs/IBs and SDs/
MSPs
Pierpont Securities Holdings LLC
expressed agreement with the
Commission’s proposal to apply
§ 23.605 and § 1.71 in a manner that is
consistent with one another. The
consistency is particularly important in
situations where a FCM is an affiliate of,
or dually registered as, an SD or MSP.
The Commission acknowledges the
comment and notes its belief that such
consistent treatment is reasonable and
reflects the statutory directives and
policy goals underlying sections 4d(c)
and 4s(j)(5) of the CEA, as amended by
sections 732 and 731 of the Dodd-Frank
Act, respectively.
4. Definitions—§ 23.605(a), § 1.71(a)
a. Business Trading Unit—
§ 23.605(a)(2), § 1.71(a)(2)
The proposed rules defined the term
‘‘business trading unit’’ as ‘‘any
department, division, group, or
personnel of a [SD, MSP, FCM, or IB] or
any of its affiliates, whether or not
identified as such, that performs or is
involved in any pricing, trading, sales,
marketing, advertising, solicitation,
structuring, or brokerage activities on
behalf of a [SD, MSP, FCM, or IB].’’
The Commission received a comment
from the FHLBs, and a joint comment
from FIA, ISDA, and SIFMA, arguing
that the Commission should clarify that
§ 23.605(a)(2) and § 1.71(a)(2) apply to
traditional ‘‘front office’’ functions and
not to those functions that support the
21 17
22 17

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front office, such as legal, compliance,
operations, credit, and human resources
functions. FIA/ISDA/SIFMA noted that
in order to fulfill legal, compliance, and
risk management functions, firms are
integrated such that the exclusion of
such control and/or support functions
should be excluded from the definitions
of business trading unit and clearing
unit. In a separate comment, JP Morgan
expressed a general agreement with the
points raised in the FIA/ISDA/SIFMA
letter.
In the preambles of the SD/MSP and
FCM/IB NPRMs, the Commission noted
that the proposed rules are not intended
to hinder the execution of sound risk
management programs by SDs, MSPs,
FCMs, IBs, or by any affiliate of an SD,
MSP, FCM, or IB. The Commission’s
proposals largely addressed the issue
raised by the commenters in the
proposed definitions of ‘‘non-research
personnel’’ at § 23.605(a)(5) and
§ 1.71(a)(5), which carved out legal and
compliance personnel from those
definitions. In addition, the final rule
modified the definition of non-research
personnel to those employees who are
not directly responsible for, or
otherwise not directly involved in,
research or analysis intended for
inclusion in a research report. The
Commission believes its prior
statements and these changes should
clarify the scope of the definitions.
Nonetheless, upon reviewing the
comments, the Commission has
determined it appropriate to modify the
definitions. The rule language, as
originally proposed, is amended in the
final rules to: (1) Clarify that the term
includes those persons who directly
perform or exercise supervisory
authority over the performance of the
tasks listed in the rule, and not those
who merely are ‘‘involved in’’ such
activities, such as the legal, compliance,
human resources, risk management,
operations, and other support functions;
and (2) exclude price verification for
risk management purposes from the
types of pricing activities covered by the
definitions. The Commission believes
that these changes will address the
issues raised by the commenters while
ensuring that the rule text properly
reflects the intent of the Commission.
b. Clearing Unit—§ 23.605(a)(3),
§ 1.71(a)(3)
The proposed rules defined the term
‘‘clearing unit’’ as ‘‘any department,
division, group, or personnel of a [SD,
MSP, FCM, or IB] or any of its affiliates,
whether or not identified as such, that
performs or is involved in any
proprietary or customer clearing

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activities on behalf of a [SD, MSP, FCM,
or IB].’’
Similar to the concerns raised in
comments on the proposed definition of
‘‘business trading unit,’’ FIA, ISDA, and
SIFMA, in a joint comment, argued that
the Commission should clarify that
§ 23.605 and § 1.71 applies to traditional
‘‘front office’’ functions and not to
functions that support the front office,
such as legal, compliance, operations,
credit, and human resources functions.
In a separate comment, JP Morgan
expressed a general agreement with the
points raised in the FIA/ISDA/SIFMA
letter.
As stated above with respect to the
comments received on the proposed
definition of ‘‘business trading unit,’’
the Commission noted in the preambles
to the SD/MSP and FCM/IB Conflicts
NPRMs that the proposed rules are not
intended to hinder the execution of
sound risk management programs by
SDs, MSPs, FCMs, IBs, or by any
affiliate of an SD, MSP, FCM, or IB. The
NPRMs largely addressed the issue
raised by the commenters in the
proposed definitions of ‘‘non-research
personnel’’ at § 23.605(a)(5) and
§ 1.71(a)(5), which carved out legal and
compliance personnel from that
definition. The Commission reiterates
its prior statements on this issue, which
should make clear the scope of the
definitions.
Nonetheless, upon reviewing the
comments, the Commission has
determined it appropriate to modify the
definitions. The rule language, as
originally proposed, is amended in the
final rules to clarify that the term
includes those persons or groups who
perform or exercise supervisory
authority over the performance of the
tasks listed in the rules, and not those
who merely are ‘‘involved in’’ such
activities. The Commission believes that
these changes will address the issues
raised by the commenters while
ensuring that the rule text properly
reflects the intent of the Commission.
c. Non-Research Personnel—
§ 23.605(a)(5)
The proposed rule defined the term
‘‘non-research personnel’’ as ‘‘any
employee of the business trading unit or
clearing unit, or any other employee of
the [SD] or [MSP] who is not directly
responsible for, or otherwise involved
with, research concerning a derivative,
other than legal or compliance
personnel.’’
EEI argued that the Commission
should limit the definition of nonresearch personnel to include only those
persons involved with trading, pricing,

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or clearing activities, and not to other
areas.
Upon reviewing the comment, the
Commission is adopting the language as
originally proposed. The Commission
believes that changing the language in
the manner suggested by the commenter
would increase the risk that SDs or
MSPs might attempt to evade the
restrictions set forth in the rule.
d. Public Appearance—§ 23.605(a)(6),
§ 1.71(a)(6)
The proposed rules defined the term
‘‘public appearance’’ as ‘‘any
participation in a conference call,
seminar, forum (including an interactive
electronic forum) or other public
speaking activity before 15 or more
persons, or interview or appearance
before one or more representatives of
the media, radio, television or print
media, or the writing of a print media
article, in which a research analyst
makes a recommendation or offers an
opinion concerning a derivatives
transaction.23 This term does not
include a password-protected webcast,
conference call, or similar event with 15
or more existing customers, provided
that all of the event participants
previously received the most current
research report or other documentation
that contains the required applicable
disclosures, and that the research
analyst appearing at the event corrects
and updates during the public
appearance any disclosures in the
research report that are inaccurate,
misleading, or no longer applicable.’’
FIA, ISDA, and SIFMA, in a joint
comment, argued that the definition of
public appearance (speaking before 15
or more ‘‘persons’’) should articulate
that the term ‘‘person’’ includes both a
customer that is a natural person and
one that is an entity. For example, if a
single institutional customer sends 16
employees to a forum held by an SD,
MSP, FCM, or IB, each of those
employees should not be counted as a
‘‘person;’’ rather, employees from a
single institutional customer should be
deemed to be one ‘‘person’’ at that
forum, for purposes of the rule. In a
separate comment, JP Morgan expressed
a general agreement with the points
raised in the FIA/ISDA/SIFMA letter.
Upon reflection, the Commission
agrees with the commenters, and is
altering the rules to incorporate the
23 The Commission notes that SD and MSP
communications with counterparties and potential
counterparties also are addressed in the
Commission’s external business conduct standards
rules. See Subpart H of Part 23 of the Commission’s
Regulations, Business Conduct Standards for Swap
Dealers and Major Swap Participants with
Counterparties, 77 FR 9734 (Feb. 17, 2012).

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recommendation offered by the
commenter. Specifically, the
Commission is modifying the rule to
clarify that the term ‘‘persons’’ in this
context refers to either natural persons
or entities. Thus, for example, if a single
entity sends multiple natural persons as
representatives to a public speaking
activity that may be subject to the rule,
such natural persons would be counted
as a single ‘‘person’’ for purposes of
determining whether the public
speaking activity meets the definition of
‘‘public appearance.’’
e. Research Department—§ 23.605(a)(8),
§ 1.71(a)(8)
The proposed rules defined the term
‘‘research department’’ as ‘‘any
department or division that is
principally responsible for preparing the
substance of a research report relating to
any derivative on behalf of a [SD, MSP,
FCM, or IB], including a department or
division contained in an affiliate of a
[SD, MSP, FCM, or IB].’’
FIA, ISDA, and SIFMA, in a joint
comment, argued that the scope of
‘‘research department,’’ and the
restrictions imposed by the proposed
rules concerning research departments,
should not apply to the global affiliates
of an SD, MSP, FCM, or IB. FIA/ISDA/
SIFMA posited that the imposition of
such restrictions on global affiliates
would create significant logistical
hurdles and expenses for multinational
firms, especially in situations where an
affiliate has no significant interaction
with the SD, MSP, FCM, or IB. Further,
FIA/ISDA/SIFMA suggested that local
regulations governing non-US affiliates
may not permit such non-US affiliates to
comply with the rules. As an
alternative, FIA/ISDA/SIFMA suggested
that the Commission limit the rules to
requiring disclosure ‘‘on third party
research reports,’’ and focus the
Commission’s enforcement resources on
SDs, MSPs, FCMs, and IBs that attempt
to evade the rule by moving research
analysts to affiliates. In a separate
comment, JP Morgan expressed a
general agreement with the points raised
in the FIA/ISDA/SIFMA letter.
Upon reviewing the comments, the
Commission has determined it
appropriate to adopt the rules as
originally proposed. The Commission
believes that the alternatives suggested
by FIA/ISDA/SIFMA would increase the
risk of evasion by multinational
registrants. Such risk of evasion
outweighs any benefit to be derived
from the proffered alternative. However,
to clarify any ambiguity that may exist
in the rules adopted herein, the
Commission confirms that a holding
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functions of all of its affiliates under
these rules; rather, a holding company
needs only to look at those research
groups doing research on behalf of an
SD, MSP, FCM, or IB. In light of its
stated intent, the Commission believes
that the cost-effectiveness of the rules
will be promoted.
f. Research Report—§ 23.605(a)(9),
§ 1.71(a)(9)
The proposed rules defined the term
‘‘research report’’ as: ‘‘[A]ny written
communication (including electronic)
that includes an analysis of the price or
market for any derivative, and that
provides information reasonably
sufficient upon which to base a decision
to enter into a derivatives transaction.’’
However, the proposals expressly
excluded four categories of
communications from coverage by the
definitions.
FIA, ISDA, and SIFMA, in a joint
comment, argued that the exclusions
from the definition of ‘‘research report’’
should be expanded to include general
market discussions and other
communications that are not ‘‘research
reports’’ in other regulatory contexts.
The definitions should be limited to
those research reports analyzing a
specific derivative or futures
transaction. Exclusions set forth in other
regulatory contexts—specifically NASD
Rule 2711(a)(9)(A) and SEC Regulation
AC—should be included in the
Commission’s definitions of ‘‘research
report.’’ FIA/ISDA/SIFMA further
argued that communications produced
by a business trading unit labeled as a
‘‘trading/sales desk product’’ and as
‘‘non-research’’ should be excluded
from the definitions of research report.
In a separate comment, JP Morgan
expressed a general agreement with the
points raised in the FIA/ISDA/SIFMA
letter.
EEI argued that the Commission
should exclude from the definition any
communication between an SD or MSP,
and its regulator, concerning hedging
activity. The commenter posited that
firms with small trading operations
should be permitted to publish
occasional research reports to justify
trading decisions, without being subject
to the rules set forth in the SD/MSP
Conflicts NPRM.
The National Futures Association
(NFA) argued that the definition in
proposed § 1.71(a)(9) was too broad and
suggested that the definition be limited
to reports containing material
information at a level of detail that
amounts to ‘‘a call to action to the
customer,’’ or that could have a price
impact on the market for a particular
product. NFA also argued that the

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definition should include an exception
for general market commentary, similar
to NASD Rule 2711. Newedge USA LLC
(Newedge) also argued that the
definition in proposed § 1.71(a)(9) was
too broad, because any discussion of a
derivative that references the underlying
physical commodity or financial
instrument could be deemed to provide
‘‘information reasonably sufficient upon
which to base a decision to enter into
a derivatives transaction.’’ Newedge
contended that the definition of
research report should be restricted to
‘‘any written communication * * *
including an analysis of the price/
market for any specific derivative
contract, and that provides information
reasonably sufficient upon which to
base a decision to enter into a
transaction involving such specific
derivative contract.’’
ADM Investor Services Inc.
commented on the differences between
daily research reports and weekly and
monthly research reports, arguing that
proposed § 1.71(a)(9) unnecessarily
threatened existing industry practices,
particularly with respect to opening and
closing comments or intraday market
comments by IBs, which do not consist
of detailed research but could be
covered by the proposed definition of
‘‘research report.’’
Having considered the comments, the
Commission has determined it
appropriate to modify the exclusions to
the definitions of ‘‘research report,’’ as
that term was proposed in the SD/MSP
and FCM/IB Conflicts NPRMs.
Specifically, the Commission agrees
with FIA/ISDA/SIFMA’s
recommendation that ‘‘commentaries on
economic, political, or market
conditions’’ and ‘‘statistical summaries
of multiple companies’ financial data,
including listings of current ratings’’
should be excluded from the definitions
of research report. With regard to the
exclusion for commentaries on
economic or market conditions, the
Commission believes that there are
distinguishing characteristics between
research reports setting forth factual
statements about the market for specific
derivatives and commentaries that
provide opinion on general economic,
political, or market conditions.
Accordingly, the Commission has
modified the rules to incorporate those
two exclusions into the definitions of
‘‘research report.’’
However, the Commission does not
believe that other types of
communications should be excluded
from the definitions, because they could
represent the core focus of a research
department doing research on behalf of
an SD, MSP, FCM, or IB, e.g., asset

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classes, economic variables commonly
referenced in derivatives, and on-therun swap rates. Adopting the NASD
2711 exclusion for analysis concerning
economic variables (e.g. rates, inflation)
that are commonly referenced in
derivatives, would create an exception
that would swallow the rule. For
example, research conducted on trends
in the interest rate, gold, or oil markets
are inextricably linked to the swap
markets that reference those underlying
assets or rate.
The Commission believes that the
changes adopted herein will increase
consistency with NASD Rule 2711,
which was promulgated pursuant to
section 15D of the Securities Exchange
Act. The Commission believes that the
rules, in final form, provide SDs, MSPs,
FCMs, and IBs with sufficient flexibility
concerning solicitation materials
generated by the trading unit, given the
exclusion from coverage of ‘‘[a]ny
communication generated by an
employee of the business trading unit
that is conveyed as a solicitation for
entering into a derivatives transaction,
and is conspicuously identified as
such.’’ 24
5. Policies and Procedures—§ 23.605(b)
As proposed, § 23.605(b) required
each SD and MSP to ‘‘adopt and
implement written policies and
procedures reasonably designed to
ensure that the [SD] or [MSP] and its
employees comply with the provisions
of this rule.’’ Chris Barnard commented
that the prevention of SDs and MSPs
from engaging in activities with actual,
perceived, or potential conflicts of
interest will improve transparency and
confidence in the markets, and will
reduce risk. The Commission
acknowledges the comment and is
adopting § 23.605(b) without revision.
6. Research Analysts and Research
Reports—§ 23.605(c), § 1.71(c)
a. Separation of Research Analysts From
Business Trading Unit and Clearing
Unit—§ 23.605(c)(1)

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Proposed §§ 23.605 and 1.71
prescribed certain restrictions on the
relationship between the research
department and all non-research
personnel. Such restrictions included
limitations on influencing the content of
research reports, the supervision of
24 The Commission notes that SD and MSP
communications with counterparties and potential
counterparties are addressed in the Commission’s
external business conduct standards rules. See
Subpart H of Part 23 of the Commission’s
Regulations, Business Conduct Standards for Swap
Dealers and Major Swap Participants with
Counterparties, 77 FR 9734 (Feb. 17, 2012).

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research analysts, and the review or
approval of research reports.
With regard to this proposed rule,
MFA suggested that the Commission
provide additional clarity on the
proposed rule by further describing the
bright lines of separation between the
research department and non-research
personnel. For example, the commenter
queried whether an SD may house its
research department and trading
department in the same building or on
the same floor, and whether different
key cards for entry into each department
are required by the rule. Additionally,
BlackRock commented that the
Commission ‘‘should explicitly exempt
entities whose research personnel
produce reports for internal use only.’’
After reviewing the comments, the
Commission believes that the comments
raised by the commenters may best be
addressed through clarification of the
underlying intent of the rule.
Accordingly, the Commission has
determined it appropriate to adopt the
rule as it was originally proposed. First,
with respect to MFA’s comments, the
rule does not expressly require physical
separation of the research department
and all non-research personnel;
however, such separation will be
considered by the Commission to be a
good practice by registrants in order to
minimize the risk of violating the rule.
Second, with respect to BlackRock’s
comments, the Commission believes
that the issue of internal research
reports is adequately addressed by
proposed § 23.605(a)(9)(iv), which
excluded from the definition of
‘‘research report’’ any ‘‘internal
communications that are not given to
current or prospective customers.’’ 25
b. Conflicts of Interest Adequately
Addressed by Existing Commission and
NFA Rules
Proposed § 1.71 did not discuss the
issue of whether existing Commission
and NFA rules adequately address the
directives set forth in section 4d(c) of
the CEA as amended by section 732 of
the Dodd-Frank Act. Nonetheless, the
Commission received comments that
raised the issue.
NFA commented that certain of its
existing rules address issues raised in
the Commission’s rule proposal, and
that the specific requirements related to
research reports that may not be directly
applicable to derivatives could have
unintended consequences. K&L Gates
LLP (on behalf of Peregrine Financial
Group Inc.), ADM Investor Services Inc.,
25 This language is being adopted by the
Commission as proposed; however, the provision
has been renumbered as § 23.605(a)(9)(vi).

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John Stewart & Associates Inc., and
Stewart-Peterson Group Inc. each
argued that the issues addressed by the
proposed rule are already addressed
through existing rules.
Swaps and Derivatives Market
Association commented that the
proposed rules should be adopted as
they were originally proposed.
After considering the comments, the
Commission has determined it
appropriate to adopt the rule, as it was
originally proposed, on this issue.
Although certain Commission and NFA
rules tangentially address the issues set
forth in the proposed rule, section 732
of the Dodd-Frank Act directed the
Commission to take certain actions
beyond the requirements previously
promulgated in the rules of the
Commission and NFA. Further, given
the similarities between section 4d(c) of
the CEA as amended by section 732 of
the Dodd-Frank Act, and section 15D of
the Securities Exchange Act of 1934, the
Commission believes that it is important
to provide a measure of specificity with
respect to the conflict-of-interest
policies and procedures mandated
under section 4d(c) and § 1.71. Such
specificity will promote consistency in
the marketplace. Further, by
maintaining consistency—to the extent
warranted—with NASD Rule 2711, the
Commission believes that the proposed
rule will minimize disruption to the
marketplace, given that such standards
are well-established in the financial
industry.
c. Treatment of Small IBs
As proposed, § 1.71 did not establish
a separate standard for small IBs.
However, in the preamble of the
proposed rule, the Commission
expressly invited comment on how
these rules should apply to FCMs and
IBs, considering the varying size and
scope of the operations of such firms.
The preamble noted, as an example of
how the rule could be adjusted to
account for firms of different sizes, that
NASD Rule 2711(k) provides an
exception from certain requirements for
‘small firms,’ defined to include those
firms that over the past three years have
participated in ten or fewer investment
banking services transactions and
generated $5 million or less in gross
investment banking services revenues
from those transactions. The
Commission solicited comment on
whether a similar approach should be
adopted for small FCMs and IBs.
Moreover, the exceptions to the
definition of research report were
designed to address issues typically
found in smaller firms where
individuals in the trading unit perform

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Federal Register / Vol. 77, No. 64 / Tuesday, April 3, 2012 / Rules and Regulations
their own research to advise their
clients or potential clients.
Several commenters suggested that
small IBs should be excepted from the
proposed rule. NFA argued that the
proposed rule effectively could prohibit
the business model of a number of firms
that provide an important service to the
industry, particularly with respect to
agriculture. The commenter suggested
that, in adopting an exception for small
IBs, the Commission could consider the
following factors: A firm’s gross annual
revenue, number of associated persons,
number of annual futures transactions,
and nature of the customer base.
National Introducing Brokers
Association, ADM Investor Services
Inc., John Stewart & Associates Inc., and
Stewart-Peterson Group Inc. each
argued that implementing the proposed
rules would be prohibitively costly,
burdensome, and unnecessary for small
IBs, particularly for IBs dealing with
agricultural commodities, and would
force small IBs out of business. Chris
Barnard noted that small IBs lack the
capacity to carry the proportionately
heavier regulatory burden set forth in
the proposed rule, and as such, some
regulatory mitigation would be
beneficial, based on number of staff or
revenues. Multiple commenters also
commented on the limited market price
impact of research reports created or
distributed by small IBs, as well as the
potential that the normal duties of
associated persons may be deemed to be
research activities for purposes of the
rule.
The Commission recognizes and
agrees with certain concerns raised by
the commenters. Thus, upon review of
the comments, the Commission is
adopting a separate regulatory standard
for small IBs, reflecting the alternative
set forth in the preamble of the
proposed rule. Section 4d(c) of the CEA
mandates the establishment of
‘‘appropriate informational partitions’’
within FCMs and IBs, and all such firms
are bound by that statutory requirement.
However, the Commission recognizes
that the size of an IB plays a significant
role in determining the appropriateness
of such partitions. Accordingly, the rule,
in its final form, establishes a separate
standard for any IB that has generated,
over the preceding 3 years, $5 million
or less in aggregate gross revenues from
its activities as an IB. This standard is
similar to language in NASD Rule 2711
that was raised expressly as a possible
alternative in the preamble of the
proposed rule.
For any IB meeting those financial
requirements, § 1.71(c) of the rule would
not apply. Further, § 1.71(b) has been
changed to set forth a separate policies

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and procedures requirement for small
IBs. The recommended language of new
§ 1.71(b)(2) largely mirrors the statutory
requirement of section 4d(c). However,
the Commission believes that small IBs
should be subject to § 1.71(e) (policies
and procedures mandating disclosure of
material incentives and conflicts of
interest) and § 1.71(f) (recordkeeping
and reporting).26 The Commission
believes that these changes to the rule,
as originally proposed, will address the
concerns raised by the commenters and
limit the cost burden imposed on small
IBs.
Finally, the Commission notes that
commentaries on market conditions
have been excluded from the definition
of ‘‘research report,’’ as discussed above.
d. Insider Trading and Futures Markets
Proposed § 1.71 did not address
insider trading in the futures markets, or
how that issue impacts the
implementation of section 732 of the
Dodd-Frank Act. Nonetheless, the
Commission received comments on the
issue. Specifically, K&L Gates LLP (on
behalf of Peregrine Financial Group
Inc.), John Stewart & Associates Inc.,
ADM Investor Services Inc., and
Stewart-Peterson Group Inc. each
argued that the proposed rules
inappropriately relied upon established
rules in the securities industry, claiming
that no ban on insider trading exists in
the futures industry. Further, ADM
Investor Services Inc. and StewartPeterson Group Inc. each contended that
only the publication of a U.S.
Department of Agriculture market report
could have a dramatic effect on the
futures market.
Having considered the comments, the
Commission has determined not to
modify the rule on this issue. Section
732 of the Dodd-Frank Act directed the
Commission to take actions concerning
conflict-of-interest policies and
procedures, and in that provision,
Congress included language previously
included in section 15D of the
Securities Exchange Act of 1934.
Section 15D directed that regulatory
language be promulgated to implement
that statute, and those regulatory
standards are now well-established in
the financial industry. Given the
similarities in statutory language,
coupled with the well-established
principles set forth in NASD Rule 2711,
the Commission believes that it is
important to provide a measure of
specificity with respect to the conflictof-interest policies and procedures
mandated under section 4d(c) and the
26 The provisions of § 1.71(d) are applicable only
to FCMs.

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20149

proposed rule. Such specificity will
promote consistency and certainty in
the marketplace. Further, by
maintaining consistency—to the extent
warranted—the Commission believes
that the final rule will minimize
disruption to the marketplace.
e. Exception for FCMs If Engaged in
Only a de minimis Amount of
Proprietary Trading
Proposed § 1.71 did not set forth a de
minimis exception for FCMs.
Nonetheless, the Commission received a
comment from Newedge, which argued
that FCMs engaging in minimal
proprietary trading should not be
subject to the provisions relating to
research analysts. The commenter stated
that the proposed rule would impose
unnecessary burdens, and that a firm
that engages in only limited proprietary
trading does not present a risk of
conflicts of interest.
Having considered the comment, the
Commission does not believe it
appropriate to modify the proposed rule
on this issue. The imposition of a de
minimus exception to the conflicts rule
is inconsistent with the statutory
directive that Congress set forth in
section 732 of the Dodd-Frank Act,
which does not distinguish between
proprietary trading and trading for the
accounts of customers. Moreover, the
limited nature of a firm’s proprietary
trading does not serve to negate the
issues intended to be addressed through
the statutory mandate.
f. Lack of Examples of Research-Related
Conflicts of Interest in the Futures
Industry
Proposed § 1.71 did not cite specific
examples of conflicts of interest in the
futures industry, nor did it discuss the
prevalence of conflicts in the industry.
Nonetheless, the Commission received
comments relating to those issues. K&L
Gates LLP (on behalf of Peregrine
Financial Group Inc.) commented that
the Commission failed to cite any
evidence of conflicts of interest arising
from the publication of research reports.
NFA commented that it had issued
guidance prohibiting a FCM or IB from
trading in a security futures product in
anticipation of the issuance of a related
research report, but that the commenter
was unaware of any instances of
conflicts of interest in research reports
of security futures products. Further,
Senator Carl Levin commented that the
Commission should encourage
compliance by developing examples of
potential or actual conflicts of interest
that should be disclosed to investors.
After considering the comments, the
Commission has decided not to modify

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the proposed rule on this issue. Section
732 of the Dodd-Frank Act directed the
Commission to take certain actions
concerning conflict-of-interest policies
and procedures. Specifically, as noted
in the preamble of proposed § 1.71,
section 732 ‘‘requires, in relevant part,
that FCMs and IBs implement conflicts
of interest systems and procedures that
‘establish structural and institutional
safeguards to ensure that the activities
of any person within the firm relating to
research or analysis of the price or
market for any commodity are separated
by appropriate informational partitions
within the firm from the review,
pressure, or oversight of persons whose
involvement in trading or clearing
activities might potentially bias the
judgment or supervision of the
persons.’’’ This statutory language
draws heavily from section 15D of the
Securities Exchange Act, which was
established through the Sarbanes-Oxley
Act of 2002. The Commission believes
that the provisions of the proposed rule
relating to conflicts of interest represent
a prudent implementation of the
statutory directive.
As noted above, the regulatory
requirements promulgated pursuant to
section 15D—which are similar to the
requirements contained in the rule—are
now well-established in the financial
industry. Given the similarities in
statutory language, coupled with the
well-established principles set forth in
NASD Rule 2711, the Commission
believes that the proposed rule will
promote consistency and certainty,
while minimizing disruption, in the
marketplace. With respect to Senator
Levin’s recommendation that the
Commission should develop examples
of potential or actual conflicts of
interest, the Commission notes the
many examples cited in Senator Levin’s
comment letter,27 but declines to
provide additional examples so as not to
pre-judge the scope of possible future
enforcement actions.

27 See, e.g., SEC Fact Sheet on Global Analyst
Research Settlements, SEC (Apr. 28, 2003),
available at http://www.sec.gov/news/speech/
factsheet.htm; Hans G. Heidle and Xi Li, Is There
Evidence of Front-Running Before Analyst
Recommendations? An Analysis of the Quoting
Behavior of Nasdaq Market Makers, Nov. 10, 2003,
available at http://www.afajof.org; Joint Report by
NASD and the NYSE On the Operation and
Effectiveness of the Research Analyst Conflict of
Interest Rules (Dec. 2005), available at http://
www.finra.org/Industry/Issues/
ResearchAnalystRules/.

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g. Restriction on Non-Research
Personnel From ‘‘Influencing the
Content’’ of Research Reports—
§ 23.605(c)(1)(i), § 1.71(c)(1)(i)
The proposed rule provided that
‘‘[n]onresearch personnel shall not
influence the content of a research
report of the [SD, MSP, FCM, or IB].’’
NFA commented that non-research
personnel should be allowed to
influence the content of a research
report under certain circumstances and,
further, that paragraph (i) should be
eliminated from proposed § 1.71(c)(1).
FIA, ISDA, and SIFMA, in a joint
comment, argued that the proposed
prohibition on ‘‘influencing the
content’’ should be eliminated because
it would impair ordinary
communications between research and
non-research personnel. As an
alternative, FIA/ISDA/SIFMA suggested
that non-research personnel should be
prohibited only from ‘‘directing the
views and opinions expressed in
research reports.’’ In a separate
comment, JP Morgan expressed a
general agreement with the points raised
in the FIA/ISDA/SIFMA letter.
Better Markets commented that the
Commission should clarify and further
restrict the communications covered by
the provisions. Specifically, Better
Markets argued that § 23.605 and § 1.71
should be expanded not only to prohibit
non-research personnel from
influencing the content of a research
report or any decision to publish a
research report, but also any decision
not to publish a report or to refrain from
including relevant information.
Upon consideration of the comments,
the Commission agrees with the
suggestions raised by both FIA/ISDA/
SIFMA and Better Markets and is
incorporating the suggestions into the
final rules. Specifically, the Commission
is modifying both proposed rules to
remove the phrase ‘‘shall not influence
the content of a research report’’ and
replacing it with the phrase ‘‘shall not
direct a research analyst’s decision to
publish a research report of the [SD,
MSP, FCM, or IB], and non-research
personnel shall not direct the views and
opinions expressed in a research report’’
The Commission believes that the
changes accommodate the concerns
raised by the commenters while still
reflecting the intent of the proposed
rules.
h. Restriction on Research Analyst
Supervision by Business Trading Unit
or Clearing Unit—§ 23.605(c)(1)(ii),
§ 1.71(c)(1)(ii)
The proposed rules provided that
‘‘[n]o research analyst may be subject to

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the supervision or control of any
employee of the [SD’s, MSP’s, FCM’s, or
IB’s] business trading unit or clearing
unit, and no personnel engaged in
pricing, trading or clearing activities
may have any influence or control over
the evaluation or compensation of a
research analyst.’’
FIA, ISDA, and SIFMA, in a joint
comment, suggested that the
Commission limit the scope of the rules,
whereby employees of business trading
and clearing units would be prohibited
only from acting as direct supervisors of
research analysts. In a separate
comment, JP Morgan expressed a
general agreement with the points raised
in the FIA/ISDA/SIFMA letter.
Upon reviewing the comment, the
Commission has decided not to change
the language of the proposed rules in
the manner suggested by the
commenter. Any influence on research
analysts by non-research senior
management responsible for pricing,
trading, or clearing activities would
undermine the conflict-of-interest
requirements mandated by new sections
4d(c) and 4s(j)(5) of the CEA and set
forth in the rules. However, the
Commission has determined it
appropriate to clarify the language of the
rules, as they had been originally
proposed, by using the defined terms
‘‘business trading unit’’ and ‘‘clearing
unit’’ to designate those personnel who
may not have influence or control over
the evaluation or compensation of a
research analyst.
i. Trading Ahead of Research Report
Publication
Proposed § 1.71 did not expressly
impose restrictions against trading
ahead of the publication of a research
report. Senator Carl Levin commented
that the Commission should add
provisions akin to FINRA Rule 5280
(Trading Ahead of Research Reports) in
order to improve the quality of research
reports and the integrity of the
marketplace. The Commission observes
that it did not propose a trading ahead
prohibition in its original proposals.
However, the Commission believes that
the restrictions on communications
already included in the rules will
minimize the opportunities for such
activities to take place.28 Moreover, the
Commission will continue to monitor
28 The Commission also notes that depending on
the facts and circumstances, improperly trading
ahead or front running counterparty orders may
constitute fraudulent, deceptive or manipulative
conduct under sections 4b and 6(c)(1) of the CEA,
and § 180.1 of Commission regulations, among
other fraudulent, deceptive, and manipulative
practices protections under the CEA and
Commission regulations.

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this issue and may incorporate such a
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j. Requirement That Legal/Compliance
Personnel Supervise Communication
Between Research and Non-Research
Personnel—§ 23.605(c)(1)(iv)
The proposed rule permitted nonresearch personnel to review a research
report before its publication ‘‘as
necessary only to verify the factual
accuracy of information in the research
report, to provide for non-substantive
editing, to format the layout or style of
the research report, or to identify any
potential conflicts of interest.’’
However, such review (1) may only be
conducted through authorized legal or
compliance personnel, and (2) must be
properly documented.
EEI commented that the Commission
should exempt communications that are
factual in nature from oversight by legal
and compliance personnel, positing that
coverage of such communications
would hinder unnecessarily the
development of research reports and
unnecessarily burden legal/compliance
personnel.
After considering the comment, the
Commission has decided to promulgate
the rule as it was originally proposed.
The Commission believes that
involvement by legal or compliance
personnel in such communications will
reduce significantly the risk that nonresearch personnel will act in an
unlawful manner, inadvertently or
otherwise.
k. Restrictions on Research Analyst
Communications—§ 23.605(c)(2),
§ 1.71(c)(2)
The proposed rules provided that
‘‘[a]ny written or oral communication by
a research analyst to a current or
prospective counterparty, or to any
employee of the [SD, MSP, FCM, or IB],
relating to any derivative must not omit
any material fact or qualification that
would cause the communication to be
misleading to a reasonable person.’’
FIA, ISDA, and SIFMA, in a joint
comment, argued that the proposed rule
would burden an affected firm’s
operations—especially firms with
foreign offices—and suggested that
internal communications within a firm
should be exempt from the material
facts or qualifications required to be
communicated to prospective and
current customers. FIA/ISDA/SIFMA
further noted that neither NASD Rule
2210 nor similar SRO rules contain
equivalent restrictions, and that firms
should be permitted to consider the
nature of the audience when assessing
whether a particular communication is
misleading. FIA/ISDA/SIFMA also

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argued that the phrase ‘‘or to any
employee’’ should be struck from
proposed §§ 23.605(c)(2) and 1.71(c)(2).
In a separate comment, JP Morgan
expressed general agreement with the
points raised in the FIA/ISDA/SIFMA
letter.
Upon review of the comments, the
Commission has determined it
appropriate to change the rules to
eliminate restrictions on
communications to employees of an SD,
MSP, FCM, or IB. The Commission
believes that by deleting the phrase ‘‘or
to any employee of the [SD, MSP, FCM,
or IB],’’ the cost concerns implicated by
requiring registrants to monitor internal
communications will be addressed
without producing a materially adverse
impact on the effectiveness of the rules.
To the extent that commenters stated
that firms should be permitted to
consider the nature of the audience
when assessing whether a particular
communication is misleading, the
Commission notes that such matters
will be governed by the Commission’s
existing anti-fraud standards.
l. Restriction on Influence of Business
Trading Unit and Clearing Unit on
Research Analyst Compensation—
§ 23.605(c)(3), § 1.71(c)(3)
Proposed §§ 23.605(c)(3) and
1.71(c)(3) provided that an SD, MSP,
FCM, or IB ‘‘may not consider as a factor
in reviewing or approving a research
analyst’s compensation his or her
contributions to the [SD’s, MSP’s,
FCM’s, or IB’s] trading or clearing
business’’ and that ‘‘[n]o employee of
the business trading unit or clearing
unit of the [SD, MSP, FCM, or IB] may
influence the review or approval of a
research analyst’s compensation.’’
FIA, ISDA, and SIFMA, in a joint
comment, contended that research
management should be able to solicit
input from business trading and clearing
unit personnel, particularly as nonresearch personnel may be in a better
position to receive feedback from clients
concerning the performance of research
personnel. FIA/ISDA/SIFMA suggested
that the Commission exempt from
§§ 23.605(c)(1)(ii) and 1.71(c)(1)(ii) any
personnel who occupy non-trading or
non-clearing positions, and who are not
employed in the business trading or
clearing units. FIA/ISDA/SIFMA, as
well as Newedge, further argued that
research management decisions
concerning the performance evaluation
of research analysts should be subject to
firm-wide compensation guidelines, as
long as they are non-discriminatory and
non-prejudicial. In a separate comment,
JP Morgan expressed a general
agreement with the points raised in the

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FIA/ISDA/SIFMA letter. Newedge
complained of a lack of clarity as to
which personnel of a firm engaged
exclusively or substantially in clearing
activities, and not proprietary trading,
would be available to supervise and
evaluate research analysts. Newedge
also argues that senior officers and
employees of departments other than
business trading and clearing units
should be allowed to have input on
compensation decisions.
Michael Greenberger argued that
research management should be
prohibited from soliciting any input of
business trading and clearing units
concerning a research analyst’s
compensation or performance
evaluation, even if the influence is
indirect or if research management
maintains the ability to make all final
decisions on such determinations.
Better Markets commented that the
provision should be broadened. For
example, Better Markets argued that a
research analyst’s contribution to the
trading business of an affiliate should be
prohibited from being considered when
determining compensation. The
commenter further noted that, in
addition to prohibiting a research
analyst’s contributions to the trading
business from being considered in
respect of an analyst’s compensation,
‘‘consideration of adverse effects on
such trading business’’ must be also
prohibited from being considered.
After considering the comments, the
Commission has determined it
appropriate to change the language as
set forth in the original proposal. As
revised, the rules permit personnel of a
business trading unit or clearing unit to
forward communications by a client or
customer to research department
management, to the extent that such
communications relate to feedback,
ratings, and other indicators of a
research analyst’s performance provided
by the client or customer. The
Commission believes that the change
will address certain concerns raised by
FIA/ISDA/SIFMA and Newedge while
not detracting from the policy goals
underlying the provision. Beyond that
change, the Commission has decided
not to modify further the language that
was originally proposed. Maintaining a
firewall around research analyst
compensation decisions is crucial to
implementing effective conflict-ofinterest policies and procedures.
Nonetheless, to address an issue raised
by FIA/ISDA/SIFMA, the Commission
wishes to clarify the intent of the rule.
Specifically, the rule is not intended to
prohibit management decisions
concerning the performance evaluation
of research analysts from being subject

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to firm-wide compensation guidelines,
as long as they are non-discriminatory
and non-prejudicial.

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m. Relevance of a Promise of Favorable
Research to Futures Market—§ 1.71(c)(4)
As proposed, § 1.71(c)(4) prohibits an
FCM or IB from ‘‘directly or indirectly
offer[ing] favorable research, or
threaten[ing] to change research, to an
existing or prospective customer as
consideration or inducement for the
receipt of business or compensation.’’
K&L Gates LLP (on behalf of Peregrine
Financial Group Inc.) commented that
the provision may be relevant in the
context of research on a particular
company, but it has no relevance in
terms of a report on soybeans or the
Euro.
After reviewing the comment, the
Commission has decided not to modify
the proposed rule on this issue. The
Commission believes that the provision
appropriately addresses the statutory
directive and is an important
component of firewall protection.
Moreover, inclusion of this provision
will maintain consistency with the
conflict-of-interest provisions proposed
for SDs and MSPs.
n. Disclosure of Conflicts by Research
Analysts in Research Reports and Public
Appearances—§ 23.605(c)(5),
§ 1.71(c)(5)
Proposed §§ 23.605(c)(5)(i) and
1.71(c)(5)(i) required that an SD, MSP,
FCM, or IB ‘‘disclose in research reports
and a research analyst must disclose in
public appearances: (1) Whether the
research analyst maintains, from time to
time, a financial interest in any
derivative of a type that the research
analyst follows, and the general nature
of the financial interest; and (2) any
other actual, material conflicts of
interest of the research analyst or [SD,
MSP, FCM, or IB] of which the research
analyst has knowledge at the time of
publication of the research report or at
the time of the public appearance.’’
FIA, ISDA, and SIFMA, in a joint
comment, argued that §§ 23.605(c)(5)(i)
and 1.71(c)(5)(i) should be limited to
disclosing whether a research analyst
maintains a relevant financial interest
‘‘at the time of publication of the report/
time of public appearance,’’ rather than
the phrase ‘‘from time to time.’’ FIA/
ISDA/SIFMA also contended that the
phrase ‘‘any other actual, material
conflict of interest of the research
analyst’’ is vague and would be
burdensome to implement, requiring
coordination among various business
units and the creation of special
databases in order to comply with the
rule. In a separate comment, JP Morgan

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expressed a general agreement with the
points raised in the FIA/ISDA/SIFMA
letter. NFA also commented on the
difficulty for FCMs to remain current on
an analyst’s financial interests, and that
the Commission should clarify that the
term ‘‘of a type that the research analyst
follows’’ (§ 1.71(c)(5)(i)) refers to interest
rate swaps, credit swaps, equity swaps,
and other commodity swaps, consistent
with the characterization of swaps set
forth in the Commission’s proposed
product definitions.
Senator Carl Levin commented that
the Commission should use this rule not
only to ensure the integrity of research
reports, but also to impose a broader
duty on FCMs and IBs to more
completely disclose any adverse
interest. The commenter suggested that
the rule should prohibit firms from
betting on the failure of instruments
they designed and sold to customers.
EEI suggested that the Commission
modify the proposed rule to provide a
de minimis exception from the research
analyst financial interest disclosure
requirements, and that a research
analyst should be required only to
identify relevant financial interests.
Upon review of the comments, the
Commission is modifying the language
of §§ 23.605(c)(5) and 1.71(c)(5) to
remove the phrase ‘‘from time to time.’’
The Commission believes that this
change will address the issue raised by
FIA/ISDA/SIFMA. However, the
Commission has determined that a de
minimus exception would be
inappropriate given the difficulty of
deciding when a financial interest is de
minimis in this context. Further, the
Commission believes that the cost
concerns of FIA/ISDA/SIFMA are
misplaced. The rules require disclosure
of ‘‘any other actual, material conflicts
of interest of the research analyst or [SD
or MSP] of which the research analyst
has knowledge at the time of publication
of the research report or at the time of
the public appearance’’ (emphasis
added).29 Thus, the disclosure
requirement is limited to conflicts of
which the research analyst has
knowledge, and the SD, MSP, FCM, or
IB need not construct the databases
suggested by FIA/ISDA/SIFMA in order
to comply with the rule.
29 The Commission notes that in an action
brought for failure to disclose a material conflict of
interest of an SD or MSP in a research report or
public appearance, the onus will be on the SD or
MSP to show that they had policies and procedures
reasonably designed to ensure that the research
analyst had no knowledge of the material conflict
of interest of the SD or MSP.

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o. Disclosure of Conflicts in Third-Party
Research Reports—§ 23.605(c)(5)(iv),
§ 1.71(c)(5)(iv)
As proposed, §§ 23.605(c)(5)(iv) and
1.71(c)(5)(iv) required that if an SD,
MSP, FCM, or IB distributes or makes
available third-party research reports,
each report must be accompanied by
certain disclosures or an internet link to
the appropriate disclosures, subject to
certain conditions and qualifications.
EEI argued that the required
disclosures are unnecessary because
third-parties are, by definition,
independent of an SD or MSP. FIA,
ISDA, and SIFMA, in a joint comment,
stated that it was unclear what
disclosures must be made in connection
with the distribution of independent
third-party research reports, given that,
by definition, the SD, MSP, FCM, or IB
has no role in the content or creation of
an ‘‘independent third-party research
report.’’ In a separate comment, JP
Morgan expressed a general agreement
with the points raised in the FIA/ISDA/
SIFMA letter.
Upon review of the comments, the
Commission is adopting the rule as
proposed. Third-party research reports
provided by a registrant may be
interpreted by recipients as carrying the
endorsement of the registrant and may
present conflicts-of-interest issues in the
same way as research reports originating
with the registrant’s own research
analysts. The Commission believes that
the disclosures will afford recipients
with a clear understanding of conflicts
posed by a particular report.
p. Application of Proposed Research
Conflicts Rules to Research Reports
Covering Derivatives and Securities
The proposed rules and
accompanying preambles did not
address how the proposed requirements
would apply to research reports that
contain information that is subject to the
rule and information that is securitiesrelated.
FIA, ISDA, and SIFMA, in a joint
comment, questioned how § 23.605 and
§ 1.71 would apply to a research report
that addresses multiple products (i.e.,
both derivatives and securities), or to a
report discussing a product that may be
a derivative, security, or both. FIA/
ISDA/SIFMA suggested that only the
derivatives section of a report
discussing securities and derivatives
should be subject to the proposed
regulations. In a separate comment, JP
Morgan expressed a general agreement
with the points raised in the FIA/ISDA/
SIFMA letter.
Upon review of the comments, the
Commission has decided not to change

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the language that was originally
proposed. To the extent that securities
underlie the derivatives discussed in the
report, or to the extent that securities are
otherwise intertwined with the
discussion of derivatives, the
Commission believes that any such
discussion of securities should be
subject to the Commission’s rules. SDs,
MSPs, FCMs, and IBs will be registered
with the Commission, and the swaps
and futures in which they transact will
be within the Commission’s
jurisdiction. Because the value of each
swap and future intrinsically may be
based on the value of one or more
underlying instruments, research
reports by SDs, MSPs, FCMs, or IBs that
analyze such underlying instruments
should be addressed by the conflict-ofinterest policies and procedures
mandated under sections 4d(c) and
4s(j)(5) of the CEA.
q. Application of Proposed Research
Conflicts Rules to Research Analysts
Covering Derivatives and Securities
The proposed rules and
accompanying preambles did not
address how the proposed requirements
would apply to research analysts that
work with derivatives subject to the
Commission’s rules and securities
subject to rules promulgated by the SEC
or FINRA.
FIA, ISDA, and SIFMA, in a joint
comment, queried how the rule would
apply to research analysts registered
with both futures and securities
regulators. FIA/ISDA/SIFMA suggested
that the Commission confirm that
individuals subject to both § 23.605 or
§ 1.71 and securities regulations must
only comply with § 23.605 or § 1.71
when acting in the capacity as a
‘‘research analyst,’’ as defined by
§ 23.605 or § 1.71. FIA/ISDA/SIFMA
also raised concerns with respect to
inconsistencies between §§ 23.605 and
1.71 and other rules promulgated in the
securities or futures context. In a
separate comment, JP Morgan expressed
a general agreement with the points
raised in the FIA/ISDA/SIFMA letter.
Having considered the comments, the
Commission confirms that individuals
subject to both § 23.605 or § 1.71 and
securities regulations must only comply
with § 23.605 or § 1.71 when acting in
the capacity of a ‘‘research analyst,’’ as
defined by § 23.605 or § 1.71. SDs,
MSPs, FCMs, and IBs will be registered
with the Commission, and the swaps
and futures in which they transact will
be within the Commission’s
jurisdiction. Because the value of each
swap and future intrinsically may be
based on the value of one or more
underlying instruments, research

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reports by SDs, MSPs, FCMs, and IBs
analyzing such underlying instruments
should be addressed by the conflict-ofinterest policies and procedures
mandated by new sections 4d(c) and
4s(j)(5) of the CEA.
7. Clearing Activities—§ 23.605(d),
§ 1.71(d)
a. Separation of Clearing Unit From
Business Trading Unit—§ 23.605(d)(1)
and (2); Separation of Business Trading
Unit and Clearing Unit—§ 1.71(d)(1)
and (2)
As proposed, § 23.605(d)(1) provided
that ‘‘[n]o [SD] or [MSP] shall directly
or indirectly interfere with or attempt to
influence the decision of any affiliated
clearing member of a [DCO] with regard
to the provision of clearing services and
activities,’’ while proposed § 1.71(d)(1)
congruently provided that ‘‘[n]o [FCM]
shall permit any affiliated [SD] or [MSP]
to directly or indirectly interfere with,
or attempt to influence, the decision of
the clearing unit personnel of the [FCM]
with regard to the provision of clearing
services and activities. * * *’’
Likewise, proposed § 23.605(d)(2)
provided that ‘‘[e]ach [SD and MSP]
shall create and maintain an appropriate
informational partition, as specified in
section 4s(j)(5)(A) of the Act, between
business trading units of the [SD or
MSP] and clearing member personnel of
any affiliated clearing member of a
[DCO],’’ while proposed § 1.71(d)(2)
congruently provided that ‘‘[e]ach
[FCM] shall create and maintain an
appropriate informational partition
between business trading units of an
affiliated [SD] or [MSP] and clearing
unit personnel of the [FCM].’’
MFA commented that it supports the
prohibition of SDs and MSPs from
directly or indirectly interfering with, or
attempting to influence, the decision of
any affiliated clearing member of a DCO
with regard to clearing services and
activities, as well as the informational
partitions between business trading
personnel and personnel of an affiliated
clearing member. Pierpont Securities
Holdings LLC also supported the
Commission’s proposals, contending
that the informational partitions
between a business trading unit and a
clearing unit within a large financial
institution must be established and
maintained as to all personnel, not just
supervisory personnel, and the penalties
for violating those restrictions must be
meaningful.
Swaps and Derivatives Market
Association filed two comments on
these rules, both of which were
supportive of the proposals. In the first
comment, the commenter argued that

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the proposed separation of trading and
clearing units in § 23.605(d) should be
expanded so as to require ‘‘distant
physical separation’’ of the two. The
commenter also expressed support for
requiring the use of objective criteria in
determining whether to accept clearing
customers. In the second letter, the
commenter contended that the
restrictions set forth in § 23.605(d), as
proposed, correctly address key areas
where conflicts arise, and that the
independence of clearing members is
essential to accomplish several policy
goals of the Dodd-Frank Act. In the
second comment, the commenter stated
its belief that the firewalls mandated by
the proposed rules ‘‘are critical to
reducing potential conflicts between the
trading unit of an FCM, IB, SD, or MSP
and their clearing unit.’’
Michael Greenberger also expressed
support for § 23.605(d), as proposed,
noting that attempts to tie clearing
decisions to trade execution decisions
would raise potential conflicts of
interest, which could serve to block
access to clearing and prevent
competition among execution venues.
The commenter also noted that
mandatory public disclosure of client
acceptance criteria by SDs and MSPs is
consistent with legislative intent.
Likewise, Pierpont Securities Holdings
LLC also expressed support for the
Commission’s proposal, in particular
the requirements that no direct or
indirect interference or influence be
permitted by the business trading unit
on the clearing unit as to (i) whether
clearing services will be provided and
(ii) how clearing fees will be set.
The Principal Traders Group
supported a rule preventing interference
by the business trading unit of an SD or
MSP, with respect to the decision of an
affiliated FCM to accept a client for
clearing services, but preferred that the
rule be presented in the form
recommended by FIA/ISDA/SIFMA
below.
In contrast, FIA, ISDA, and SIFMA, in
a joint comment, commented that the
proposed rules would alter the business
operations of integrated financial
services firms to the detriment of clients
and in a manner disproportionate to
achieving the regulatory goals the
Commission has identified, including
the promotion of effective risk
management. The commenters also
argued that the Commission’s proposed
application of the conflicts rules to FCM
clearing activities is not contemplated
by section 732 of the Dodd-Frank Act.
FIA/ISDA/SIFMA argued that the
proposed rules would impair an SD’s/
MSP’s ability to follow risk management
best practices. FIA/ISDA/SIFMA

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recommended that the Commission not
adopt the proposed rules, but instead
adopt a rule that prohibits an affiliated
SD or MSP from obtaining information
from an affiliated FCM’s clearing
personnel concerning transactions
conducted by FCM clients with either
their own clients or with independent
SDs or MSPs. FIA/ISDA/SIFMA also
expressed support for a rule that would
require each FCM’s clearing unit to have
independent management that makes its
own final decisions regarding clients to
which it will offer clearing services as
well as the terms for those services. FIA/
ISDA/SIFMA also suggested that the
Commission clarify that the rule does
not mandate that firms publicize client
sales and on-boarding decisions.
UBS Securities LLC echoed certain
points made in the FIA/ISDA/SIFMA
comment, particularly with respect to
the ability of a financial services firm to
operate its swap clearing business as a
partnership with its trading business in
order to serve clients, while JP Morgan
agreed with the FIA/ISDA/SIFMA
comment discussed above. JP Morgan
also posited that while ‘‘it would be
appropriate for the CFTC to issue rules
prohibiting any activity intended to
restrict open access to clearing, * * *
we believe a SD/MSP should be
permitted to work and share
information with its clearing member
affiliate to promote and facilitate a
client’s access to clearing services or to
define the parameters pursuant to which
clearing services will be offered.’’
The FHLBs argued that the proposed
rule goes beyond the standards set forth
in the Dodd-Frank Act and that the
proposed rule ‘‘overly restricts the
ability of [SDs and MSPs] to run their
trading and clearing operations and
effectively service the needs of their
end-user counterparties.’’ The proposed
rule also could inhibit SDs and MSPs
‘‘from taking prudent, well-informed
and timely actions in situations with
respect to the closing out of
transactions, in a default scenario or
otherwise.’’
NFA commented that § 1.71(d) is too
broad and may negatively impact a
firm’s ability to share information about
customers to make credit and risk
determinations. UBS Securities LLC
echoed certain of the points made in the
FIA/ISDA/SIFMA comment,
particularly with respect to the ability of
a financial services firm to operate its
swap clearing business as a partnership
with its trading business in order to
serve clients. Newedge commented that
the proposed rule would limit firms’
ability to coordinate, credit, risk, and
other policies, and suggested that rather
than prohibiting an affiliated SD or MSP

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from interfering with a FCM’s decision
to provide clearing services, § 1.71(d)
should prohibit a FCM from permitting
business trading unit personnel of an
affiliated SD or MSP from interfering
with the FCM’s decision to provide
clearing services.
Commenters have expressed divergent
views on this issue, with some
commenters strongly favoring the
Commission’s proposed rules (and, to a
certain extent, requesting that the rule
be expanded), while others have
advocated that the provision not be
adopted. Upon consideration of all the
comments, the Commission has
determined it appropriate to promulgate
the rules largely as they were originally
proposed. The separation of the FCM
clearing unit from the interference or
influence of an affiliated SD or MSP is
crucial to promoting open access to
clearing. Open access to clearing will be
essential for the expansion of client
clearing needed for market participants
to comply with the mandatory clearing
of swaps as determined by the
Commission under section 723 of the
Dodd-Frank Act. The Commission
believes that the promulgation of the
language as proposed would be
‘‘appropriate,’’ as that term is used in
section 4d(c) as amended by section 732
of the Dodd-Frank Act. Moreover, the
Commission does not believe the rule
will hamper risk management. The
Commission notes that it has proposed
straight-through processing rules,30
counterparty clearing documentation
rules,31 and clearing member risk
management rules 32 that would, if
adopted, minimize the counterparty risk
to an SD or MSP with respect to
transactions required or intended to be
cleared.
In response to commenters’ concerns
about an FCM’s ability to manage a
default scenario without the benefit of
the trading expertise in the business
trading unit, the Commission is
modifying proposed § 1.71(d)(2)(i) to
permit the business trading unit of an
affiliated SD or MSP to participate in
the activities of an FCM during an event
of default. Specifically, the business
trading unit personnel would be
permitted to participate in the activities
of the FCM, as necessary, during any
default management undertaken by a
derivatives clearing organization that
results from an event of default and for
30 See Requirements for Processing, Clearing, and
Transfer of Customer Positions, 76 FR 13101, 13109
(Mar. 10, 2011).
31 See Customer Clearing Documentation and
Timing of Acceptance for Clearing, 76 FR 45730,
45737 (Aug. 1, 2011).
32 See Clearing Member Risk Management, 76 FR
45724, 45729 (Aug. 1, 2011).

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the purposes of transferring, liquidating,
or hedging any proprietary or customer
positions as a result of an event of
default.
In addition, the Commission is
including the term ‘‘clearing unit,’’ as
defined in § 23.605(a), in the relevant
provisions of § 23.605(d). This change
will serve to clarify the scope of the
informational partition between the SD
or MSP and the personnel or division of
a clearing member responsible for the
provision of clearing services.
To clarify an issue raised by FIA/
ISDA/SIFMA, the Commission notes
that SDs and MSPs are not required to
publicize their client sales and onboarding decisions; rather, the criteria
used in making those decisions should
be publicly available and objective. In
other words, ‘‘all such decisions
regarding the acceptance of customers
for clearing should be made in
accordance with publicly disclosed,
objective, written criteria,’’ as stated in
the preamble of the proposed rule.
b. Division of Clearing Unit Into SelfClearing Unit and Customer Clearing
Unit
The proposed rules did not
distinguish between a self-clearing unit
(clearing for an SD’s or MSP’s own
trades) and a customer clearing unit
(clearing for customers and
competitors). However, Swaps and
Derivatives Market Association
commented that the proposed rules
should differentiate between the two
units. Having considered that comment,
the Commission has decided not to
modify the language in the manner
suggested by the commenter. The
Commission believes that subdividing
the clearing unit into two separate subunits would create an unnecessary
complication that could erode the
firewall mandated by the statute.
c. Prohibition on Business Unit
Personnel of an SD or MSP From
Supervising Personnel of an Affiliated
DCO-Clearing Member—§ 23.605(d)(2);
Restrictions on SD and MSP Business
Trading Unit Supervision of Clearing
Unit of Affiliated FCM—§ 1.71(d)(2)(ii)
As proposed, § 23.605(d)(2) provided
that, at a minimum, the § 23.605(d)(2)
informational partitions ‘‘shall require
that no employee of a business trading
unit of a [SD] or [MSP] shall supervise,
control, or influence any employee of a
clearing member of a derivatives
clearing organization,’’ while proposed,
§ 1.71(d)(2)(ii) congruently provided
that ‘‘[n]o employee of a business
trading unit of an affiliated [SD] or
[MSP] shall supervise, control, or

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Federal Register / Vol. 77, No. 64 / Tuesday, April 3, 2012 / Rules and Regulations
influence any employee of a clearing
unit of the [FCM].’’
FIA, ISDA, and SIFMA, in a joint
comment, posited that because
employees of a business trading unit
and a clearing unit may be supervised
by the same manager, §§ 23.605(d)(2)
and 1.71(d)(2)(ii) should be amended to
prohibit an employee of an SD or MSP
from acting as a direct supervisor of any
non-management personnel of an
affiliated FCM’s clearing unit. The
commenter also suggested that
salespeople be permitted to associate
with an SD or MSP and with an
affiliated FCM, and be permitted to act
for clients at both entities. Further, the
commenter argued that a carve-out
should be added to §§ 23.605(d) and
1.71(d) enabling an SD parent to
exercise risk management over its
affiliated FCM (e.g., approving credit
and risk parameters for common and
distinct customers) in a manner that is
non-discriminatory, non-prejudicial,
and for the sole purpose of complying
with group risk and credit policies and
parameters. In a separate comment, JP
Morgan expressed a general agreement
with the points raised in the FIA/ISDA/
SIFMA letter.
After reviewing the comment, the
Commission has decided to adopt the
rule with certain modifications. Any
influence on clearing unit personnel by
upper-level supervisors involved in
business trading unit activities would
undermine the conflict-of-interest
requirements mandated by new sections
4d(c) and 4s(j)(5) of the CEA, as
amended by sections 731 and 732 of the
Dodd-Frank Act, respectively, and set
forth in the rule. Moreover, the
Commission does not believe that the
rule language should be changed to
permit sales personnel to act for both
the trading unit and the clearing unit.
The risks associated with this approach,
in terms of potential undue influence
and interference with clearing decisions
has been well-supported by
commenters, as discussed above.
With regard to proposed § 1.71(d), the
Commission is making certain changes
to clarify the intent of the rule. In
particular, § 1.71(d)(1)(vi) is modified to
prohibit an affiliated SD or MSP from
interfering with or influencing decisions
related to setting a particular customer’s
fees for clearing services based upon
criteria that are not generally available
and applicable to other customers of the
FCM. Additionally, as proposed
§ 1.71(d)(2)(i) required that the
informational partitions between the
business trading unit of the affiliated SD
or MSP and the clearing unit personnel
of the FCM include a prohibition on any
business trading unit personnel

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participating in any way with the
provision of clearing services. As
modified, the rule clarifies that business
trading unit personnel may not
condition or tie the provision of trading
services to the provision of clearing
services or otherwise participate in
clearing services by improperly
incentivizing or encouraging the use of
the affiliated FCM.33 In addition, as
discussed above, business trading unit
personnel would be permitted to
participate in the activities of the FCM
in the event of a default.
8. Undue Influence on Customers—
§ 1.71(e)
As proposed, § 1.71(e) mandated that
FCMs and IBs ‘‘adopt and implement
written policies and procedures that
mandate the disclosure to its customers
of any material incentives and any
material conflicts of interest regarding
the decision of a customer as to the
trade execution and/or clearing of the
derivatives transaction.’’
K&L Gates LLP (on behalf of Peregrine
Financial Group Inc.) commented that
existing Commission regulations already
impose risk disclosure requirements on
FCMs and IBs, and that the proposed
rule inappropriately imports a concept
from the securities industry into the
futures industry.
Better Markets submitted two
comment letters in support of the
proposal. In the first comment, the
commenter suggested that the rule
should extend to the affiliates of an
FCM or IB, and that the disclosure
should include the nature and amounts
of the relevant interests. In the second
comment, the commenter suggested that
the rule be expanded so that any
incentives received by FCMs or SDs in
exchange for use of various market
infrastructures must be fully disclosed.
Swaps and Derivatives Market
Association submitted a comment
supporting § 1.71(e), as proposed.
Having considered the comments, the
Commission has determined it
appropriate to adopt the rule as it was
originally proposed. The Commission
believes that in order to ensure that
33 The Commission generally would not view as
‘‘improper’’ making available discounted clearing
services in connection with trading activities,
provided that the business trading unit personnel
comply with applicable prohibitions and
restrictions on their interactions with the clearing
unit. The Commission emphasizes in this regard
that in § 1.71(d)(2), the term ‘‘improperly’’ modifies
both the term ‘‘incentivizing’’ and the term
‘‘encouraging’’ and that the term ‘‘otherwise’’ is
intended to clarify that other ‘‘improper’’ activities,
similar to conditioning or tying, could be subject to
§ 1.71(d)(2). Such ‘‘improper’’ activities are limited
to those that wrongfully interfere with, or attempt
to influence, a decision of the affiliated FCM’s
clearing unit personnel specified in § 1.71(d)(1).

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20155

counterparties are adequately informed
of any material incentives or conflicts
prior to the execution of a transaction,
it is essential that FCMs and IBs be
required to adopt and implement
written policies and procedures that
require the advance disclosure of such
conflicts. In addition to addressing
issues of customer protection, the
policies and procedures will promote
consistency with proposed § 23.605(e).
Further, to the extent that Better
Markets commented that the rule should
be expanded to include disclosures of
certain incentives received by FCMs and
IBs, the Commission believes that the
recommendation is beyond the scope of
this rule.
9. Undue Influence on Customers—
§ 23.605(e)
As proposed, § 23.605(e) mandated
that SDs and MSPs ‘‘adopt and
implement written policies and
procedures that mandate the disclosure
to its counterparties of any material
incentives and any material conflicts of
interest regarding the decision of a
counterparty: (1) Whether to execute a
derivative on a swap execution facility
or designated contract market; or (2)
Whether to clear a derivative through a
derivatives clearing organization.’’
FIA, ISDA, and SIFMA, in a joint
comment, noted that the proposed rule
overlaps with disclosures proposed by
the Commission in a separate notice of
proposed rulemaking.34 The commenter
argued that the provision should be
narrowed and, alternatively, that the
Commission could require SDs and
MSPs to provide customers with an
annual disclosure document describing
potential conflicts that may exist among
the firm, its affiliates, clients, and
employees. In a separate comment, JP
Morgan expressed a general agreement
with the points raised in the FIA/ISDA/
SIFMA letter.
Better Markets submitted two
comment letters addressing the
provision at issue. In the first comment,
the commenter suggested that the
Commission extend the disclosure
requirements in several respects. In the
second comment, the commenter
reiterated its belief that incentives of
SDs and MSPs received in exchange for
use of various market infrastructures
should be fully disclosed. Michael
Greenberger, UNITE HERE, and Swaps
and Derivatives Market Association
each submitted comments supporting
§ 23.605(e), as proposed.
34 See Business Conduct Standards for SDs and
MSPs with Counterparties, 75 FR 80638, 80659
(Dec. 22, 2010).

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After considering the comments, the
Commission has determined it
appropriate to adopt the rule as it was
originally proposed. The Commission
believes that in order to ensure that
counterparties are adequately informed
of any material incentives or conflicts
prior to the execution of a transaction,
it is essential that SDs and MSPs be
required to adopt and implement
written policies and procedures that
require the advance disclosure of such
conflicts. In addition to addressing
issues of customer protection, the
policies and procedures will promote
the efficient use of trading facilities and
DCOs for swap transactions, by ensuring
that counterparties are adequately
informed of any material incentives or
conflicts of an SD or MSP that could
impact the execution and clearing
decisions of the counterparty.

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N. Designation of a Chief Compliance
Officer; Required Compliance Policies;
and Annual Report of an FCM, SD, or
MSP
Section 4d(d) of the CEA, as added by
section 732 of the Dodd-Frank Act,
requires that each FCM designate an
individual to serve as its chief
compliance officer (CCO). Likewise,
section 4s(k) of the CEA as added by
section 731 of the Dodd-Frank Act
requires that each SD and MSP
designate an individual to serve as its
CCO. The CCO NPRM proposed § 3.3(a)
to codify these requirements for FCMs,
SDs, and MSPs, and prescribed certain
qualifications for the position.
Section 4s(k)(2) of the CEA sets forth
certain duties to be performed by a CCO
of an SD and MSP, and section 4d(d) of
the CEA requires the Commission to
promulgate rules concerning the duties
of a CCO of an FCM. The CCO NPRM
proposed § 3.3(d) to codify the duties set
forth in section 4s(k)(2) and applied
them uniformly to FCMs, SDs, and
MSPs.
Section 4s(k)(3) of the CEA requires
that the CCO of an SD or MSP annually
prepare and sign a report containing a
description of the registrant’s
compliance with the CEA and
regulations promulgated under the CEA,
and a description of each policy and
procedure of the CCO, including the
code of ethics and conflicts of interest
policies. Proposed § 3.3([e]) 35 codified
this requirement and applied these
requirements to CCOs of FCMs as well.
The Commission received 25
comment letters and Commission staff
35 The proposed regulations misnumbered the
subsections of § 3.3 such that two subsections were
designated as ‘‘(d).’’ To avoid confusion, this release
re-designates such sections correctly in brackets.

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participated in one meeting in response
to the CCO NPRM and considered each
in formulating the final rules.
1. Identical Rules Applicable to SDs,
MSPs, and FCMs
The Commission proposed uniform
rules applicable to SDs, MSPs, and
FCMs.
Rosenthal Collins Group, LLC
(Rosenthal) and Newedge commented
that Congress did not intend for CCOs
of FCMs to be subject to the same
requirements as CCOs for SDs and
MSPs, and it is ‘‘overkill’’ for CCOs of
‘‘pure’’ FCMs to be subject to the same
requirements as CCOs of SDs and MSPs.
However, Rosenthal conceded that an
FCM that is also an SD or MSP should
comply with the more stringent
requirements.
NFA questioned why there was no
explanation of the decision to extend
identical requirements to CCOs of
FCMs. NFA argued that it is more
important to harmonize with FINRA
Rule 3010 and FINRA Interpretive
Material 3010–1, Rule 3012, and Rule
3130 because 55% of FCMs are also
broker-dealers (BDs) registered with the
SEC.
The FHLBs commented that they are
already subject to Federal Housing
Finance Agency (FHFA) regulation,
such as internal control systems under
12 CFR 917.6, and requested that the
Commission defer to this regime
because duplicative regulations will not
increase transparency and may cause
some limited SDs to leave the business.
Better Markets supported extension of
the same duties to FCMs because of
their critical role in the market that will
expand dramatically with the increased
use of clearing. The National Society of
Compliance Professionals (NSCP) also
supported application of identical CCO
requirements to all registrants, provided
the NSCP’s suggested modifications to
the rule were made. The Council of
Institutional Investors (CII) commented
that extending the same duties to CCOs
of FCMs would be comprehensive and
consistent, and may help mitigate
regulatory uncertainties.
FIA and SIFMA agreed with NSCP
that the CCO requirements for SDs,
MSPs, and FCMs can be harmonized in
an identical regime, provided the
suggested changes to the rule are made
to bring the rule into harmony with the
traditional financial services
compliance model. FIA and SIFMA also
noted that the more traditional
compliance model would be consistent
with the approach the Commission took

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with regard to retail foreign exchange
dealers (RFEDs).36
With regard to comments that CCOs of
FCMs should be subject to different or
lesser standards than SDs or MSPs, the
Commission notes that FCMs are subject
to fiduciary duty standards,37 and agrees
with Better Markets that the role of
FCMs likely will grow in importance as
client clearing of swaps increases. The
Commission also agrees with CII that
the Commission has an interest in
consistent regulation of its registrants.
As discussed below, after considering
the comments of NSCP, FIA, SIFMA,
and others, the Commission is making a
number of changes to the final rule to
harmonize the rule to the extent
possible with the traditional financial
services compliance model. Therefore,
the Commission is not promulgating
different rules for FCMs. The
Commission further notes that whereas
the Dodd-Frank Act required that FCMs
designate CCOs, the Act did not
establish a similar requirement that BDs
must designate CCOs under the
securities laws. Accordingly, the
distinction between treatment of FCMs
and BDs has a statutory basis.
In response to comments regarding
consistency with RFED and FINRA
rules, the Commission believes that the
changes to the rule discussed below will
broadly harmonize the rule with the
standard currently applicable to CCOs
of RFEDs and the standards applicable
to the CCOs of BDs.
The Commission recognizes that there
may be some overlap with FHFA rules
for the FHLBs. However, the
Commission believes that the two
approaches are broadly compatible. For
example, the FHFA requires senior
management to establish and implement
an effective system to track internal
control weaknesses and the actions
taken to correct them, and to monitor
and report to the bank’s board on the
effectiveness of the internal control
system, whereas the Commission’s rule
requires the CCO to establish, in
consultation with the board or the
senior officer, procedures for the
handling, management response,
remediation, retesting, and closing of
noncompliance issues, and to have a
meeting with the board or senior officer
at least once a year. These provisions
are compatible if the CCO works in
36 RFEDs are required to designate a CCO and
prepare an annual compliance certification under
current Commission regulations. See 17 CFR 5.18(j).
37 See Joint Report of the SEC and the CFTC on
Harmonization of Regulation at 68 (Oct. 16, 2009),
available at www.cftc.gov/PressRoom/
PressReleases/pr5735–09 (discussing relevant case
law establishing a fiduciary duty standard for
FCMs).

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consultation with the senior officer (as
permitted under § 3.3 as adopted) to
establish a monitoring system. The
board would receive the benefit of two
views on effectiveness of compliance
policies—one from managers who
implement the policies, and one from a
monitor of the managers, who is the
CCO.

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2. Harmonization With CCO Rule of the
Financial Industry Regulatory Authority
(FINRA)
Although the Commission reviewed
and considered the existing FINRA rules
for BDs’ CCOs, the duties and
requirements of a CCO under section
4s(k) of the CEA are far more specific
than the general policies, procedures,
and testing requirements of the FINRA
rule. Thus, the proposed rule
necessarily differed in both form and
substance from the FINRA rule, which
was not mandated by statute.
FIA and SIFMA argued that the
proposal should be harmonized with
existing precedent for compliance
models in the financial services
industry (such as those applicable to
BDs), and that NFA, of which SDs and
MSPs will be required to be members,
should have primary responsibility for
setting compliance standards.
Newedge argued that jointly
registered BD–FCMs should be able to
apply the requirements of FINRA Rule
3130, which Newedge considers to be
better designed, and only comply with
the Commission’s rules if no
comparable provision exists in Rule
3130. Newedge also argued that NFA
has extensive experience dealing with
FCM CCOs and is best positioned to
determine their proper role.
Rosenthal commented that the
substantial experience of FINRA and
NFA in dealing with conduct and
compliance should be relied upon, with
FINRA Rule 3130 as a guide.
Market participants 38 in a May 17,
2011 meeting (May Meeting) with
Commission staff stated that the
Commission’s rules differed from
FINRA’s rules in three main ways:
resolution vs. mitigation of conflicts, the
term ‘‘ensure compliance’’ in the
Commission’s rules, and whether the
CEO or the CCO certifies the annual
report. The participants also stated that,
without revisions to the proposed rule,
they would be required to prepare two
38 Representatives from the SEC and Commission
staff met with industry participants including
representatives of FIA, SIFMA, UBS Financial
Services, Inc., MF Global, Morgan Stanley,
JPMorgan Chase & Co., Pershing, Alliance
Bernstein, and Newedge USA on May 17, 2011. See
http://comments.cftc.gov/PublicComments/.

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annual reports: one for FINRA and one
for the Commission.
Having considered these comments,
the Commission has determined it is
unable to conform the rule fully to
match the FINRA standard for CCOs of
BDs and still meet the statutory
requirements of section 4s(k). However,
the Commission believes the purpose of
the rule is supplemental to—not
contradictory with—the relevant
provisions of FINRA Rules 3010, 3012,
and 3130.
As explained by commenters, the
CCO customarily has acted as an
advisor, and has not had the ability to
enforce compliance policies by directing
staff or making hiring and firing
decisions. By way of contrast, new
section 4s(k) of the CEA requires that
the CCO resolve conflicts of interest, be
responsible for administering certain
policies and procedures, and ensure
compliance with the CEA. While the
Commission has attempted to be
responsive to the traditional role of
compliance officers in the financial
services industry, the Commission does
not believe that FINRA’s rules provide
a model that would encompass all of the
statutory provisions in section 4s(k).
The Commission believes, however, that
the changes to the rule discussed below
will broadly harmonize the final rule
with FINRA standards and allow a CCO
of a dual registrant to fulfill the duties
required by both rules without undue
duplication or contradiction.
Notably, as explained above, the
Dodd-Frank Act required that FCMs
designate CCOs, whereas the Act did
not establish a similar requirement that
BDs must designate CCOs under the
securities laws. Accordingly, the
distinction between treatment of FCMs
and BDs has a statutory basis.
3. Regulatory Structure
In the CCO NPRM, the Commission
requested comment on whether the
structure of the proposed rules allows
for sufficient flexibility.
EEI urged the Commission to follow
the Federal Energy Regulatory
Commission’s approach by setting forth
principles or attributes of an effective
compliance program while leaving the
details to the registrant.
Rosenthal argued that the rule should
allow for flexibility because the role of
a CCO varies, and should not be a ‘‘one
size fits all,’’ while NSCP commented
that the proposed rules ‘‘strike an
appropriate balance’’ between
aspirational standards and forcing all
entities to conform to one standard.
Cargill commented that if the scope of
the rules is limited to a registrant’s swap
dealing division, the provisions in the

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proposed rule are ‘‘in general reasonable
and provide flexibility so that each
swap dealer can apply the general
requirements to its own business
structure.’’
Commodity Markets Council (CMC)
requested that the Commission clarify
whether registration as an SD due to
activities in one commodity would
require compliance obligations for all
activities of an integrated firm, require
compliance obligations on the activities
of an involved affiliate, or require
compliance obligations for just those
activities in the underlying commodity.
NFA and the FHLBs commented that
the rules should explicitly permit the
CCO to share any other executive role,
such as CEO, to provide flexibility for
smaller firms. NFA also argued that the
rules should recognize that compliance
expertise may reside with more than
one individual, and thus the
Commission should consider allowing
an entity to designate multiple CCOs, so
that each CCO’s primary area of
responsibility is defined, and each CCO
should be required to perform duties
and responsibilities with respect to their
defined area. NFA also recommended
that CCOs explicitly be permitted to
consult with other employees, outside
consultants, lawyers, and accountants.
Newedge, Hess Corporation (Hess),
and The Working Group argued that
affiliated FCM/SD/MSPs that are
separate legal entities should be
permitted to share the same CCO to
increase compliance efficiency. The
Working Group also argued that the
CCO of affiliated registrants should be
allowed to report to a board of an
affiliated entity that controls both
entities. Better Markets, on the other
hand, commented that a senior CCO
should have overall responsibility of
each affiliated and controlled entity,
even if individual entities within the
group have CCOs. Better Markets also
recommended that the rule require the
CCO office to be located remotely from
the trading floor.
In response to EEI’s recommendation
that the Commission set forth general
principles akin to those required by
FERC, the Commission observes that the
statutory regime established by Congress
would not permit such an approach.
The Commission agrees with
commenters that CCOs should be
permitted to ‘‘wear multiple hats.’’ In
other words, the Commission confirms
that a CCO may share additional
executive responsibilities and/or be an
existing officer within the entity. This is
particularly appropriate in smaller
firms, which may lack sufficient scale to
employ a stand-alone CCO. However,
employing a stand-alone CCO may be

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appropriate in a larger firm, depending
on the scale of its operations and degree
of the CCO’s responsibilities.
Additionally, the Commission confirms
that nothing in the rules would prohibit
multiple legal entities from designating
the same individual as CCO, but the rule
as adopted will require the CCO to
report to each entity’s board or senior
officer, rather than to the board or senior
officer of a consolidated corporate
parent.
The Commission has determined not
to permit designation of multiple CCOs
with delineated areas of responsibility
because this arrangement would not
comply with sections 4d(d) and 4s(k) of
the CEA, which require FCMs, SDs, and
MSPs to ‘‘designate an individual to
serve as chief compliance officer.’’ In
response to NFA’s concern about CCOs
being able to rely on the expertise of
others, the annual report certification
language in the rule as adopted
containing the qualifier ‘‘to the best of
his or her knowledge and reasonable
belief’’ would permit the CCO to rely on
other experts for statements made in the
annual report.
As previously noted, the Commission
is clarifying in the final rules that the
CCO’s duties extend only to the
activities of the registrant that are
regulated by the Commission, namely,
swaps activities of SDs and MSPs and
the derivatives activities included in the
definition of FCM under section 1(a)(28)
of the CEA.

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4. Public Availability of the Annual
Report
The Working Group commented that
it is likely that the annual report will
not be considered confidential
information protected from Freedom of
Information Act requests, and could
expose registrants to legal and
reputational risk if made public. The
Working Group also argued that the
report may force firms to make
disclosures prior to having remedial
actions agreed with the Commission and
put into effect, and could grant valuable
insight to competitors. The Working
Group recommended that the
Commission take steps to ensure that
the information remains confidential
and should make explicit that there is
no private right of action for
misstatements and inaccurate content in
the report. EEI also expressed concern
about disclosure of confidential or
proprietary information if the report
would be made public. FIA and SIFMA
recommended that the Commission
make the report nonpublic by including
it in the list of exempted items in
Commission regulation § 145.5.

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In response to these comments, the
Commission notes that a registrant may
request confidential treatment under
§ 145.9 for information submitted to the
Commission under these regulations.
Accordingly, an FCM, SD, or MSP must
petition for confidential treatment of its
annual report under § 145.9 if it wants
the Commission to determine that a
particular annual report should be
subject to confidentiality.
5. Definitions—§ 3.1
Proposed amendments to Part 3 of the
Commissions regulations in the CCO
NPRM added chief compliance officers
to the definition of ‘‘principal’’ in
§ 3.1(a)(1), and added definitions of
‘‘compliance policies’’ and ‘‘board of
directors’’ at § 3.1(g) and (h),
respectively.
a. Definition of ‘‘Principal’’—§ 3.1(a)(1)
The proposed regulations modified
the definition of ‘‘principal’’ in Part 3 to
include a CCO as an example of a
person ‘‘having the power, directly or
indirectly, through agreement or
otherwise, to exercise a controlling
influence over the entity’s activities that
are subject to regulation by the
Commission.’’
Rosenthal argued that declaring the
CCO to be a principal adds no incentive
for qualified individuals to become a
CCO because he or she could be liable
outside his/her area of competence or
control. Rosenthal also argued that it
should be the firm’s responsibility to
comply, with ultimate responsibility for
compliance placed with the firm’s
senior management. EEI argued that the
proposal is overly prescriptive, that
requiring the CCO to be a principal
would require significant changes to
current practice, and that the reporting
structure should be left to each
individual firm. On the other hand,
Cargill commented that the requirement
to be listed as a principal applies
statutory disqualification standards that
are clear and objective.
NFA recommended that the proposed
change to the definition of ‘‘principal’’
be modified to mention the CCO earlier
in the definition rather than listing the
position as an example of a person with
supervisory authority over business
personnel (i.e., a position with power to
exercise a controlling influence). NFA
stated that the rule should clarify that
the CCO is not a line supervisor, nor
does the CCO have supervisory
authority over personnel.
FIA and SIFMA argued that, although
the FINRA CCO rules require the CCO
to register as a ‘‘general securities
principal,’’ FINRA has explicitly stated
that this ‘‘does not create the

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presumption that a chief compliance
officer has supervisory responsibilities
or is otherwise a control person.’’ FIA
and SIFMA recommended that the
Commission make a similar qualifying
statement when promulgating the final
rules.
Considering these comments, the
Commission is modifying the proposed
rule to list the position of CCO within
the definition of principal separately for
each type of entity as recommended by
NFA, rather than as an example of
someone in a position to exercise a
controlling influence. The Commission
believes that this modification addresses
the issue sufficiently, without the need
to incorporate the qualifying statement
recommended by FIA and SIFMA.
However, this change should not be
interpreted to undermine the CCO’s
ability to fulfill the CCO’s duties as
provided for under the CEA and by
Commission regulation.
b. Definition of Compliance Policies—
§ 3.1(g)
The proposed regulations defined
‘‘compliance policies’’ broadly to
include all policies required to be
adopted or established by the registrant
pursuant to the CEA and regulations,
including a code of ethics.
The Working Group requested that the
Commission clarify that the proposed
rules do not require that a firm must
adopt a code of ethics, but only that in
its annual report the firm provide a
description of a code of ethics to the
extent that it has one.
The National Whistleblowers Center
(NWC) recommended that the
Commission establish a rule that
provides contact with internal
compliance departments with the same
whistleblower protection as contacts
with the Commission. NWC also
recommended that the Commission
require registrants to adopt a code of
ethics and conduct that contain rigorous
whistleblower protections. Finally,
NWC recommended that the
Commission require an effective
compliance program with the following
components: Consistent enforcement of
the company’s code of conduct;
professional management of the help
line; vigorous enforcement of nonretaliation policies; effective compliance
and ethics risk-assessment; integration
of clear, measurable compliance and
ethics goals into the registrant’s annual
plan; direct access and reporting by the
CCO to a compliance-savvy board;
strong compliance and ethics
infrastructure; compliance audits to
uncover law-breaking; CEO action to
promote compliance; and shared
learning within the registrant.

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In order to achieve maximum
consistency across the CCO provisions
for SDs, MSPs, FCMs, DCOs, SDRs, and
SEFs, the Commission has deleted the
definition of ‘‘compliance policies’’
from the rule. The Commission believes
this definition is unnecessary given the
overall changes to the scope of the
review required by the annual report,
discussed below. The changes to the
scope of the review of the annual report
track the language of the statute in that
the annual report will require a
description of the written policies and
procedures, including a code of ethics
and conflicts of interest policies. The
annual report separately will require a
description of material compliance with
the CEA and Commission regulations.
In response to The Working Group’s
comment, the Commission notes that
the statute requires that the CCO
prepare and sign an annual report that
contains a description of each policy
and procedure, including the code of
ethics and conflicts of interest policies.
Whether a firm decides to adopt a
separate code of ethics in furtherance of
this requirement is left to its discretion.
In response to NWC’s comments, the
Commission takes note of NWC’s points
related to whistleblowers as sound
practices. However, these additional
requirements, such as requiring specific
whistleblower provisions in codes of
ethics or conduct are outside the scope
of this rulemaking.
6. Designation of Chief Compliance
Officer—§ 3.3(a)
Proposed § 3.3(a) required each SD,
MSP, and FCM to designate an
individual as a CCO and provide the
CCO with the full responsibility and
authority to develop and enforce, in
consultation with the board or senior
officer, appropriate policies and
procedures to fulfill the duties set forth
in the CEA and regulations.
EEI argued that a CCO should work in
concert with business and control
functions to assure appropriate policies
are in place, but that the proposed rules
go beyond what is required by the CEA
by inappropriately imposing upon the
CCO full responsibility to develop and
enforce all policies. Newedge also
commented that CCOs generally do not
have full responsibility to develop and
enforce compliance policies, and cites a
Security Industry Association White
Paper that states: ‘‘* * * there is a huge
difference between the role of the
Compliance Department and its
personnel, and the overall broad firm
responsibility ‘to comply’ with
applicable rules and regulations. The
Compliance Department plays an
integral support function for firm

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compliance programs, but only senior
management and business line
supervisors ultimately are responsible
for ensuring firm compliance with laws
and regulations.’’
Rosenthal commented that the
Commission’s rules should be revised in
a manner that reflects the view that the
CCO is only an advisor to management
and should not be viewed as an enforcer
of policies within the FCM, as that
would represent a ten-year step
backward in governance.
In an attempt to balance the
traditional role of compliance officers in
the financial service industry with the
statutory requirements and policy
objectives of promoting a strong culture
of compliance, the Commission is
revising proposed § 3.3(a) to (i) remove
the requirement that a CCO be provided
with ‘‘full’’ responsibility and authority;
(ii) remove the requirement that a CCO
‘‘enforce’’ policies and procedures; (iii)
limit the responsibilities of the CCO to
the ‘‘swaps activities’’ of SDs and MSPs,
and the FCMs’ derivatives activities
included in the definition of FCM under
section 1(a)(28) of the CEA; and (iv)
clarify that a CCO need only develop
policies and procedures to fulfill the
duties set forth in, and ensure
compliance with, the CEA and
Commission regulations. The
Commission is making the changes to
§ 3.3(a) to alleviate commenters’
concerns about the use of the term
‘‘enforce’’ and about the scope of the
CCO’s duty to develop policies and
procedures.
7. Reporting Line—§ 3.3(a)(1) & (2)
Proposed § 3.3(a)(1) required that the
CCO report to the board of directors or
the senior officer of a registrant, that the
board or senior officer approve the
compensation of the CCO, and that the
board or senior officer meet with the
CCO at least once a year to discuss the
effectiveness of compliance policies and
their administration by the CCO.
Proposed § 3.3(a)(2) also prohibited the
board or senior officer of a registrant
from delegating its authority over the
CCO, including the authority to remove
the CCO.
The CCO NPRM requested comment
on the degree of flexibility in the
reporting structure, including whether it
would be more appropriate for a CCO to
report to the board or the senior officer;
whether the board or the senior officer
is a stronger advocate on compliance
matters; whether the proposed reporting
structure should address issues related
to affiliates; and whether the rule
should include a provision requiring a
majority of the board to remove the
CCO. The proposal also requested

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comment regarding whether it is
necessary to adopt rules for the CCO
regarding conflicts of interest between
compliance interests, commercial
interests, and ownership interests of a
registrant.
Cargill recommended that the
definition of board of directors be
expanded to include a governing body
of a division, such as a management
committee, if the SD registration applies
to activities within a division of a larger
company, rather than the company as a
whole. Cargill also recommended that
the Commission add a definition of
‘‘senior officer’’ and that it include a
senior officer of a division, because a
division might be more familiar with the
swaps activities of an SD. Cargill and
The Working Group each argued that a
requirement that a CCO can be removed
only by a majority of the members of a
governing body would be inflexible, and
should not be added to the rules.
The Working Group argued that the
CCO should be allowed to report to a
board of an affiliated entity that controls
both the affiliate and the registrant. The
Working Group also argued that the
CCO should be permitted to operate
under the direction of other corporate
officers, even middle level officers, so
that the CCO is not an independent
inspector general that operates outside
the traditional reporting structure
within a corporate entity. EEI also
argued that the proposal is overly
prescriptive and recommends that the
reporting structure be left to each
individual firm. Similarly, FIA and
SIFMA commented that although the
board is the ultimate supervisory
authority, the CCO should not be
required to directly report to it. Instead,
firms should be free to determine the
reporting structure as long as
independence and authority as a control
function is maintained. FIA and SIFMA
recommended, for example, that the
CCO be allowed to report to the chief
legal officer or the chief risk officer.
On the other hand, Rosenthal
commented that the CCO should report
to the board or, if the registrant is not
a corporation, to the senior officer.
Rosenthal also commented that the CCO
should be prohibited from receiving any
transaction or customer-based
compensation to insulate the CCO from
potential conflicts. NSCP also agreed
that CCOs should report to senior
management and have compensation set
by managers that are not influenced by
the profitability of particular business
units. NSCP noted that new
Organizational Sentencing Guidelines
consider whether individuals with
operational responsibility for
compliance and ethics have direct

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reporting obligations to the governing
authority or an appropriate subgroup
thereof (like an audit committee of a
board), which the proposed rules would
require. NSCP recommended that a
provision be added to the proposed
rules to make it illegal for a registrant
to coerce a CCO improperly, similar to
the one for CCOs of investment
companies and independent public
accountants.
Better Markets and Chris Barnard
recommended that decisions to
designate or terminate a CCO, as well as
compensation decisions, be prescribed
as the sole responsibility of independent
members of the board of directors, or
audit committee, acting by majority
vote, and not the responsibility of the
executive officer. Better Markets also
recommended that both the board and
the senior officer be required to meet
with the CCO to discuss the
effectiveness of compliance policies,
and that such meetings be held at least
quarterly. Better Markets further
recommended that the CCO’s duties be
performed in consultation with both the
board and the senior officer.
National Whistleblowers Center
(NWC) recommended that the term
‘‘senior officer’’ be defined as the CEO
or chairman of the board, and should
not be the general counsel or a
subordinate employee to the CEO. NWC
believes that the rule should permit the
CCO to report to the full board at any
time with no interference from a board
committee or a CEO. NWC also argued
that the rule should prohibit
termination of the CCO unless the CCO
is presented the opportunity to address
the board.
MetLife requested that the definition
of board of directors include ‘‘(or
committee of such board or governing
body)’’ to permit it to continue its
current practice of delegating particular
responsibilities to expert committees of
the whole board (i.e., audit, finance,
investments, risk, and compensation).
NFA also sought additional flexibility in
the reporting structure for CCOs,
provided that the firm’s business unit is
not permitted to impose undue pressure
on a CCO regarding compliance.
Newedge recommended that the CCO
be required to meet at least quarterly
with the board or senior officer to
discuss the effectiveness of compliance
policies.
The Working Group believes it is not
necessary to address conflicts of interest
between compliance interests and
commercial interests in the rule because
the independent audit requirements
imposed by the Sarbanes Oxley Act
already address such conflicts.

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Having considered these comments,
the Commission will not permit CCOs to
report to committees of a board of
directors. Section 4s(k) of the CEA
requires the CCO to ‘‘report directly’’ to
the board or the senior officer of the SD
or MSP. In other contexts (for example
the risk management duties rules for
SDs and MSPs discussed above),
reporting to committees of the board is
permitted. However, in this context, the
Commission believes that the statutory
requirement that the CCO report directly
to the board or senior officer does not
afford such discretion. The Commission
is guided by the policy objectives of
section 4s(k) in reaching the same
conclusion with regard to FCMs, and
observes that no currently registered
FCM requested that the CCO report to a
committee of the board. Indeed,
Rosenthal, and FCM, agreed with the
requirement that CCOs for FCMs report
to a board of directors if the entity has
one, or the senior officer, if the entity
does not have a board.
In response to Cargill’s comments, the
Commission notes that under the CEA
and under the rules as adopted, a
registrant may elect to have the CCO
report to the senior officer of the
registrant. Because, ‘‘senior officer’’ is
not defined, if a division of a larger
company is a registered SD, then the
CCO of such registrant could report to
the senior officer of that division.
In order to preserve CCO
independence, the Commission is not
changing the requirement that only the
board or the senior officer can hire, set
compensation for, and remove the CCO.
However, in order to promote
consistency among the CCO rules for
registrants and registered entities, the
Commission is modifying proposed
§ 3.3(a)(1) and (2) to (i) require only that
the CCO and board or senior officer
meet once a year and at the election of
the CCO, but not mandate the content of
such meeting; and (ii) to clarify that
only the board or senior officer may
remove the CCO.
The Commission believes that
additional requirements, such as
providing the CCO an opportunity to
address the board prior to removal,
requiring more frequent meetings
between the CCO and the board or
senior officer, restricting the
composition of CCO compensation, or
mandating independent director
approval, would be overly prescriptive
and unnecessary to achieve the
purposes of the rule. Similarly, the
Commission believes that a provision
prohibiting improper coercion is
unnecessary because the rule adequately
ensures CCO independence through a
direct reporting line to the board or

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senior officer and by requiring
compensation decisions to be made by
the board or a senior officer.
8. Qualifications—§ 3.3(b)
As proposed, § 3.3(b) required the
CCO to have the background and skills
appropriate for fulfilling the
responsibilities of the position, and
prohibited an individual who is
statutorily disqualified under sections
8a(2) or 8a(3) of the CEA from serving.39
The proposal requested comments
regarding whether additional limitations
should be placed on CCOs, such as a
prohibition on designating a registrant’s
counsel as CCO.
NFA argued that the statement that no
individual disqualified from registration
under section 8a(2)–(3) of the CEA may
serve as a CCO is redundant because an
SD, MSP, or FCM’s registration could be
denied or revoked under section 8a(2)–
(3) of the CEA if any principal of the
registrant is subject to a statutory
disqualification. NFA argues that
inclusion of this qualification in the
proposed rule could appear to convey a
different standard for CCOs than for
other principals.
Cargill commented that the
requirement for a CCO to have ‘‘the
background and skills appropriate’’ is a
commendable aspirational goal but is
too vague a standard for Federal law,
and is best reserved as a business
decision. Cargill agreed that the
requirement to be listed as a principal
applies statutory disqualification
standards that are clear and objective.
Newedge recommended that CCOs be
required to pass a specific compliance
examination and obtain a specific
compliance license, as is the case in the
securities world. On the other hand,
NSCP does not believe that CCOs
should have to pass a qualification exam
or otherwise have a certain number of
years in the industry, given the diversity
of the registrant community. The
Working Group also commented that
wide latitude for qualifications of a CCO
is necessary.
EEI argues that the general counsel
and other attorneys should be allowed
to be the CCO because they are subject
to ethics considerations and a
prohibition on conflicts in their
representation. NFA also recommended
that the CCO be permitted to be an
attorney who represents the registrant or
its board as long as the conflict can be
39 These CEA sections contain an extensive list of
matters that constitute grounds pursuant to which
the Commission may refuse to register a person,
including, without limitation, felony convictions,
commodities or securities law violations, and bars
or other adverse actions taken by financial
regulators.

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managed and duties discharged.
Rosenthal and Hess felt that persons
with legal training may be well-suited as
CCOs, and that the rule requirement to
demonstrate compliance proficiency is
reasonable. To the contrary, Better
Markets argued that a CCO should not
be permitted to be an attorney that
represents the SD, MSP, or FCM, or its
board because the potential conflict
would disqualify such an attorney.
Having considered these comments,
the Commission is adopting the rule
substantially as proposed, with only a
technical change to clarify the
references to sections 8a(2) and 8a(3) of
the CEA. The Commission believes it is
important for the ‘‘Qualifications’’
section of the rule to put registrants on
notice of the possible disqualification of
CCO candidates pursuant to the CEA.
The benefit of such notice outweighs the
concern of creating an appearance of a
different standard for CCOs than for
other principals. The Commission is
retaining the ‘‘background and skills’’
qualification in the final rule because
the standard effectively will prohibit
appointment of unqualified persons as
CCO. However, the Commission does
not believe that it is necessary to require
a proficiency exam for CCOs at this
time.
The Commission also agrees with
Better Markets that there may be a
potential conflict if a member of the
legal department or the general counsel
of a registrant also served as the
registrant’s CCO. The Commission notes
that the final rules for SDRs prohibited
members of the legal department or the
entity’s general counsel from serving as
CCO.40 On the other hand, the final
rules for derivative clearing
organizations did not include the same
prohibition.41 Given the diversity of
FCMs and probable diversity of SDs and
MSPs and cost considerations, the
Commission is taking a flexible
approach in these final rules and is not
prohibiting a member of the legal
department or general counsel from
serving as CCO for an SD, MSP, or FCM.
However, should a CCO be a member of
the registrant’s legal department, the
Commission expects the CCO and
registrant to articulate clearly the
segregation of that individual’s CCO and
non-CCO responsibilities. All reports
required under sections 4d(d) and 4s(k)
of the CEA, as well as the rules
promulgated pursuant thereto, are
meant to be made available to the
40 See Swap Data Repositories: Registration
Standards, Duties and Core Principles, 76 FR 54538,
54584 (Sept. 1, 2011).
41 See 17 CFR 39.10; Derivatives Clearing
Organization General Provisions and Core
Principals, 76 FR 69334, 69434 (Nov. 8, 2011).

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Commission, and as such, they should
not be subject to the attorney-client
privilege, the work-product doctrine, or
other similar protections.
9. Duty To Establish Compliance
Policies—§ 3.3(d)(1)
Proposed § 3.3(d)(1) required the CCO
to establish the registrant’s compliance
policies in consultation with the board
of directors or senior officer.
Hess and Newedge each argued that
the proposal concentrates too much of
the compliance function on a single
individual to the exclusion of other
members of senior management and
day-to-day business line supervisors.
Hess argued that overemphasis on the
independent role of the CCO and
concentrating responsibility is less
effective than integration. Instead, Hess
recommended that the CCO should
remain the monitor of the compliance
monitors, which they could not be if
they are responsible for compliance.
The Commission believes that section
4s(k) of the CEA requires that the CCO
administer the compliance policies, but
that it does not require the CCO to
establish all of a registrant’s compliance
policies. To alleviate some of the
commenters’ concerns regarding
concentration of the compliance
function, the Commission is revising the
proposed rule to track more closely the
statutory language of section 4s(k).
10. Duty To Resolve Conflicts of
Interest—§ 3.3(d)(2)
Following section 4s(k)(2)(C) of the
CEA, proposed § 3.3(d)(2) required the
CCO, in consultation with the board or
senior officer, to resolve any conflicts of
interest that may arise.
NFA commented that resolution of
conflicts of interest should rest with the
board or the senior officer, in
consultation with the CCO. FIA and
SIFMA also commented that the CCO
should not be deemed to be a business
line supervisor and the rule should not
fundamentally change the role of the
CCO, which has customarily been an
independent advisor to the business line
supervisors that are ultimately
responsible for compliance. FIA and
SIFMA argued that when Congress used
the term ‘‘resolve any conflicts of
interest that may arise,’’ Congress did
not mean resolve in the executive or
managerial sense, requiring a CCO to
examine the facts and determine the
course of action. Instead, FIA and
SIFMA recommended that the rule be
revised to provide a definition of
‘‘resolving conflicts of interest’’ that
reads: ‘‘designing a system of conflict
identification, assessment and
resolution, advising on conflict

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20161

avoidance or mitigation alternatives,
and escalating inadequate management
responses to conflicts to senior
management. * * *’’ Newedge
commented that the CEO and business
line supervisors are in a better position
than the CCO to resolve conflicts.
Newedge believes that any transfer of
regulatory responsibility currently held
by executive officers to the CCO could
have the unintended effect of reducing
the amount of time and level of concern
such officers will spend on compliance
matters.
Participants in the May Meeting with
Commission staff stated that the phrase
‘‘resolve any conflicts of interest’’ would
traditionally be interpreted as
eliminating a conflict of interest, but
that elimination is not always
preferable. The participants commented
that further interpretation is needed to
permit conflicts of interest to be
addressed, mitigated, or conditioned as
well. Participants argued that the role of
a compliance officer is to advise the
business line of acceptable and
unacceptable alternatives, and if the
business line chooses an unacceptable
alternative, then the compliance officer
must escalate the problem until an
acceptable alternative is selected.
However, participants strongly believed
that the compliance officer should not
be the actual decision maker in the
resolution.
Having considered these comments,
the Commission is not removing the
requirement that the CCO ‘‘resolve’’
conflicts of interest from the rule
because the requirement is provided for
in section 4s(k)(2)(C) of the CEA.
However, the Commission confirms, as
suggested by commenters, that the term
‘‘resolve’’ encompasses both elimination
of the conflict of interest as well as
mitigation of the conflict of interest, and
that the CCO’s role in ‘‘resolving’’
conflicts of interest may involve actions
other than making the final decision.
The Commission notes that the SEC has
taken a similar approach in the
preamble of its equivalent CCO
proposal.42
42 See Business Conduct Standards for SecurityBased Swap Dealers and Major Swap Participants,
76 FR 42396, 42436 (July 18, 2011) (stating ‘‘we
would anticipate that the CCO’s role with respect
to such resolution and mitigation of conflicts of
interest would include the recommendation of one
or more actions, as well as the appropriate
escalation and reporting with respect to any issues
related to the proposed resolution of potential or
actual conflicts of interest, rather than decisions
relating to the ultimate final resolution of such
conflicts’’).

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11. Duty To Review and Ensure
Compliance—§ 3.3(d)(3)
Following the statutory text of section
4s(k)(2)(E) of the CEA, proposed
§ 3.3(d)(3) required the CCO to review
and ‘‘ensure compliance’’ by the
registrant with the registrant’s
compliance policies and all applicable
laws and regulations.
FIA and SIFMA argued that the term
‘‘ensure compliance’’ needs to be
clarified, because the common usage of
the word (i.e., to guarantee) goes well
beyond any existing compliance model
and creates a standard that is impossible
to satisfy. FIA and SIFMA further
argued that the requirement to
remediate non-compliance issues, and
the discussion of management’s
response to remediation, acknowledges
that instances of noncompliance are not
wholly preventable by any person, and
that it is management’s responsibility
for implementing compliance policies.
Instead, FIA and SIFMA recommended
that the phrase should mean taking
reasonable steps to adopt, review, test,
and modify compliance policies, and
pointed to the Commission’s RFED rule,
which requires each RFED to designate
a CCO that must certify that the RFED
has in place policies and procedures
‘‘reasonably designed to achieve
compliance with the Act, rules,
regulations and orders thereunder.’’ FIA
and SIFMA also recommended that the
Commission add a provision in the
definition of compliance policies and
procedures to include ‘‘procedures for
escalating inadequate management
responses to apparent material
violations of compliance policies and
procedures to the appropriate level of
senior management * * * depending on
the facts and circumstances of the issues
being addressed.’’
The Working Group argued that the
requirement to ‘‘ensure compliance’’
should not be adopted literally from the
statute, because it is an impossible task.
The Working Group recommended that
the rules be revised to avoid suggestions
that an incident of noncompliance by a
firm might constitute or evidence a
failure by a CCO to meet its statutory or
regulatory responsibilities.
NSCP argued that ‘‘ensure
compliance’’ imposes a level of
responsibility on a CCO that cannot be
discharged and is inconsistent with the
customary role of a compliance officer.
Instead, NSCP recommended that the
CCO ‘‘administer the system of
compliance that is designed to ensure
compliance with compliance policies
and applicable law.’’ NSCP concedes
that although the statutory language
may be viewed as constraining, it offers

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section 501 of the Gramm-Leach-Bliley
Act as an example of constraining
language modified by regulation. NSCP
stated that section 501 of that act
required financial institutions to adopt
safeguards to ‘‘ensure the security and
confidentiality of personal
information,’’ but that banking
regulators modified the standard to
require adoption of safeguards
‘‘designed to ensure the security and
confidentiality of personal
information.’’ NSCP further argued that
the business units within registrants
either obey the law or violate it, and a
CCO is limited to providing guidance,
monitoring for compliance, and
reporting on the business activities.
NFA commented that it should not be
the duty of the CCO to ensure
compliance by the FCM, SD, or MSP
because it is an impracticable standard
and imposes a duty to supervise a firm’s
business activities. NFA argued that the
rules improperly redefine a CCO’s
duties, and registrants will have
difficulty retaining CCOs who are
willing to perform these duties. NFA
believes that FINRA’s Rule 3130 sets
forth the appropriate role of a CCO.
Participants in the May Meeting with
Commission staff stated that the CCO’s
responsibility to escalate (repeatedly if
necessary) a problem that has not been
resolved could serve as a possible
meaning of the term ‘‘ensure
compliance’’ when applied to the CCO
position.
EEI believes that a basic tenet of
modern compliance is that compliance
departments advise, monitor, assist, and
escalate to a governing body if
necessary. EEI argued that the act of
complying must be borne and executed
by the business, and imposing
responsibility on the CCO could
abrogate responsibility of senior
management and other employees.
Newedge believes that the CCO
should be required only to review
whether a registrant has established
policies designed to achieve compliance
and that the responsibility to enforce
compliance should lie with the business
line. Newedge believes the enormity of
the obligations assigned to the CCO
would result in inadequate means of
ensuring compliance, defeating the
plain purpose of the statute.
In response to the comments received
regarding the role of the CCO in
ensuring compliance, the Commission is
modifying the proposed rule to provide
that the CCO must take ‘‘reasonable
steps to ensure compliance.’’ The
Commission believes that this approach
is responsive to commenters’ concerns,
is consistent with the final rules for

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SDRs 43 and DCOs,44 and is broadly
consistent with the SEC’s proposal for
the duties of a CCO of a security-based
swap dealer or a major security-based
swap participant.45
In response to comments advocating a
purely advisory role for the CCO, the
Commission observes that the role of the
CCO required under the CEA, as
amended by the Dodd-Frank Act, goes
beyond what has been represented by
commenters as the customary and
traditional role of a compliance officer.
While the Commission does not believe,
as some commenters have suggested,
that the CCO’s duties under the CEA or
§ 3.3 requires that the CCO be granted
ultimate supervisory authority by a
registrant, it is the Commission’s
expectation that the CCO will, at a
minimum, be afforded supervisory
authority over all staff acting at the
direction of the CCO. Recent events
have demonstrated the importance of
the active compliance monitoring duties
required of the CCO under the DoddFrank Act, as implemented through
these regulations.
12. Duty To Prepare, Sign, and Certify
Compliance Annual Report—§ 3.3(d)(6)
Proposed § 3.3(d)(6) required the CCO
of an SD, MSP, or FCM to prepare, sign,
and certify, under penalty of law, the
annual report specified in section
4s(k)(3) of the CEA.
Rosenthal commented that FINRA’s
approach to certification is preferable,
i.e., that the CEO certifies that the firm
has processes to establish, maintain,
review, test, and modify written
compliance policies and written
supervisory procedures reasonably
designed to achieve compliance with
securities laws, regulations, and FINRA
rules, based on a report by the CCO.
FIA, SIFMA, and Newedge each argued
that section 4s(k)(3) of the CEA requires
the CCO to sign the annual report, but
does not require the CCO to certify the
report. FIA, SIFMA, MFA, Newedge,
43 See Swap Data Repositories: Registration
Standards, Duties and Core Principles, 76 FR at
54584 (stating that the duties of an SDR’s CCO
include ‘‘[t]aking reasonable steps to ensure
compliance with the [CEA] and Commission
regulations’’).
44 See Derivatives Clearing Organization General
Provisions and Core Principals, 76 FR at 69434
(stating that the duties of a DCO’s CCO include
‘‘[t]aking reasonable steps to ensure compliance
with the [CEA] and Commission regulations’’).
45 See Business Conduct Standards for SecurityBased Swap Dealers and Major Security-Based
Swap Participants, 76 FR 42396, 42458–59 (July 18,
2011) (requiring the CCO of a security-based swap
dealer or major security-based swap participant to
‘‘[e]stablish, maintain and review policies and
procedures reasonably designed to ensure
compliance with the Act and the rules and
regulations thereunder’’).

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and NFA all recommended that the rule
be revised to require the CEO to certify
the report. Participants in the May
Meeting with Commission staff stated
that requiring the CEO, rather than the
CCO, to make a certification as to
whether policies are in place that are
reasonably designed to ensure
compliance appropriately shares
responsibility between compliance and
business management. FIA and SIFMA
recommended that if the Commission
requires the CCO to certify the annual
report, then with respect to any
Commission registrant that is also a BD,
the Commission also should require the
CEO to make the certification
Rosenthal argued that requiring the
CCO to certify under penalty of law will
make the CCO liable for firm infractions
and will give disgruntled customers a
roadmap for frivolous lawsuits.
Newedge also believes that the
requirement to certify under penalty of
law is not fair or practicable because
whoever certifies will have to rely on
many individuals to compile the report.
On the other hand, Hess commented
that the certification language strikes an
appropriate balance such that strict
liability is not imposed for inadvertent
errors. NSCP commented that the
certification that the report is accurate
and complete should have a materiality
qualifier added to it. Participants in the
May Meeting with Commission staff
requested clarification as to how the
certification of the accuracy and
completeness of the information in the
annual report might be kept separate
from matters of opinion expressed in the
annual report. The participants urged
the Commission to adopt a standard for
the annual report certification that is
reasonably attainable.
FIA and SIFMA requested that the
Commission clarify that criminal
liability for the certification will not
apply (absent a knowing and willful
materially false and misleading
statement) because there is no
indication that Congress ever thought
CCOs should be subject to criminal
liability. Similarly, NSCP requested that
the Commission clarify whether ‘‘under
penalty of law’’ means liability under 18
U.S.C. 1001 for a false statement to a
Federal officer. FIA and SIFMA also felt
that imposing criminal liability for
annual report certifications would make
it hard to fill the position of CCO.
EEI argued that although section
4s(k)(3) of the CEA requires the CCO to
certify the report, any additional content
requirements for the annual report
beyond what section 4s(k)(3) requires
will make the certification more
difficult.

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In response to these comments, with
respect to certification by the CCO, the
Commission is modifying the proposed
rule to permit either the CCO or the CEO
to make the required certification.
Section 4s(k)(3)(A) of the CEA requires
the CCO to sign the annual report and
section 4s(k)(3)(B)(ii) requires that the
annual report contain a certification
that, under penalty of law, the
compliance report is accurate and
complete. Given the statutory provisions
and under these circumstances, the
Commission believes it is appropriate to
afford SDs, MSPs, and FCMs the
discretion to choose whether the CCO or
CEO will make the certification.
The Commission disagrees with
commenters that a mere certification
that policies are in place that are
reasonably designed to achieve
compliance would satisfy the
requirements of section 4s(k)(3) of the
CEA. The Commission believes that the
statute also requires a CCO to assess
how compliance policies are
implemented.
The Commission is of the view that
limiting the certification with the
qualifier ‘‘to the best of his or her
knowledge and reasonable belief’’
addresses commenters’ concerns of
overbroad liability because the rule
would not impose liability for
compliance matters that are beyond the
certifying officer’s knowledge and
reasonable belief at the time of
certification. If the certifying officer has
complied in good faith with policies
and procedures reasonably designed to
confirm the accuracy and completeness
of the information in the annual report,
both the registrant and certifying officer
would have a basis for defending
accusations of false, incomplete, or
misleading statements or
representations made in the annual
report.
With respect to requests for
clarification of the liability that may
attach to the certification ‘‘under
penalty of law,’’ the Commission notes
that administrative, civil, and/or
criminal liability could be imposed on
the registrant or the certifying officer or
both, either directly or vicariously. As
explained in the NPRM, possible
violations could include a claim of
failure to supervise or false statements
to the Commission, and the Commission
could seek an injunction against future
violations, civil monetary penalties,
and/or any other appropriate relief.
Additionally, criminal penalties may be
sought by criminal authorities for
willful violations of the CEA or
Commission regulations, in appropriate
cases.

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20163

The Commission is declining to add
a materiality qualifier to the
certification, as suggested by
commenters. This approach is
consistent with the statutory text, with
the approach taken in final rules for
SDRs 46 and DCOs,47 and with proposed
CCO rules for SEFs.48
13. Description and Review of
Compliance in Annual Report—
§ 3.3([e])(1) and (2)
The proposed regulation required the
annual report to contain a description of
the compliance by the registrant with
respect to the CEA and regulations; a
description of each of the registrant’s
compliance policies; and a review of
each applicable requirement under the
CEA and regulations, and, with respect
to each, identification of the policies
that ensure compliance, an assessment
as to the effectiveness of the policies,
discussion of areas of improvement, and
recommendations of potential or
prospective changes or improvements to
its compliance program and resources
devoted to compliance.
NSCP, The Working Group, EEI, and
Hess each argued that the level of detail
contemplated by the rule would impose
unnecessary burdens on the CCO with
little offsetting benefits. NSCP argued
that a better approach would be to
follow the SEC requirements for annual
reviews of compliance by registered
investment advisers. NSCP stated that
such reviews must reflect review of the
adequacy of policies established and the
effectiveness of their implementation
(SEC Rule 206(4)–7(b)). NSCP believes
the proposed rule is overbroad and
discourages reporting of compliance
issues to the CCO because if every issue,
no matter how trivial, must be reported
and recorded, there may be a chilling
effect on open communication. NSCP
believes that the key issue should be
whether material issues were escalated
and remedied. Newedge argued that
thousands of Federal, SRO, and internal
rules apply, so the report should contain
a summation of compliance, with
details only for areas of material
noncompliance.
FIA and SIFMA argued that a onesize-fits-all approach to the annual
report requirements is not appropriate
because some registrants are not public
reporting companies, some have
customers while others only conduct
46 See Swap Data Repositories: Registration
Standards, Duties and Core Principles, 76 FR at
54584.
47 See Derivatives Clearing Organization General
Provisions and Core Principals, 76 FR at 69435.
48 See Core Principles and Other Requirements for
Swap Execution Facilities, 76 FR 1214, 1252 (Jan.
7, 2011).

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proprietary trading, some deal with
retail customers while others only deal
with sophisticated counterparties, and
some are small and local, while others
are large, integrated institutions with
thousands of employees worldwide.
FIA and SIFMA recommended that
the Commission specify the material
issues that should be discussed, so that
there is no second guessing with respect
to the adequacy of the report, and that
the Commission clarify that compliance
policies only include those relating to
the CEA and Commission regulations.
FIA, SIFMA, and NFA also argued that
the report should identify the policies
that are reasonably designed to result in
compliance, not that ensure compliance.
Hess recommended that the annual
report contain only a summary of the
registrant’s compliance policies and
procedures. CMC commented that the
scope of activities included in the
annual report should be limited to those
directly triggering the requirement of a
CCO. EEI argued that inclusion of
descriptions of violations in the report
to the Commission should not be
decided by the CCO, but should be
decided on a case-by-case basis by the
registrant’s governing body. NFA
requested that a materiality qualifier be
added to the requirement that
registrants include a description of noncompliance.
Better Markets recommended that the
board approve the annual report in its
entirety or specify where and why it
disagrees with any provision, and then
CCOs should provide the report to the
Commission either as approved or with
statements of disagreement.
The Working Group recommended
that the Commission develop a standard
form of report and guidance as to how
such report needs to be completed.
In response to the comments received,
the Commission is modifying the
proposed requirements for the annual
report in § 3.3([e]) to (i) require the
annual report to contain a description of
the registrant’s policies and procedures,
rather than a description of the
compliance of the registrant; (ii) require
the annual report to identify the
registrant’s policies and procedures that
‘‘are reasonably designed’’ to ensure
compliance, rather than those that
ensure compliance; (iii) require a
description of material non-compliance
issues. The Commission agrees with
commenters that certain information
need be reported only if it is materially
significant and that the requirement to
‘‘ensure compliance’’ can be interpreted
to mean ‘‘safeguard’’ rather than
‘‘guarantee.’’

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14. Certification of Compliance With
Sections 619 and 716 of the Dodd-Frank
Act in Annual Report—§ 3.3([e])(3)
The proposed regulation required
registrants to include in the annual
report a certification of compliance with
sections 619 and 716 of the Dodd-Frank
Act (the Volcker Rule and Derivatives
Push-Out), and any rules adopted
pursuant to these sections.
NFA recommended that the
certification of compliance with
sections 619 and 716 of Dodd-Frank be
deleted, arguing that the Commission
should wait for the implementing
rulemakings for such sections before
determining certification requirements.
FIA and SIFMA commented that the
requirement to certify compliance with
the Volcker Rule and Derivatives PushOut provisions should be included as
part of the rulemaking that will address
the scope and requirements of those
provisions, but not be prematurely
included in the CCO rule.
In consideration of these comments,
the Commission has determined not to
finalize this provision.
15. Description of Compliance
Resources in Annual Report—
§ 3.3([e])(6)
Proposed § 3.3([e])(6) required the
annual report to contain a description of
the registrant’s financial, managerial,
operational, and staffing resources set
aside for compliance with the CEA and
regulations, including any deficiencies
in such resources.
FIA and SIFMA argued that the CCO
is not in a position to describe the
financial, material, operational, and
staffing resources set aside for
compliance. FIA and SIFMA
recommended that the CCO only be
required to describe the resources of the
compliance department and any
recommendations that the CCO has
made to senior management with regard
to financial, managerial, operational, or
staffing resources.
The Working Group argued that a
description of deficiencies in resources
dedicated to compliance would require
a CCO to identify potential
shortcomings and report them in a
document likely to be available to the
public, which could materially hinder
the CCO’s ability to function as an
integral member of the management
team.
Having considered these comments,
the Commission is adopting the rule as
proposed, but with the addition of a
materiality standard with respect to the
description of any deficiency. The
Commission does not believe that the
required description of resources

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available for compliance would hinder
the CCO’s ability to fulfill his or her
duties in coordination with others in the
firm. The rule requires a description of
compliance resources, but does not
prescribe the form or manner of this
description, which the Commission
views as within the reasonable
discretion of the registrant.
16. Delineation of Roles of the Board
and Senior Officer in Addressing
Conflicts of Interest in Annual Report—
§ 3.3([e])(7)
The proposed regulations required the
annual report to include a delineation of
the roles and responsibilities of a
registrant’s board of directors or senior
officer, relevant board committees, and
staff in addressing any conflicts of
interest, including any necessary
coordination with, or notification of,
other entities, including regulators.
FIA and SIFMA argued that the
Sarbanes-Oxley Act already requires
public companies to report the roles and
responsibilities of its board, senior
officers, and committees in resolving
conflicts of interest, so the Commission
should allow such reporting to satisfy
this content requirement for the annual
report. NFA also recommended that the
reporting of any necessary coordination
with, or notification of other entities,
including regulators, should be deleted.
In response to FIA, SIFMA, and
NFA’s comments, the Commission is
deleting § 3.3([e])(7) from the final rule.
This provision is not essential to the
Commission’s evaluation of registrants’
compliance programs, and if it is
relevant to a material compliance
matter, it will be provided to the
Commission pursuant to § 3.3([e])(6).
The Commission also notes that
removing this provision will make the
CCO requirements for FCMs, SDs, and
MSPs more consistent with the CCO
requirements for SDRs and DCOs, and
those proposed for SEFs.
17. Recordkeeping—§ 3.3([g])
Proposed § 3.3([g]) required FCMs,
SDs, and MSPs to maintain records of
its compliance policies, materials
provided to the board in connection
with its review of the annual
compliance report, and work papers that
form the basis of the annual compliance
report.
The Working Group argued that
retaining all materials relating to the
preparation of the report will cause the
CCO to retain all materials for fear of an
audit that second-guesses the CCO’s
materiality judgments, or the CCO will
limit his or her inquiries to avoid
making a determination of materiality.
The Working Group recommended that

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materials to be retained should be only
those germane to the content of the
compliance report.
Better Markets recommended adding
a requirement that discussions between
a CCO and traders or executives with
oversight of traders involving
compliance and trading practices and
strategies be recorded by the CCO and
retained in the CCO’s records. Better
Markets believes this requirement is
necessary because the duties of the CCO
could come into conflict with the
interests of traders and managers.
The Commission is adopting the rule
as proposed. In response to The
Working Group’s comment, the
Commission believes the rule
sufficiently qualifies the materials that
must be retained by stating that the
records must be ‘‘relevant’’ to the
annual report. With regard to Better
Markets’ recommendation that CCOs
record discussions with traders and
executives regarding compliance and
trading practices, the Commission
believes that this material will be
covered by the rules to the extent that
the annual report requires the CCO to
assess the effectiveness of the
registrant’s policies and procedures and
describe any material non-compliance
issues and the corresponding action
taken. Consequently, any conflicts that
arise between the CCO and the trading
unit of an SD, MSP, or FCM in which
the CCO believes that the requirements
of the CEA and Commission regulations,
including risk management obligations,
are not being met, must be included in
the annual report. Additionally, under
§ 3.3(g)(1)(iii), all records of that conflict
as described in the annual report must
be maintained. The Commission further
notes that in such instances, it would be
good practice for the CCO to make and
maintain records of all discussions with
traders and management.

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III. Effective Dates and Compliance
Dates
In the Duties NPRM, Recordkeeping
NPRM, and CCO NPRM, the
Commission requested comment on the
length of time necessary for registrants
to come into compliance with the
proposed rules.
A. Comments Regarding Compliance
Dates
The Working Group recommended
that the Commission not require
compliance with proposed §§ 23.600
through 23.607 for at least two years,
not require compliance with proposed
§§ 23.200 through 23.205 for six to
twelve months to provide adequate time
to develop the necessary information
technology systems and business

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practices, and not require compliance
with the CCO designation requirement
of proposed § 3.3 for one year after
registration. With respect to § 23.601,
The Working Group also commented
that if complex requirements are
included in position limit rules, such as
the requirement to convert customized
bilateral transactions into futuresequivalents, substantially more time
will be required for firms to design and
implement procedures to monitor
compliance with position limits. With
respect to proposed § 3.3, The Working
Group commented that entities should
be able first to hire a CCO and then be
permitted a reasonable period of time in
which to write, test, and implement
policies and procedures. With respect to
all of the proposed rules, The Working
Group recommended that the
Commission provide an extended
transition period for firms that have not
been prudentially regulated by a
financial regulator and might require
substantial corporate restructuring.
FIA, ISDA, SIFMA, and the Financial
Services Forum argued that if existing
systems are not easily adaptable to
§§ 23.200 through 23.205, the
Commission must provide sufficient
time for registrants to make the
necessary changes in an orderly manner,
but no specific time period was
provided. FIA, ISDA, SIFMA, and the
Financial Services Forum also
recommended that compliance with
proposed § 3.3 should not be required
until after the regulatory requirements
under section 4s of the CEA for which
the CCO is responsible are finalized and
become effective.
Cargill recommended that the
Commission provide SDs with at least
one year to come into compliance with
proposed §§ 23.600 through 23.607
following the effective date of the rules.
Cargill also stated that one year was a
reasonable period to comply with
proposed § 3.3.
MetLife recommended that the
Commission allow one year from
registration as an MSP to comply with
the proposed §§ 23.600 through 23.607,
because such compliance will require
hiring required human capital
resources, build out of necessary
information technology, development of
policies and procedures and internal
vetting of a mandated risk management
program. MetLife also stated that it
would it would require one year after
registration to recruit a CCO and
develop a compliance program in
compliance with proposed § 3.3.
NSCP stated that 18 months was
necessary for registrants that do not
currently have a CCO to comply with
proposed § 3.3.

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20165

The Bank of Tokyo-Mitsubishi UFJ,
Ltd., Mizuho Corporate Bank, Ltd., and
Sumitomo Mitsui Banking Corporation
recommended that the effective date of
the rules be deferred until December 31,
2012.
The Commission received no
comments related to the length of time
necessary for registrants to come into
compliance with the rules proposed in
the SD/MSP Conflicts NPRM and FCM/
IB Conflicts NPRM.
B. Compliance Dates
Having considered the comments
received, the Commission is adopting
the effective and compliance dates as set
forth below.
1. Reporting, Recordkeeping and Daily
Trading Records of SDs and MSPs—
§§ 23.200–23.205
The effective date of §§ 23.200
through 23.205 will be the date that is
60 days after publication of the final
rules in the Federal Register.
SDs and MSPs that are currently
regulated by a U.S. prudential regulator
or are registrants of the SEC must
comply with §§ 23.200, 23.201, 23.202,
23.203, 23.204, and 23.205 by the date
that is the later of 90 days after
publication of these final rules in the
Federal Register or the date on which
SDs and MSPs are required to apply for
registration pursuant to § 3.10. SDs and
MSPs that are not currently regulated by
a U.S. prudential regulator and are not
registrants of the SEC must comply with
§§ 23.200, 23.201, 23.202, 23.203,
23.204, and 23.205 by the date that is
the later of 180 days after publication of
these final rules in the Federal Register
or the date on which SDs and MSPs are
required to apply for registration
pursuant to § 3.10.
2. Duties of SDs and MSPs—§§ 23.600
Through 23.607
The effective date of §§ 23.600
through 23.607 will be the date that is
60 days after publication of the final
rules in the Federal Register.
With respect to § 23.600 (Risk
Management Program), SDs and MSPs
that are currently regulated by a U.S.
prudential regulator or are registrants of
the SEC must comply with § 23.600 by
the date that is the later of 90 days after
publication of this final rule in the
Federal Register or the date on which
SDs and MSPs are required to apply for
registration pursuant to § 3.10. SDs and
MSPs that are not currently regulated by
a U.S. prudential regulator and are not
registrants of the SEC must comply with
§ 23.600 by the date that is the later of
180 days after publication of this final
rule in the Federal Register or the date

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on which SDs and MSPs are required to
apply for registration pursuant to § 3.10.
With respect to § 23.603 (Business
Continuity and Disaster Recovery), SDs
and MSPs that are currently regulated
by a U.S. prudential regulator or are
registrants of the SEC must comply with
§ 23.603 by the date that is the later of
180 days after publication of this final
rule in the Federal Register or the date
on which SDs and MSPs are required to
apply for registration pursuant to § 3.10.
SDs and MSPs that are not currently
regulated by a U.S. prudential regulator
and are not registrants of the SEC must
comply with § 23.603 by the date that is
the later of 270 days after publication of
this final rule in the Federal Register or
the date on which SDs and MSPs are
required to apply for registration
pursuant to § 3.10.
With respect to § 23.601 (Monitoring
of Position Limits), § 23.602 (Diligent
Supervision), § 23.605 (Conflicts of
Interest Policies and Procedures),
§ 23.606 (General Information:
Availability for Disclosure and
Inspection), and § 23.607 (Antitrust
Considerations), SDs and MSPs must
comply with §§ 23.601, 23.602, 23.605,
23.606, and 23.607 by the later of the
effective date of these rules or the date
on which SDs and MSPs are required to
apply for registration pursuant to § 3.10.

the SEC, must comply with § 3.3 by the
date that is the later of 180 days after
publication of this final rule in the
Federal Register or the date on which
SDs and MSPs are required to apply for
registration pursuant to § 3.10. SDs and
MSPs that are not currently regulated by
a U.S. prudential regulator and are not
registrants of the SEC must comply with
§ 3.3 by the date that is the later of 360
days after publication of this final rule
in the Federal Register or the date on
which SDs and MSPs are required to
apply for registration pursuant to § 3.10.
FCMs that are (1) registered with the
Commission as of the effective date of
the rule, and (2) currently regulated by
a U.S. prudential regulator or are
registrants of the SEC, must comply
with § 3.3 by the date that is 180 days
after publication of this final rule in the
Federal Register. FCMs that are (1)
registered with the Commission as of
the effective date of the rule, and (2) not
currently regulated by a U.S. prudential
regulator and are not registrants of the
SEC must comply with § 3.3 by the date
that is 360 days after publication of this
final rule in the Federal Register. FCMs
that are not registered with the
Commission as of the effective date of
this rule must comply with § 3.3 upon
registration with the Commission.

3. Conflicts of Interest Policies and
Procedures by FCMs and IBs—§ 1.71
The effective date of § 1.71 will be the
date that is 60 days after publication of
the final rule in the Federal Register.
FCMs and IBs that are registered with
the Commission as of the effective date
of this rule must comply with § 1.71 by
such effective date except that such
FCMs need not comply with § 1.71(d)
until the later of the effective date or the
date on which SDs and MSPs are
required to apply for registration
pursuant to § 3.10. FCMs and IBs that
are not registered with the Commission
as of the effective date of this rule must
comply with § 1.71 upon registration
with the Commission, except that such
FCMs need not comply with § 1.71(d)
until the later of their registration or the
date on which SDs and MSPs are
required to apply for registration
pursuant to § 3.10.

A. Introduction
The swaps markets, which have
grown exponentially in recent years, are
now an integral part of the nation’s
financial system. As the financial crisis
of 2008 demonstrated, inadequate
understanding, oversight, and
management of swaps can contribute to
systemic risk.49 The internal business
conduct standards that the Commission
is promulgating for SDs and MSPs in
this rulemaking are an important
element of the ‘‘improve[d] financial

4. Chief Compliance Officer of FCMs,
SDs, and MSPs—§ 3.3
The effective date of § 3.3 and the
amendments to § 3.1 will be the date
that is 60 days after publication of the
final rule in the Federal Register.
With respect to § 3.3 (Chief
Compliance Officer), SDs and MSPs that
are currently regulated by a U.S.
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IV. Cost Benefit Considerations

49 As the U.S. Senate Committee on Banking,
Housing, and Urban Affairs explained in reporting
what became the Dodd-Frank Act, while a
‘‘downturn in the national housing market’’ was the
2008 financial crisis’ ‘‘first trigger:’’
* * * the use of unregulated derivatives products
based on [faulty mortgage loans was among the
elements that] only served to spread and magnify
the risk. The system operated on the wholesale
misunderstanding of, or complete disregard for the
risks inherent in the underlying assets and the
complex instruments they were backing * * *’
Technology, plus globalization, plus finance has
created something quite new, often called
‘‘financial technology.’’ Its emergence is a bit like
the discovery of fire—productive and transforming
when used with care, but enormously destructive
when mishandled’ * * * Gaps in the regulatory
structure allowed these risks and products to
flourish outside the view of those responsible for
overseeing the financial system.
S. Rep. No. 111–176, at 43 (2010) (quoting former
Comptroller of the Currency, Eugene Ludwig;
citations omitted).

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architecture’’ that Congress intended in
enacting the Dodd-Frank Act.50 For, as
entities that, respectively, engage in
swap dealing activities 51 and ‘‘whose
outstanding swaps create substantive
counterparty exposure that could have
serious adverse effects on the financial
stability of the United States banking
system or financial markets,’’ 52 the
standards that SDs and MSPs follow (or
fail to follow) in transacting their swaps
may have repercussions for financial
system stability more broadly. Effective
systemic risk management for swaps
begins with effective internal risk
management protocols of individual
SDs and MSPs.
Title VII of the Dodd-Frank Act
mandates the Commission to establish
risk management requirements for SDs
and MSPs. Specifically, Section 731
adds new section 4s of the CEA that,
among other things:
• Establishes reporting,
recordkeeping, and daily trading records
requirements for SDs and MSPs.53
• Defines and imposes duties on SDs
and MSPs with regard to: (1) Risk
management procedures,54 (2)
monitoring of trading to prevent
violations of applicable position
limits,55 (3) diligent supervision,56 (4)
disclosure and the ability of regulators
to obtain general information,57 and (5)
antitrust considerations.58
• Establishes conflicts-of-interest
requirements for SDs and MSPs to
establish information partitions between
research and trading and between
trading and clearing.59
• Requires each SD and MSP to
designate a chief compliance officer, set
out qualifications and duties of the chief
compliance officer, and require that the
chief compliance officer prepare, sign,
and furnish to the Commission an
annual report containing an assessment
of the registrant’s compliance
activities.60
Additionally, Dodd-Frank Act section
732 amends section 4d of the CEA to
add conflict of interest requirements for
50 Id. at 228. Stated another way, they are an
aspect of that legislation’s ‘‘comprehensive
regulation and rules’’ to achieve a ‘‘strengthened
infrastructure for the financial system * * *
intended to make the system more resilient and
resistant to the adverse effects of financial
instability.’’ Id. at 228–29.
51 CEA section 1(a)(49)(A).
52 CEA section 1(a)(33)(A)(ii).
53 CEA section 4s(f)&(g).
54 CEA section 4s(j)(2).
55 CEA section 4s(j)(1).
56 CEA section 4s(h)(1).
57 CEA section 4s(j)(3).
58 CEA section 4s(j)(6).
59 CEA section 4s(j)(5).
60 CEA section 4s(k).

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FCMs and IBs,61 and a chief compliance
officer requirement for FCMs.62 This
rulemaking implements these
provisions of sections 4s and 4d of the
CEA.
Section 15(a) 63 of the CEA requires
the Commission to consider the costs
and benefits of its actions before
promulgating a regulation under the
CEA or issuing an order. Section 15(a)
further specifies that the costs and
benefits shall be evaluated in light of the
following five broad areas of market and
public concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. To the
extent that these new regulations reflect
the statutory requirements of the DoddFrank Act, they will not create costs and
benefits beyond those resulting from
Congress’s statutory mandates in the
Dodd-Frank Act.64 However, to the
extent that the new regulations reflect
the Commission’s own determinations
regarding implementation of the DoddFrank Act’s provisions, such
Commission determinations may result
in other costs and benefits. It is these
other costs and benefits resulting from
the Commission’s own determinations
pursuant to and in accordance with the
Dodd-Frank Act that the Commission
considers with respect to the section
15(a) factors.
The Commission is obligated to
estimate the burden of and provide
supporting statements for any
collections of information it seeks to
establish under considerations
contained in the PRA, 44 U.S.C. 3501 et
seq., and to seek approval of those
requirements from the OMB. To the
extent costs of the rulemaking are
associated with collections of
information, the estimated burden and
support for such collections of
information, as well as the
consideration of comments thereto, are
discussed in the PRA section of this
rulemaking and the information
collection requests filed with OMB as
61 CEA

section 4d(c).
section 4d(d).
63 7 U.S.C. 19(a).
64 Certain commenters, such as The Working
Group and the FHLBs, posit that there is no benefit
to be derived from internal business conduct
standards as mandated by Congress and that the
mandated provisions do not generate sufficient
benefits relative to costs or contribute to the
purposes (e.g., mitigating systemic risk and
enhancing transparency) of the Dodd-Frank Act. As
such, these commenters’ concerns fall outside the
Commission’s regulatory discretion to implement
sections 4s and 4d of the CEA and fail to raise
issues subject to consider under section 15(a).

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required by that statute. The
Commission has also considered these
costs, which it incorporates herein by
reference, in its CEA section 15(a)
analysis.
In each of the NPRMs encompassed
within this final rulemaking, the
Commission asked for public comment
on the costs and benefits of the
proposed regulations, and specifically
invited commenters to submit ‘‘any data
or other information * * * quantifying
or qualifying’’ the costs and benefits of
the proposal.65 The Commission also
separately requested comments on the
overall costs and benefits of the
proposed rules implementing the DoddFrank Act.66 The Commission received
approximately 51 comments addressing
the cost and benefit considerations of
the proposed rules, but few commenters
presented to the Commission
quantitative data pertinent to any of the
proposed rulemakings, and no
commenter stated whether such data is
ascertainable with a degree of certainty
that could inform Commission
deliberations. After conducting a review
of applicable academic literature, the
Commission is not aware of any
research reports or studies that are
directly relevant to its considerations of
costs and benefits of these final rules.
The Commission considered the
comments on the costs and benefits of
the proposed rules and, in particular,
reasonable alternatives suggested by
commenters. As detailed in the
discussions of each rulemaking above,
the Commission is adopting alternatives
or modifications to the proposed rules
where, in the Commission’s judgment,
the alternative or modification
accomplishes the same regulatory
objective in a less burdensome manner.
Indeed, the Commission has sought to
reduce the burden on market
participants to the extent doing so
satisfies the statute’s requirements and
does not undermine important benefits
that the Commission believes the statute
was intended to promote. In addition to
benefits, the costs of the regulations and
the steps the Commission has taken to
mitigate them are discussed below.
Notwithstanding the paucity of
available quantitative information, the
Commission has endeavored to estimate
quantifiable costs and benefits of the
final rules when possible. Where
estimation or quantification is not
feasible, the Commission provides a
qualitative assessment of the relevant
65 See SD/MSP Conflicts NPRM, 75 FR at 71395;
FCM/IB Conflicts NPRM, 75 FR at 70157; Duties
NPRM, 75 FR at 71404; Recordkeeping NPRM, 75
FR at 76673; and CCO NPRM, 75 FR at 70886.
66 Id.

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costs and benefits. In the following
discussion, the Commission: (i)
Addresses comments regarding the
effects of these final rules in terms of
their material costs and benefits; (ii)
considers the material cost and benefit
implications of these final rules in
comparison to baseline costs imposed
by the statutory requirements and
discusses cost mitigation undertaken in
modifying the rules as proposed; and
(iii) considers the material costs and
benefits of the final rules in light of the
five broad areas of market and public
concern pursuant to section 15(a) of the
CEA. After discussing some general
considerations applicable to all
rulemaking areas covered by this release
and comments regarding rule scope, the
cost-benefit considerations are divided
among the following rulemaking areas:
recordkeeping; duties and risk
management; conflicts-of-interest
policies and procedures; and
designation of a CCO.
B. General Considerations
This rulemaking generated an
extensive record, which is discussed at
length throughout this notice as it
relates to the substantive provisions in
the final rules. A number of commenters
stated that they would incur significant,
though largely unquantified, costs
because of the proposed rules. Others
identified benefits attributable to the
proposed rules or more stringent
requirements. The Commission
carefully considered these comments
and the alternatives proposed in them.67
In response to the Commission’s
invitation for comments on the overall
costs and benefits of the proposed
rules,68 Better Markets stated that the
Commission’s cost-benefit analyses in
the notices of proposed rulemaking may
have understated the benefits of the
proposed rules.69 Better Markets argued
67 These comments also have been addressed in
other sections of this release. This section’s
consideration of costs and benefits reviews and
assesses them to the more narrow extent that they
raise relative cost/benefit issues. A complete policy
analysis of, and response to, these comments can
be found in section II of this release.
68 See SD/MSP Conflicts NPRM, 75 FR at 71395;
FCM/IB Conflicts NPRM, 75 FR at 70157; Duties
NPRM, 75 FR at 71404; Recordkeeping NPRM, 75
FR at 76673; and CCO NPRM, 75 FR at 70886.
69 See Letter from Better Markets dated June 3,
2011(comment file for 75 FR 71397 (Regulations
Establishing and Governing the Duties of Swap
Dealers and Major Swap Participants)). On the other
hand, certain commenters, such as The Working
Group and the FHLBs, posit that there is no benefit
to be derived from internal business conduct
standards as mandated by Congress and that the
mandated provisions do not generate sufficient
benefits relative to costs or contribute to the
purposes (e.g., mitigating systemic risk and
enhancing transparency) of the Dodd-Frank Act.

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that adequate assessment of the costs
and benefits of any single proposed rule
or element of such a rule would be
difficult or impossible without
considering the integrated regulatory
system of the Dodd-Frank Act as a
whole. According to Better Markets:

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It is undeniable that the Proposed Rules are
intended and designed to work as a system.
Costing-out individual components of the
Proposed Rules inevitably double counts
costs which are applicable to multiple
individual rules. It also prevents the
consideration of the full range of benefits that
arise from the system as a whole that
provides for greater stability, reduces
systemic risk and protects taxpayers and the
public treasury from future bailouts.

Better Markets also stated that an
accurate cost benefit assessment must
include the avoided risk of a new
financial crisis and opined that one
measure of this is the still accumulating
cost of the 2008 financial crisis.70 The
Commission agrees with Better Markets
that the proposed rules should operate
in a coordinated manner to improve and
protect financial markets;
notwithstanding this, the Commission
must (and has) conducted a cost-benefit
analysis with respect to this specific
rulemaking.
Recognizing that there will be costs
incurred to comply with the regulations,
the Commission believes there are
significant benefits to be gained from
these requirements, including but not
limited to, increased risk management
and enhanced transparency. While the
Commission notes that the costs and
benefits stemming from these
regulations, in large part, are
attributable to the baseline statutory
mandate, each subsection herein further
details the costs and benefits of the
numerous discrete provisions of the
rules in order to inform market
participants more fully of the costs and
benefits anticipated by the Commission.
As a general matter across these rules,
the Commission sought to ease the
burden for market participants through
tailored phasing in of compliance
requirements. In each of the Duties
NPRM, Recordkeeping NPRM, and CCO
NPRM, the Commission requested
comment on the length of time
necessary for registrants to come into
compliance with the proposed rules.
These comments are enumerated in
section III.A., and the Commission
considered those comments in adopting
compliance dates for each rule as set
70 The comment letter cited Andrew G. Haldane,
Executive Director for Financial Stability of the
Bank of England, who estimated the worldwide cost
of the crisis in terms of lost output at between $60
trillion and $200 trillion, depending primarily on
the long term persistence of the effects.

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forth in section III.B. above. The
approach recommended by commenters
and accepted by the Commission
recognizes and generally differentiates
between registrants that have been
previously regulated by the SEC or a
prudential regulator and those that have
not been previously regulated. The
Commission has elected to provide
additional time for compliance, where
appropriate, for those that have not been
previously regulated. In many instances,
the Commission is providing more time
for all market participants beyond the
statutorily prescribed minimum of 60
days.
C. Comments Regarding the Scope of
the Proposed Rules
Several commenters questioned the
scope of the proposed rules and
implicitly, if not expressly, whether the
breadth as proposed was appropriate in
light of the costs that would result to
certain registrants. Comments
illustrative of the concerns are
discussed below.
The FHLBs articulated several
reasons 71 for exempting them from the
proposed internal business conduct
standard rules. First, they maintain that
subjecting FHLBs to internal business
conduct standards could cause them to
cease offering swaps transactions to
their risk-hedging members, depriving
their members of a competitive swap
transaction counterparty and potentially
increasing members’ hedging costs.
Second, they maintain that many of the
requirements duplicate those imposed
by their prudential regulator, the
Federal Housing Finance Agency
(FHFA), thus there is no incremental
benefit attributable to the additional
costs of complying with the proposed
rules.72
The Commission finds the FHLB’s
position unpersuasive. First, the
concern that FHLBs would cease
transacting swaps is undermined by the
FHLB’s position that the proposed rules
in large part duplicate the requirements
of its prudential regulator; if internal
business conduct standards would
likely curb the FHLBs’ swaps activity,
presumably that would have occurred
already. Second, the Commission
construes the FHLB’s position to be
inconsistent with the statutory intent of
sections 4s(f), (g), (j), and (k)—i.e.,
71 In addition to the two reasons discussed, the
FHLBs also expressed that, unlike external business
conduct standards, the internal business conduct
standards as mandated by Congress in the DoddFrank Act do not generate benefits to justify their
costs. As noted above, this concern falls beyond the
Commission’s implementation discretion.
72 SIFMA made a similar argument with respect
to all SDs and MSPs that are subject to regulation
by a prudential regulator.

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consistent Commission oversight of SDs
and MSPs, regardless of whether they
are also subject to regulation by a
prudential regulator. For, in the one area
that Congress intended the Commission
to defer to prudential regulation with
respect to SDs and MSPs—capital and
margin requirements—it provided so
expressly.73 There is no such express
language requiring prudential regulation
deference in sections 4s(f), (g), (j), and
(k). This gives rise to a negative
inference that, with respect to them,
Congress intended the Commission to
establish uniform requirements for SDs
and MSPs, notwithstanding any
overlapping prudential regulation. In
addition, to the extent that, as the
FHLBs assert, FHFA rules are
substantively similar with the proposed
rules, compliance with the proposed
rules should not present substantial
additional compliance costs.
The Working Group suggested that the
proposed rules would impose
substantial costs with no corresponding
increase in risk management and
compliance effectiveness. The
Commission disagrees. It believes that
its final internal business conduct
standards will enhance risk
management by requiring, among other
things: (1) SDs and MSPs to have a
complete understanding of the various
risks that the entity faces; and (2)
entities to monitor their traders for
compliance with trading policies
established by the SD or MSP. These
final rules also require that SDs and
MSPs have sound recordkeeping
policies in place, which will ensure that
swap transactions are fully
memorialized. Sound risk management
and internal controls on an individual
firm level is the basis of systemic risk
mitigation.
Other commenters (MetLife, MFA,
BlackRock, and AMG) argued that the
Dodd-Frank Act does not require the
Commission to apply the same rules to
MSPs as those applied to SDs, and that
MSPs should not be subject to the same
regulations as SDs because MSPs do not
engage in market-making activities.
These commenters contend that the
costs of compliance would be too high
for MSPs. The Commission believes that
the statutory baseline under sections
4s(f), (g), (j), and (k) of the CEA is
identical treatment of SDs and MSPs.
The statutory provisions of sections
4s(f), (g), (j), and (k) of the CEA do not
distinguish between the requirements
applied to SDs and those applied to
MSPs. Additionally, in response to
claims that the costs will be too high for
MSPs, the Commission notes that if an
73 See

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MSP does not engage in certain
activities, the regulations pertaining to
those activities are not applicable.
Therefore, in these cases, the
Commission believes MSPs would be
relieved of any burden such regulations
present.
Finally, Cargill recommended that the
Commission make clear that the
Commission’s regulations only apply to
the swap dealing business of an SD that
is a division of a larger company, and
not to the other, non-swaps-related
business activities of the company.74
The Commission has accepted the
alternative proposed by Cargill by
including a new definition of ‘‘swaps
activities’’ in the final regulations and
by limiting the scope of several
requirements to fit this definition.
Adopting this alternative approach
should allow entities to understand
their duties and requirements under the
final regulations more clearly and
reduce costs by limiting the scope of the
rules’ applicability.
D. Recordkeeping, Reporting, and Daily
Trading Records Requirements for Swap
Dealers and Major Swap Participants
As added by section 731 of the DoddFrank Act, sections 4s(f) and 4s(g) of the
CEA establish reporting and
recordkeeping requirements and daily
trading records requirements for SDs
and MSPs. Section 4s(f)(1) requires SDs
and MSPs to ‘‘make such reports as are
required by the Commission by rule or
regulation regarding the transactions
and positions and financial condition of
the registered swap dealer or major
swap participant.’’ In the Recordkeeping
NPRM, the Commission proposed
regulations, pursuant to sections
4s(f)(1)(B)(i) and (ii) of the CEA,
prescribing the books and records
requirements for ‘‘all activities related to
the business of swap dealers or major
swap participants,’’ regardless of
whether or not the entity has a
prudential regulator, as required by
statute. In addition, the Commission
proposed regulations in the
Recordkeeping NPRM pursuant to
section 4s(g)(1) of the CEA, requiring
that SDs and MSPs ‘‘maintain daily
trading records of the swaps of the
registered swap dealer and major swap
participant and all related records
(including related cash and forward
transactions) and recorded
communications, including electronic
mail, instant messages, and recordings
of telephone calls.’’ The Commission
74 Presumably,

Cargill believes that limiting
application of Commission regulations to a specific
division, rather than the entirety of a larger
company, will result in cost savings, although it
does not directly advance this argument.

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notes that section 4s(g)(3) requires that
daily trading records for each swap
transaction be identifiable by
counterparty, and section 4s(g)(4)
specifies that SDs and MSPs maintain a
‘‘complete audit trail for conducting
comprehensive and accurate trade
reconstructions.’’
The Commission received 14
comment letters on the Recordkeeping
NPRM. The Commission considered
each in formulating the final rules,
including any alternatives proposed and
cost or benefit concerns expressed. Of
the 14 comments received, five
addressed issues relevant to the costs
and benefits of the proposed rules, but
no letters provided any quantitative data
to support their claims. The comment
letters focused on 9 areas of the rule that
are most relevant to the Commission’s
consideration of costs and benefits. Each
of these areas is discussed below. A
more detailed discussion can be found
in section II.B–E. above.
1. Additional Types of Records
In the Recordkeeping NPRM, the
Commission requested comments
regarding whether additional types of
records other than those specified in the
proposed rules under § 23.201 should be
required to be kept by SDs and MSPs.
The Commission also requested
comment regarding whether drafts of
documents should be kept. Having
considered the comments received,75
the Commission is not requiring any
additional types of records in the final
rule. Although the Commission agrees
that drafts may provide information
regarding the development of
transactions, the Commission does not
believe that the marginal incremental
value of such information is sufficient to
require draft retention. The Commission
also notes that pertinent pre-execution
trade information that may appear in
drafts is already subject to retention
under the daily trading records rule.
2. Reliance on SDRs for Recordkeeping
Requirements
The proposed regulations did not
address whether an SD or MSP could
fulfill the recordkeeping requirements
by reporting a swap to a swap data
repository (SDR), but ISDA & SIFMA
requested that the Commission consider
the extent to which SDs and MSPs may
rely upon SDRs to retain records beyond
the time periods that registrants
currently retain such records. ISDA &
75 The Working Group commented that the
current proposal is sufficient. Chris Barnard,
however, recommended that drafts of documents
should also be kept, arguing that the decision
process leading up to a final document can be very
informative.

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SIFMA did not elaborate on the current
retention periods for swaps records, nor
did they explain how this approach
would work in the absence of
established SDRs for all types of swaps.
The Commission considered this
alternative to its recordkeeping rules,
but determined that it is premature at
this time to permit SDs and MSPs to
rely solely on SDRs to meet their
recordkeeping obligations under the
rules. Additionally, the Commission
believes that SDs and MSPs must
maintain complete records of their
swaps for the purposes of risk
management. The data that is required
to be reported to an SDR may not be
sufficient for these purposes. At present,
SDRs are new entities under the DoddFrank Act with no track record of
operation; and, for particular swaps
asset classes, SDRs have yet to be
established. As SDRs evolve, the
proposed alternative may prove
appropriate, but the Commission
believes that putative cost-savings
benefits attributable to SDR record
retention in lieu of individual firm
record retention are too speculative
presently to justify modification of the
proposed rules.
3. Records in a Single Electronic File,
Searchable by Transaction and
Counterparty
Proposed § 23.201(a)(1) required SDs
and MSPs to keep transaction records in
a form identifiable and searchable by
transaction and by counterparty.
Proposed §§ 23.202(a) and 23.202(b)
also required SDs and MSPs to keep
daily trading records for each swap and
any related cash or forward transaction
as a separate electronic file identifiable
and searchable by transaction and
counterparty. Commenters had several
concerns with the costs of complying
with this requirement.76 In particular,
commenters objected to the burden of
maintaining the records required for
each transaction in a separate electronic
file and with maintaining the records in
a manner searchable by transaction and
counterparty. No commenter quantified
the exact cost of these requirements, but
the Commission recognizes that SDs and
MSPs would incur costs to comply with
both requirements. The Commission
retained the requirement that trading
records be searchable by transaction and
76 ISDA & SIFMA argued that SDs and MSPs
routinely store data across a number of systems, and
that aggregating transaction data from all systems
into a single electronic file would require a large
investment across market participants and would
require a substantial implementation period. The
Working Group also argued that tying relevant
records to each individual transaction in a manner
that is identifiable and searchable by transaction
would create a heavy technical burden.

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counterparty because it interprets this to
be the statutory minimum imposed by
section 4s(g)(3) of the CEA, i.e., that
registrants ‘‘maintain daily trading
records for each counterparty in a
manner and form that is identifiable
with each swap transaction.’’ However,
the Commission is modifying the
proposed rules to remove the provision
in § 23.202(a) and § 23.202(b) that
requires each transaction record to be
maintained as a separate electronic file.
The Commission believes that this
modification trims the rule’s
requirements to the baseline required by
statute, reducing the burden to the
maximum extent possible.

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4. Form of Maintaining Business
Records
As proposed, § 23.201(b) required SDs
and MSPs to keep full, complete, and
systematic business records, including
records related to corporate governance,
financial records, complaints, and
marketing and sales materials. The
Working Group recommended that, to
minimize burden, the Commission
permit these records to be retained as
they currently are in the normal course
of business. Responding to this concern,
the Commission confirms that the rule
does not require SDs and MSPs to keep
the required business records in a single
comprehensive file so long as such
records can be readily accessed and
provided to the Commission upon
request. This confirmation as requested
by The Working Group will minimize
the burden on SDs and MSPs with
regard to establishing new
recordkeeping policies.
5. Records of Complaints Received by
MSPs
Proposed § 23.201(b) required SDs
and MSPs to retain a record of
complaints received, certain identifying
information about the complainant, and
a record of the disposition of the
complaint. Without quantifying any
cost, MFA commented that, because
MSPs do not have customers nor make
markets in swaps, it is unwarranted to
subject them to the burden of retaining
a complaint record. The Commission
finds MFA’s position unpersuasive and
is adopting the rule as proposed. The
Commission has no basis to find that the
burden of maintaining a complaint
record will impose significant cost on
MSPs. Moreover, the Commission
believes that the relevant consideration
is not whether MSPs have customers or
whether they make markets, but the fact
that they have substantial swaps
positions and the potential significance
of their swaps activities that defines
them as MSPs. Given this, the

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Commission believes a record of
complaints, particularly if it establishes
a pattern, could be of important
regulatory value.
6. Recording of Pre-Execution Trade
Information, Including Voice
Recordings
Proposed § 23.202(a)(1) required SDs
and MSPs to make and keep records of
pre-execution trade information,
including records of all oral and written
communications concerning quotes,
solicitations, bids, offers, instructions,
trading, and prices that lead to the
execution of a swap, however
communicated. As explained above, the
Commission has eliminated the
requirement that pre-execution trade
information be maintained in a separate
electronic file for each transaction.
Otherwise the Commission is adopting
the rule as proposed despite
commenters concerns as to the cost of
the required recording 77 because it
believes the information specified in the
rule is the minimum necessary to
maintain an audit trail as statutorily
required by section 4s(g)(4) of the CEA.
7. Timestamp for Quotations Using
Universal Coordinated Time (UTC)
Proposed § 23.202 required SDs and
MSPs to use Universal Coordinated
Time to record the time of each
quotation provided to, or received from,
a counterparty prior to execution; the
time of swap and related cash and
forward transaction execution; and the
time of swap confirmation. The rule’s
use of UTC reflects an approach
consistent with the Commission’s final
rules for real-time public reporting,78
and the swap data reporting rule.79 By
requiring the use of UTC in § 23.202, the
Commission is ensuring that the
requirements of Part 23, Part 43, and
Part 45 remain consistent to the extent
possible. The Commission sees
important benefits deriving from
required UTC consistency in reporting
and recordkeeping: avoiding the need to
convert timestamps created in many
different time zones is essential for
timely and efficient automated
processing of large amounts of market
and pricing data by the Commission and
77 ATA commented that the current telephone
recording systems in use by SDs and MSPs may not
meet all of the proposed rule’s requirements, and
that implementing telephone recording systems that
are compliant with the requirements would impose
a significant additional cost. Notably, ATA did not
propose any alternative ways that the Commission
might achieve the statutory requirement of the CEA
in a less burdensome manner.
78 See Real-Time Public Reporting of Swap
Transaction Data, 77 FR 1182, 1251 (Jan. 9, 2012).
79 See Swap Data Recordkeeping and Reporting
Requirements, 77 FR 2136, 2212 (Jan. 13, 2012).

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others. Based on its belief that rapid
automated processing is critical to the
success of its regulatory mission, the
Commission disagrees with the
comments of ISDA & SIFMA in their
joint letter that the value of this benefit
is ‘‘minimal’’ relative to the cost of
moving to UTC, which cost they did not
quantify. Moreover, the Commission
believes that UTC works in
complimentary tandem with Part 43 and
Part 45 measures that promote straightthrough-processing.80
8. Daily Trading Records for Cash and
Forward Transactions Related to a Swap
Proposed § 23.202(b) required SDs
and MSPs to keep daily trading records,
similar to those SDs and MSPs are
required to keep for swaps, for related
cash and forward transactions.81 The
Commission is adopting the rule as
proposed because section 4s(g)(1) of the
CEA requires registrants to ‘‘maintain
daily trading records of their swaps
* * * and related records (including
related cash and forward transactions) .
* * *’’ No commenter objected to the
proposed definition of ‘‘related cash and
forward transactions,’’ although
commenters argued that hedging and
risk mitigation activities referred to in
the proposed daily trading records rule
typically are not executed with respect
to specific trades and that it would not
be possible to link cash and forward
transactions to a specific swap.82 The
Working Group also argued that
compliance with proposed § 23.202(b)
would impose expensive and
burdensome requirements on millions
of physical transactions that are
undertaken by commercial energy firms
that are also parties to swap
transactions. No commenter proposed,
and the Commission has not identified,
an alternative to achieve the statutory
requirement in a less burdensome
manner, however. Thus, the
80 Straight-through processing was considered a
‘‘critical risk mitigate’’ in a 2005 report released by
an industry group chaired by the then-chairman of
Goldman Sachs and composed of representatives
from Citigroup, JP Morgan Chase, and Morgan
Stanley, among other prominent financial
institutions. See Counterparty Risk Management
Policy Group II, Toward Greater Financial Stability:
A Private Sector Perspective, July 27, 2005, p. 84.
Publicly available at http://fcicstatic.law.stanford.edu/cdn_media/fcic-docs/200507-25%20Counterparty%20Risk%20
Management%20Policy%20Group-%20Toward%20
Greater%20Financial%20Stability.pdf.
81 See definition under proposed § 23.200, ‘‘a
purchase or sale for immediate or deferred physical
shipment or delivery of an asset related to a swap
where the swap and the related cash or forward
transaction are used to hedge, mitigate the risk of,
or offset one another.’’
82 ISDA & SIFMA and The Working Group made
this point.

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Commission is adopting the rule as
proposed.
9. Record Retention Period
Proposed § 23.203(b)(2) required SDs
and MSPs to retain records of any swap
or related cash or forward transaction
until the termination or maturity of the
transaction and for a period of five years
after such date. The Commission notes
that proposed revisions to Commission
regulation § 1.31 require retention of
swap transaction records for a period of
five years following the termination,
expiration, or maturity of a swap,83 and
that § 23.203 is consistent with retention
requirements under the final swap data
reporting rule.84 However, to mitigate
costs in response to commenters’
concerns 85 regarding retention of preexecution trade information, the
Commission is revising the rule to
reduce the voice recording retention
period to one year. The Commission
considered a six-month retention period
for voice recordings, as recommended
by ISDA & SIFMA, but determined that
for swaps, particularly long tenor swaps,
a longer period is necessary in order to
give trade discrepancies an opportunity
to surface. In addition, the Commission
believes that a one-year retention period
is necessary to make the audit trail most
useful for the Commission’s
enforcement purposes. The Commission
believes the benefit of available voice
recordings to clear up latent trade
discrepancies and aide in enforcement
actions justifies the incremental cost of
an additional six-month retention
period.

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Costs
Sections 4s(f) and (g) of the CEA
require SDs and MSPs to adopt and
implement certain reporting and
recordkeeping requirements. The costs
and benefits that necessarily result from
these basic statutory requirements are
considered to be the ‘‘baseline’’ against
83 See Adaptation of Commission Regulations to
Accommodate Swaps, 76 FR 33066, 33088 (June 7,
2011).
84 See Swap Data Recordkeeping and Reporting
Requirements, 77 FR 2136, 2212 (Jan. 13, 2012).
85 See MFA (stating that the vast majority of its
members do not keep records of transactions for
five years and compliance with rule as proposed
would be burdensome and costly); The Working
Group (long-term electronic storage of significant
amounts of pre-execution communication will
prove costly over five-year period); ISDA
(supporting a voice recording obligation aligned to
the six-month minimum required by the UK
Financial Services Authority); SIFMA (same). Chris
Barnard, conversely, recommended that records
should be required to be kept indefinitely rather
than the general five years under the proposal. Mr.
Barnard argued that documents can be scanned
after five years, so there is no practical reason for
limiting the retention period and the information
would be useful for future analytical purposes.

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which the costs and benefits of the
Commission’s final rules are compared
or measured. The ‘‘baseline’’ level of
costs includes the costs that result from
the following activities required by the
statute:
• Keeping books and records of all
activities related to the business of the
SD or MSP in such form and manner
and for such period as may be
prescribed by the Commission;
• Maintaining daily trading records of
swaps and related cash or forward
transactions and recorded
communications, including electronic
mail, instant messages, and recordings
of telephone calls, and including such
information as the Commission shall
require;
• Maintaining daily trading records
for each counterparty in a manner and
form that is identifiable with each swap;
• Maintaining a complete audit trail
for conducting comprehensive and
accurate trade reconstructions.
Compliance with the statutory
baseline alone would result in costs for
SDs and MSPs. For example, the
requirement to maintain recorded
communications would include the cost
of a telephonic recording system.
Similarly, compliance with the statutory
provisions would require data storage
and retrieval systems.
Congress mandated that the
Commission adopt rules to implement
each of the statutory provisions. With
regard to its implementation decisions,
the Commission has determined the
following to be costs to SDs and MSPs
to comply with the final regulations
regarding recordkeeping obligations
under Part 23:
• Compiling transaction, position,
and business records;
• Compiling records of data reported
to an SDR;
• Compiling records of real-time
reporting data;
• Compiling daily trading records for
swaps of pre-trade information,
including all oral and written
communications concerning quotes,
solicitations, bids, offers, instructions,
trading, and prices that lead to the
execution of a swap, however
communicated; execution trade
information, including the name of the
counterparty, the terms of each swap,
the date and time of execution; and
post-execution trade information;
• Compiling daily trading records for
related cash and forward transactions of
pre-trade information, including all oral
and written communications concerning
quotes, solicitations, bids, offers,
instructions, trading, and prices that
lead to the execution of a related cash
or forward transaction, however

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communicated; execution trade
information, including the name of the
counterparty, the terms of each swap,
the date and time of execution; and
post-execution trade information;
• Data storage, in physical and/or
digital format, in most cases for the term
of a swap plus five years;
• Telephonic recording system (to
record voice calls related to
transactions); and
• Software and/or hardware updates
to existing systems to capture and
maintain the required records and to
convert to Coordinated Universal Time.
With regard to the reporting
requirements, the Commission has
determined that compliance with the
requirements relating to reporting swap
data to an SDR and the real-time public
reporting of swap transaction data will
constitute compliance with such
reporting requirements in section 4s(f).
The reporting rules set forth in this
release consist of cross-references to the
reporting requirements in the rules
relating to the reporting of swaps to an
SDR and the real-time public reporting
of swap transaction data. Accordingly,
the Commission has considered the
costs and benefits of reporting swap
data to an SDR and real-time public
reporting in those final rulemakings;
therefore, those costs and benefits are
not addressed in this rulemaking.86
As discussed, in adhering to its
mandate from Congress, where possible
the Commission also has attempted to
alleviate the burdens on affected
entities. In this regard, the Commission
sought to minimize recordkeeping costs
by eliminating the requirement that
daily trading records of swaps and
related cash and forward transactions be
maintained as a separate electronic file.
Based on the available data, the
Commission has been unable to reliably
quantify the cost of compliance with the
recordkeeping rules.87 Although the
rules were adapted from existing
recordkeeping regulations from a variety
of sources including the Commission’s
regulations and those of the SEC, such
regulations have evolved over time and
reliable quantitative data is generally
not available regarding the costs of
compliance with such requirements. A
1998 adopting release for the SEC’s
rules for OTC derivatives dealers
86 See Swap Data Recordkeeping and Reporting
Requirements, 77 FR 2136 (Jan. 13, 2012); and RealTime Public Reporting of Swap Transaction Data,
77 FR 1182 (Jan. 9, 2012).
87 To better inform this assessment, the
Commission has conducted a review of applicable
academic literature, but found no research reports
or studies that are directly relevant to its
considerations of costs and benefits of these final
rules.

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(including recordkeeping rules) cited
commenters estimates in a range from
$75,000 to $500,000 per year. Although
dated, these SEC estimates provide a
measure from which to very roughly
attempt to gauge compliance costs.88
Moreover, because financial entities that
will likely be required to register as SDs
are currently subject to prudential
regulation or other form of regulatory
oversight, the Commission believes they
will already have some form of
recordkeeping policies and procedures
in place.
In contrast, the Commission
anticipates that entities that are not
subject to prudential regulation may
incur greater costs to develop the
infrastructure to comply with these
recordkeeping requirements. In this
respect, one commenter presented a
report prepared by National Economic
Research Associates, Inc. (NERA) stating
that (1) compliance by certain entities
with the proposed requirement that SDs
and MSPs retain instant messages and
tie them to transaction identifiers would
entail average initial retention costs of
$464,000 and average incremental
ongoing annual costs of $228,000; (2)
that the retention of phone calls would
entail an average initial investment of
$649,000 with additional annual costs
of $382,000; and (3) that the
requirement to time stamp transactions
and use unique identifiers for
transactions would entail average initial
setup costs of $2,800,000 and average
annual costs of $302,000.89 The
Commission notes that the required use
of unique identifiers is the subject of
another rulemaking not adopted in this
release.
Certain of the costs associated with
these recordkeeping rules result from
collections of information subject to the
Paperwork Reduction Act. Costs
attributable to collections of information
subject to the PRA are discussed further
in section V.B.1. below. The
Commission has also considered these
costs, which it incorporates by reference
herein, in its section 15(a) analysis.
88 See OTC Derivatives Dealers, 63 FR 59362,
59391 (Nov. 3, 1998).
89 NERA, Cost-Benefit Analysis of the CFTC’s
Proposed Swap Dealer Definition Prepared for the
Working Group of Commercial Energy Firms,
December 20, 2011. In this late-filed comment
supplement, NERA concludes that cost-benefit
considerations compel excluding entities ‘‘engaged
in production, physical distribution or marketing of
natural gas, power, or oil that also engage in active
trading of energy derivatives’’—termed
‘‘nonfinancial energy companies’’ in the report—
from regulation as SDs, including these
recordkeeping and reporting rules.

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Benefits
The Commission believes these
recordkeeping requirements will
contribute to important, though
unquantifiable, benefits intended by the
Dodd-Frank Act. More specifically,
complete, rigorous transactional
recordkeeping promotes both external
and internal risk management by
providing an audit trail of past
transactions. A strong audit trail, in turn
generates a number of benefits,
including the following:
• It facilitates a firm’s ability to
recognize and manage its risk, thereby
enhancing the risk management of the
market as a whole.
• It acts as a disincentive to engage in
unduly risky or injurious conduct in
that the conduct will be traceable.
• In the event such conduct does
occur, it provides a mechanism for
policing such conduct, both internally
as part of a firm’s compliance efforts
and externally by regulators.
• It provides a basis for efficiently
resolving transactional disputes.
• And, it supports SDR reporting in
that it provides a backstop to confirm
the accuracy of reported information.
Section 15(a) Determination
1. Protection of Market Participants and
the Public
The Commission believes that, by
generating the benefits identified above,
these rules provide important
protections to swap market participants
and the public. The recordkeeping
requirements: (1) Promote the ability of
SDs and MSPs to manage their risks
through accurate and timely
recordkeeping; (2) create disincentives
for conduct, such as rogue trading, that
could be injurious to the firm (as well
as the market generally) by requiring a
comprehensive audit trail; (3) support
internal compliance efforts by requiring
that complaints and other pertinent
documents be retained; and (4) facilitate
resolution of trade disputes. Public
protection also is enhanced in that
effective comprehensive, internal risk
management improves risk management
for the market as a whole. Moreover, the
rules serve as an important link in the
risk reduction chain envisioned by
Congress in enacting the Dodd-Frank
Act. Working in concert with other
Dodd-Frank Act requirements, these
rules further the goal of avoiding market
disruptions and the resulting financial
losses to market participants and the
general public.
The Commission believes that any
incremental costs of the final rules over
those necessitated by the statutory
baseline of sections 4s(f) and (g) of the

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CEA do not hinder the goal of effective
protection of market participants and
the public. Because some basic level of
recordkeeping is fundamental to any
financial undertaking, the Commission
assumes that all likely SDs and MSPs
currently keep records of some sort for
their own internal control purposes.
Therefore, the incremental costs of
complying with the specific
requirements of the Commission’s final
rules are unlikely to lead SDs or MSPs
to withdraw from the market or cause
SDs and MSPs to make investments in
updating recordkeeping systems that
would otherwise be directed to
activities that increase protection of
market participants or the public.
2. Efficiency, Competitiveness, and
Financial Integrity of Markets 90
Accurate recordkeeping is
foundational to sound risk management
and the financial integrity of SDs and
MSPs, which impacts the financial
integrity of markets. As illustrated by
the collapse of firms during the 2008
financial crisis, poor recordkeeping can
substantially impair resolution of
customer claims.91 Additionally, the
recordkeeping rules will enhance the
financial integrity of the markets by
ensuring that swap transactions,
especially those that are bilaterally
executed and require the exchange of
margin, are documented and recorded
in a prompt and accurate manner.
Market efficiency and competitiveness
is benefited by accurate and timely
recordkeeping and the creation of a
complete audit trail to the extent that
those requirements facilitate
Commission’s enforcement actions
against market manipulation and other
market abuses.
On the other hand, compliance with
the rules is likely to require investment
in recordkeeping, storage, and other
back office systems; investment costs
that otherwise could be used to enhance
the efficiency and competitiveness of
front office trading operations. For
example, the telephonic recording
systems that are required for recording
oral communications may introduce
new costs for SDs and MSPs that those
90 Although by its terms CEA section 15(a)(2)(B)
applies to futures markets only, the Commission
finds this factor useful in analyzing regulations
pertaining to swaps markets as well.
91 See In re Lehman Brothers Holdings Inc., 08–
13555, and Giddens v. Barclays Capital Inc., 09–
01732, U.S. Bankruptcy Court, Southern District of
New York; see also Lehman Derivatives Records a
‘‘Mess,’’ Barclays Executive Says, available at
http://www.bloomberg.com/news/2010-08-30/
lehman-derivatives-records-a-mess-barclaysexecutive-says.html (reporting on testimony
provided in previously cited Lehman bankruptcy
proceeding).

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entities would prefer to avoid in favor
of enhancing trading operations.
3. Price Discovery
The Commission has identified no
likely material impact on price
discovery from the costs and benefits of
these recordkeeping rules.
4. Sound Risk Management
The Commission believes that proper
recordkeeping—though likely to require
initial investment in recordkeeping and
other back office systems—is essential
to risk management because it facilitates
an entity’s awareness of its transactions,
positions, trading activity, internal
operations, and any complaints made
against it, among other things. Such
awareness supports sound internal risk
management policies and procedures by
ensuring that decision-makers within
SDs and MSPs are fully informed about
the entity’s activities and can take steps
to mitigate and address significant risks
faced by the firm. When individual
market participants engage in sound risk
management practices, the entire market
benefits. Accordingly, the Commission
believes that these final rules,
notwithstanding potential costs
identified above, will promote the
public interest in sound risk
management.

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5. Other Public Interest Considerations
The Commission has not identified
any other public interest considerations
that could be impacted by these
recordkeeping and reporting obligations
for SDs and MSPs.
E. Duties and Risk Management
Requirements of Swap Dealers and
Major Swap Participants
As part of an overall business conduct
regime for SDs and MSPs, section 4s(j)
of the CEA, as added by section 731 of
the Dodd-Frank Act, sets forth certain
duties for SDs and MSPs. In its Duties
NPRM, the Commission proposed six
regulations to implement section 4s(j),
specifically addressing risk
management, monitoring of positions
limits, diligent supervision, business
continuity and disaster recovery, the
availability of general information, and
antitrust considerations. The
Commission’s proposed conflicts-ofinterest policies and procedures were
the subject of the separate SD/MSP
Conflicts NPRM.
As described in detail in the
preamble, the Commission in preparing
these final rules sought and
incorporated comment from the public.
The Commission received 20 comment
letters on the Duties NPRM, and
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rules. Of the 20, eight comments
addressed issues relevant to the costs
and benefits of the proposed rules, but
only two provided any quantitative data
to support their claims. The comments
focused on seven areas of the rules that
are most relevant to the Commission’s
consideration of costs and benefits. Each
of these areas is discussed below. A
more detailed discussion of the
Commission’s policy decisions can be
found in sections II.F–L. above.
1. Scope of Risk Management Program
The proposed regulations required
SDs and MSPs to establish, document,
maintain, and enforce a system of risk
management policies and procedures
designed to monitor and manage the
risks associated with the business of the
SD or MSP. The Working Group,
MetLife, and the Office of the
Comptroller of the Currency, argued in
favor of limiting § 23.600 to the risks
associated with swaps activities, and
not other business lines in which an
entity may engage.92 The Commission
agrees with the commenters that its
regulatory purpose is the management
of the risk associated with SDs’ and
MSPs’ swaps activities, not risks from
their non-swaps activities, and is
modifying the rule as they proposed.
That is, the Commission is including a
new definition of ‘‘swaps activities’’ in
the final regulations and thus limiting
the scope of several requirements.
Clearly delimiting the activities of
registrants subject to the rule in this way
reduces the compliance burden of
§ 23.600.
The Commission, however, declines
to adopt The Working Group’s
recommendation that the rule be limited
further with respect to affiliates and
consolidated entity risk management.93
The Commission believes that
considering the risks posed by affiliates
is part of ‘‘robust and professional’’ risk
management as required by section 4s(j),
and provides a benefit to the registrant,
its counterparties, and the swap market
in the form of increased security and
92 Although not expressly stated by these
commenters, the Commission presumes that burden
concerns motivate their limitation requests, at least
in part.
93 More specifically, The Working Group
recommended that the rule be revised to require the
risk management program to take into account only
swaps-related risks posed by affiliates and take an
integrated approach to risk management at the
consolidated entity level only to the extent the SD
or MSP deems necessary to enable effective risk and
compliance oversight. Presumably, The Working
Group recommended these alternatives out of an
unexpressed concern for increased costs
necessitated by monitoring and managing other
risks posed by affiliates or being required to take
an integrated approach to risk management; it did
not quantify these however.

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stability of the registrant. In the
Commission’s view, it is not
unreasonably burdensome to require
management of risk posed by affiliates—
whether in the form of inter-affiliate
transactions or otherwise—given their
potential to be of the same kind and
magnitude as risks posed by other swap
counterparties. Likewise, the benefit of
increased security and stability results
from integrating the registrant’s risk
management program with risk
management at the consolidated entity
level, if applicable, where a top level
company may be in the best position to
evaluate risk due to its organizationwide view. Again, in light of this
benefit, the Commission does not
believe integration of an SD’s or MSP’s
Risk Management Program into overall
risk management at the consolidated
entity level would be unduly
burdensome.
2. Risks Covered by the Risk
Management Program
The proposed regulation required a
registrant’s risk management program to
include certain enumerated elements:
Identification of risks and risk tolerance
limits; periodic risk exposure reports; a
new product policy; policies and
procedures to monitor and manage
market risk, credit risk, liquidity risk,
foreign currency risk, legal risk, and
operational risk; use of central
counterparties; compliance with margin
and capital requirements; monitoring of
compliance with risk management
program; and approval of trading
policies and monitoring of traders.
In response to comments received, the
Commission is modifying the rule in
several respects as discussed
specifically below. The Commission
believes that each of these changes will
reduce the compliance burden on SDs
and MSPs. More generally, the
Commission believes the rules allow
registrants to manage their costs by
relying upon existing compliance or risk
management capabilities to a large
extent.94 In this respect, the rules
generally only require ‘‘policies and
procedures’’ to monitor and manage the
enumerated risks, but do not prescribe
the content of such policies and
procedures or require any specific
control systems.
Risk Tolerance Limits: With respect to
risk tolerance limit exceptions, the
94 Comments of The Working Group, SIFMA, EEI,
and MetLife, each of whom suggested that proposed
§ 23.600 be flexible enough to allow firms to adapt
their existing compliance and risk management
measures, and not cause firms to add entirely new
compliance or risk management infrastructure.

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Commission agrees with commenters 95
that requiring approval by risk
management personnel would be more
costly without materially enhancing
benefits than allowing SDs and MSPs
the flexibility to structure their approval
process in accordance with written
policies and procedures. Accordingly,
the Commission has modified the rule
to reflect this approach.
New Product Policy Requirement:
Concerning the new product policy
requirement, the Commission notes that
the rule was adapted from existing
regulatory guidance in this area,96 and
thus believes some SDs and MSPs
already have such a policy in place; for
them, the requirement would not
impose any new burden. The
Commission rejects the more limited
alternative approach recommended by
the Working Group—i.e., that before
offering a new product an SD or MSP
need only conduct due diligence that is
commensurate with the risks associated
with a new product, and receive
approval from appropriate risk
management and business unit
personnel within the firm. While The
Working Group’s recommended
approach may be less costly for some
unspecified number of registrants that to
date have not implemented a new
product policy in line with the
proposed rule and existing regulatory
guidance, the Commission believes that
the benefits to SDs, MSPs, and financial
markets of greater scrutiny for new
products, which may entail degrees of
risk that are not initially evident, are
sufficient to adopt the rule substantially
as proposed. However, the Commission
believes that SIFMA’s recommended
alternative—allowing approval of new
products on a contingent or preliminary
limited-time basis at a non-material risk
level for the registrant to gain product
experience and develop appropriate risk
management processes for the product—
better addresses the unforeseen risk
potential. Accordingly, the Commission
considers SIFMA’s proposed alternative
preferable on cost/benefit grounds to the
rule as proposed and has modified the
rule in line with it.
95 With respect to exceptions to risk tolerance
limits, SIFMA recommended that trading
supervisors, rather than risk management
personnel, should have the authority to approve
risk tolerance limit exceptions because the quarterly
risk exposure reports provided to a registrant’s
senior management and governing body are an
adequate check on decision-making by trading
supervisors. Presumably, SIFMA believes trading
supervisor approval presents less costs than risk
management unit approval.
96 See OCC’s Comptroller’s Handbook, Risk
Management of Financial Derivatives at 7 (Jan.
1997); Federal Reserve Board’s Trading and CapitalMarkets Activities Manual.

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Reconciliation of Profits and Losses to
the General Ledger: The Commission
has responded to commenters that
objected to the burden of daily
reconciliation by modifying the rule to
require periodic, rather than daily,
reconciliation. The Commission
believes this modification, increases the
flexibility available to registrants to
design cost-effective procedures best
suited to their own circumstances.
Assessing Liquidity of Non-Cash
Collateral: With respect to assessing
liquidity of non-cash collateral, the
Commission agrees with commenters
that testing by simulated disposition
presented an unnecessary cost to SDs
and MSPs 97 and has adjusted the final
rule to provide flexibility for registrants
to design procedures to fit their own
circumstances.
Foreign Currency Risk: With respect
to foreign currency risk, rather than
mandating daily measurement, The
Working Group recommended relaxing
the rule to allow firms discretion with
respect to how frequently capital
exposed to fluctuations in the value of
foreign currency needs to be measured.
The Commission is rejecting The
Working Group’s recommendation
because daily measurement is necessary
for effective prudent risk management
because the foreign currency markets
are fluid, quick moving, and potentially
volatile. Given the wide availability of
foreign currency pricing information at
a low cost, the Commission does not
believe that the cost of daily
measurement is unduly burdensome in
light of the benefit of consistent
management of foreign currency risk.
Monitoring of Trading Requirements:
Concerning the monitoring of trading
requirements, the Commission agrees
with commenters that the proposed
rule’s requirement that traders be
monitored to prevent the incurrence of
‘‘undue risk’’ is vague and thus
potentially burdensome to implement.
To add clarity, the Commission is
revising the rule to require monitoring
of trading to prevent the incurrence of
‘‘unauthorized risk.’’ 98
The Commission also agrees with The
Working Group’s recommendation that
97 SIFMA recommended that the Commission not
require testing of liquidation procedures by
simulated disposition, but only require policies and
procedures for identifying acceptable collateral and
establishing appropriate haircuts, taking into
account reasonably anticipatable adverse price
movements, arguing that simulated disposition
could be costly during periods of market stress.
98 The Working Group and SIFMA requested that
the Commission remove the requirement that firms
monitor traders to prevent traders from ‘‘incurring
undue risk’’ because the meaning of the phrase is
ambiguous and presumably more costly to monitor
under such standard.

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the proposed rule be modified to add a
materiality standard for reporting of
trade discrepancies to management.
Accordingly, the Commission is
modifying the rule to require that only
trade discrepancies that are not
immaterial, clerical errors be brought to
the immediate attention of management
of the business trading unit.
Use of Brokers: The Commission
agrees with commenters recommending
against tasking the risk management
unit with reviewing brokers’ statements,
monitoring commissions or initiating
broker payments; allowing these
functions to be handled by operations or
other control units, and presumably
lowering the cost of compliance. The
Commission has narrowed the rule to
require risk management units to
periodically audit brokers’ statements
and payments only. The Commission
believes that this modification retains
the benefits of the rule (independent
oversight of the use of brokers), while
lowering the cost of compliance by not
requiring modifications to current
operations.
3. Risk Exposure Reports
Proposed § 23.600(c)(2)(ii) required
SDs and MSPs to provide their senior
management and governing body with
quarterly Risk Exposure Reports
detailing the registrant’s risk exposure
and any recommendations for changes
to the risk management program. Copies
of these reports were required to be
furnished to the Commission within five
business days of providing them to
senior management. The Working Group
and Cargill suggested as an alternative
that SDs’ and MSPs’ periodic Risk
Exposure Reports be required only
annually and submitted to the
Commission only upon request. They
argued that quarterly reports will be
costly, distract risk management
personnel from their primary
responsibilities, and tax Commission
resources to review reports that
frequently. The Commission is
declining to modify the rule as
suggested because, as recent events have
shown, it is important that financial
firm management have frequent
information about the risk exposures
faced. This affords prompt corrective
action important to maintain financial
stability. The potential costs of
instability in the financial markets have
been exhibited in a number of recent
failures of major financial institutions,
such as Long Term Capital Management,
Bear Stearns, Lehman Brothers, and
others. The Commission believes that
any incremental additional burden of
providing Risk Exposure Reports on a
quarterly rather than annual basis is not

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significant and is warranted by the
benefit of Commission oversight and
early risk detection capability.

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4. Frequency of Risk Management
Program Testing
Proposed § 23.600(e) required SDs
and MSPs to review and test their risk
management programs quarterly using
internal or external auditors
independent of the business trading
unit. As explained in more detail below,
commenters objected to the costs of
quarterly risk management program
testing required by the rule. The
Commission is modifying proposed
§ 23.600(e) to require only annual
testing and audit of an SD’s or MSP’s
risk management program, having been
persuaded by the comments of The
Working Group, Cargill, and MetLife,
each of which recommended that both
the frequency and the scope of audits of
the risk management program be left to
the discretion of the registrant so long
as such audits are effective and are
conducted at least annually. The
Working Group and Cargill argued that
this regime would provide the desired
results without the unnecessary cost
and administrative burden imposed by
the proposed rules. The Commission
agrees that the regulatory purpose of
periodic testing will be met by annual
testing. In order to further lessen the
burden on SDs and MSPs, the
Commission has determined not to
specify testing procedures at this time,
but to leave the design and
implementation of testing procedures to
the reasonable judgment of each
registrant based on their own
circumstances.
5. Monitoring of Position Limits
Proposed § 23.601 required SDs and
MSPs to establish policies and
procedures to monitor, detect, and
prevent violations of applicable position
limits established by the Commission, a
designated contract market (DCM), or a
swap execution facility (SEF), and to
monitor for and prevent improper
reliance upon any exemptions or
exclusions from such position limits.
One commenter presented a report
prepared by NERA stating that
compliance with proposed § 23.601 for
certain entities would entail average
incremental start-up costs of $245,000
and average incremental ongoing annual
costs of $228,000.99 The Commission
99 NERA Economic Consulting, Cost-Benefit
Analysis of the CFTC’s Proposed Swap Dealer
Definition Prepared for the Working Group of
Commercial Energy Firms, December 20, 2011. In
this late-filed comment supplement, NERA argues
that cost-benefit considerations compel excluding
entities ‘‘engaged in production, physical

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observes that the incremental average
costs provided by NERA do not
differentiate between the costs of
compliance with proposed § 23.601 and
the costs of compliance with section
4s(j)(1) of the CEA, which requires each
SD and MSP to ‘‘monitor its trading in
swaps to prevent violations of
applicable position limits.’’
Accordingly, the Commission believes
that the cost estimates presented by
NERA exceed the incremental costs
attributable to Commission rulemaking.
The NERA report, however, provides
insufficient information to allow the
Commission to assess the magnitude of
the excess.
As discussed in more detail below,
the Commission has also quantified
certain costs of a monitoring regime
based on the assumption that a firm
could choose to implement a particular
monitoring regime from a wide range of
compliance systems, based on the
specific, individual needs of the firm.
Several other commenters requested
that the rule be modified to lessen the
cost burden on registrants.100 The
Commission is reducing the burden on
SDs and MSPs by modifying the rule as
follows: (1) Require policies and
procedures reasonably designed to
monitor for and prevent violations of
applicable position limits; (2) require
only notification to relevant personnel
of changes to applicable position limits
(rather than training); (3) except onexchange violations of position limits
from the Commission reporting
requirement; (4) require testing of
distribution or marketing of natural gas, power, or
oil that also engage in active trading of energy
derivatives’’—termed ‘‘nonfinancial energy
companies’’ in the report—from regulation as swap
dealers, including § 23.601.
100 SIFMA recommended that testing of Position
Limit Procedures be required only annually and not
be required to be done all at the same time, The
Working Group recommended that testing only be
required on a semi-annual basis, and MetLife
requested that the Commission permit the
frequency of testing to be determined by an MSP
based on the extent of its swap activities. MetLife
also recommended that there be a clear exemption
from testing requirements for MSPs that do not
trade in swaps for which position limits have been
established. BGA recommended that the
Commission clarify that as long as an SD or MSP
provides training on the position limits and
establishes and enforces policies for monitoring,
detecting, and curing violations, they will have met
the obligation to ‘‘prevent violations.’’ SIFMA
recommended that the Commission revise
§ 23.601(c) to provide that a change in position
limit levels will not trigger ‘‘training,’’ but only
require effective notification. The Working Group
and MetLife recommended that the Commission
require alerting the governing body only when a
violation is material. The Working Group argued
that the reporting of on-exchange violations of
position limits to the Commission is already done
by DCMs and will likely be the responsibility of
SEFs as well, so SDs and MSPs should not be
required to report on-exchange violations.

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position limit procedures only if the
registrant has transactions in
instruments for which position limits
have been established; and (5) require
testing of position limit procedures
quarterly (rather than monthly).
With respect to quarterly reporting of
compliance with position limits to the
chief compliance officer, senior
management, and governing body under
proposed § 23.601(g), The Working
Group recommended that the proposed
rule should be revised to require only
annual reports to the entity’s senior
management and governing body, but
did not quantify the cost burden of
quarterly reporting. The Commission
recognizes that generating such reports
will entail costs in the form of preparing
and transmitting the reports as required
by the rule, but is unable to quantify the
cost because the reports will vary
greatly depending on the trading
volume of individual SDs and MSPs in
products for which position limits have
been established. As discussed above
with respect to Risk Exposure Reports,
the Commission believes that the benefit
of such reporting will be timely
notification to decision makers within
the SD and MSP of the entity’s record
of compliance with applicable position
limits, thus providing a timely
opportunity to adjust or revise Position
Limit Procedures to prevent future
violations, if necessary, and avoiding
the costs to the public of excessive
speculation.
6. Diligent Supervision
Proposed § 23.602 required SDs and
MSPs to: (1) Establish a system to
supervise all activities relating to its
business performed by its partners,
members, officers, employees, and
agents; (2) have that system be
reasonably designed to achieve
compliance with the CEA and
Commission regulations; (3) have that
system designate a person with
authority to carry out the supervisory
responsibilities of the SD or MSP; and
(4) have all such supervisors meet
qualification standards that the
Commission finds necessary or
appropriate.
The benefits of diligent supervision
result from increased compliance with
the regulatory standards of the CEA and
the rules of the Commission. The
standards that SDs and MSPs follow (or
fail to follow) in transacting their swaps
may have repercussions for financial
system stability more broadly. Effective
systemic risk management for swaps
depends upon effective internal risk
management protocols of individual
SDs and MSPs and effective internal
risk management in turn depends not

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just on appropriate policies and
procedures, but on diligent supervision
by the registrant to ensure that such
policies and procedures are actually
followed.
No commenters provided quantitative
data on the cost of complying with the
diligent supervision rule, but several
commenters requested changes to the
rule to lessen the compliance costs of
SDs and MSPs.
The Working Group recommended
that the Commission not require
designation of a single individual with
responsibility for supervision. The
Commission considered whether
permitting SDs and MSPs to designate
more than a single individual for
supervisory responsibilities would
lessen the benefits of the rule and
determined that it would not.
Accordingly, the Commission is
modifying the rule to require SDs and
MSPs to designate ‘‘at least one person’’
(rather than ‘‘a person’’) with authority
to carry out supervisory responsibilities.
The Working Group also
recommended that SDs and MSPs be
given discretion to determine supervisor
qualifications, presumably because such
a standard would entail fewer
compliance costs then the standard
proposed (i.e., ‘‘training, experience,
competence, and such other
qualification standards as the
Commission finds necessary or
appropriate’’). The Commission
considered whether the benefits of the
rule could be maintained with this
change, and determined they could not.
Accordingly, the Commission is
declining to modify the rule on this
point because it believes that full
accountability for compliance with the
CEA and Commission regulations is best
served by requiring designation of
individuals with objective
qualifications.
7. Business Continuity and Disaster
Recovery
Proposed § 23.603 required SDs and
MSPs to establish a business continuity
and disaster recovery plan that includes
procedures for and the maintenance of
back-up facilities, systems,
infrastructure, personnel, and other
resources to achieve the timely recovery
of data and documentation and to
resume operations generally within the
next business day. The proposed
regulations also required SDs and MSPs
to have their business continuity and
disaster recovery plan tested annually
by qualified, independent internal audit
personnel or a qualified third party
audit service. The Commission believes
that all SDs and MSPs may be critically
important to the proper functioning of

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the swaps market. SDs are critical
participants in the swaps market and
MSPs may have counterparty exposures
that could have serious adverse effects
on the financial stability of the United
States. Therefore, the Commission
believes the benefit of the rule is that it
ensures, to the extent practicable, that
system failures or natural disaster will
not stop the proper functioning of the
swaps market for more the one business
day.
With respect to costs, the Commission
again believes that it is not possible to
reasonably quantify the industry-wide
costs of a business continuity and
disaster recovery program for SDs and
MSPs because such costs necessarily
flow from the size of the SD or MSP and
the scope of activities in which it
engages. One commenter stated that
most SDs have the technology and
network infrastructure in place to
achieve a next day recovery time
objective, reducing the incremental
costs of compliance for these registrants.
But the commenter also believes that
some MSPs may have to develop and
implement a plan from scratch. The
commenter estimates that it would take
up to 200 personnel days for MSPs to
comply with this requirement. Thus, at
eight hours a day and $100 per hour,101
the upper end of personnel costs related
to implementation for an MSP would be
$160,000. In response, the Commission
is lengthening the time for compliance
to one year from the publication date of
the final rule in the Federal Register for
registrants that have not been previously
regulated by a U.S. prudential regulator
and are not SEC registrants. No other
commenter provided cost estimates of
compliance with the rule. Nevertheless,
several commenters requested changes
to the rule to reduce the cost of
compliance.102
To further reduce the compliance
burden, the Commission is additionally
modifying the rule as follows: (1)
Requiring procedures for alternative
staffing (rather than back-up personnel);
(2) requiring annual testing (rather than
auditing); and (3) requiring auditing
only once every three years. The
Commission believes that these changes
101 See section V.B. below for a discussion of the
Commission’s use of this hourly wage rate.
102 The Working Group argued that the
Commission should not require next business day
recovery for non-systemically important SDs or
MSPs, but should only require recovery ‘‘reasonably
promptly.’’ The Working Group also argued that the
Commission should not require staffing of back-up
facilities to avoid the burden of requiring two
persons for the same job, and recommended that the
Commission should not require annual testing of
the business continuity and disaster recovery plan
by independent auditors because independent
audits would be too costly.

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will lower compliance costs without
reducing benefits.
Finally, SIFMA recommended that
the Commission clarify that an SD’s or
MSP’s business continuity and disaster
recovery plan may be part of a
consolidated plan established for the
various entities in a holding company
group. The Commission confirmed this
could be the case.
Costs
Section 4s(j) of the CEA imposes
certain duties and risk management
requirements on SDs and MSPs. The
costs and benefits that necessarily result
from these basic statutory requirements
are considered to be the ‘‘baseline’’
against which the costs and benefits of
the Commission’s final rules are
compared or measured. The ‘‘baseline’’
level of costs includes the costs that
result from the following activities
required by the statute:
• Monitoring of trading in swaps to
prevent violations of applicable position
limits;
• Establishing robust and professional
risk management systems;
• Disclosing to the Commission and
applicable prudential regulators general
information related to swaps and
establishing internal systems and
procedures to provide such information;
• Foregoing any process or action that
results in any unreasonable restraint of
trade, or impose any material
anticompetitive burden on trading and
clearing.
Compliance with the statutory
baseline alone would result in costs for
SDs and MSPs. For example, the
requirement to monitor trading in swaps
to prevent violations of applicable
position limits would include the cost
of designing and implementing
monitoring procedures. Similarly,
compliance with the statutory
provisions would require establishment
of robust and professional risk
management policies and procedures.
Congress mandated that the
Commission adopt rules to implement
each of the statutory provisions. With
regard to its implementation decisions,
the Commission has determined the
following to be costs to SDs and MSPs
to comply with the final regulations
regarding duties and risk management:
• Compiling and reporting certain
risk assessment reports;
• Establishing, implementing, testing,
and reviewing risk management policies
and procedures;
• Auditing of policies and
procedures;
• Ensuring the monitoring of traders
and of applicable position limits;

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Federal Register / Vol. 77, No. 64 / Tuesday, April 3, 2012 / Rules and Regulations
• Implementing diligent supervision
policies and procedures; and
• Implementing, testing, and
reviewing business continuity and
disaster recovery policies and
procedures.
In adhering to its mandate from
Congress, where possible the
Commission has attempted to alleviate
the burdens on affected entities. The
Commission has modified the definition
of ‘‘governing body’’ to provide
additional flexibility and potentially
eliminate the need for some registrants
to change their current internal
governance structures, thereby reducing
compliance costs. The Commission has
clarified that the requirements for a risk
management program are confined to
‘‘swaps activities’’ of registrants, rather
than the ‘‘day-to-day business’’ of the
registrant, thereby avoiding the
potential burden associated with an
SD’s or MSP’s need to extend the
program to any non-swaps business
lines. In addition, risk management
policies and procedures are required to
be provided to the Commission only
upon request, rather than upon any
material change, reducing the reporting
burden on registrants.
Risk management unit personnel are
permitted to fulfill other duties. This
should provide cost-lowering flexibility
and potentially eliminate the need for
some registrants to change current
practices dramatically. The Commission
also will permit limited preliminary
approval for new products for testing
purposes, reducing the necessary time
and burden of new product analysis.
Pricing models may be validated by
internal personnel, eliminating the
burden of hiring an external auditor to
validate potentially valuable proprietary
information. The requirement to
reconcile profits and losses to the
general ledger on a daily basis has been
removed. Entities may perform an
assessment of collateral liquidation
procedures, instead of performing a
potentially time-intensive and
expensive test.
The proposed quarterly testing of risk
management programs and position
limit procedures has been reduced to
annual testing to reduce costs. The
proposed monthly testing of position
limit procedures has been reduced to
quarterly testing. To reduce the burden
on senior management, only material
trade discrepancies are required to be
brought to senior management. The
proposed employee training on position
limits change has been modified to a
notice requirement. Position limit
violations that occur ‘‘on-exchange’’ are
no longer required to be reported to the
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exchange will notify the Commission.
Finally, business continuity and disaster
recovery plans are required to be
audited triennially (not annually, as
proposed).
With respect to quantifying the cost of
compliance with the final rules, one
commenter stated that the cost of
implementing a comprehensive risk
management program will be
substantial. The commenter analogizes
the cost to the cost of implementing a
compliance program and cites FERC
administrative proceedings that
required implementation of compliance
programs at a cost of $1,000,000 to
$2,000,000. The same commenter also
estimates that a required audit of the
risk management program would cost
$24,000 per audit ($96,000 annually).
Another commenter stated that
implementation of a business continuity
and disaster recovery program could
take up to 200 personnel days. At eight
hours a day and $100 per hour,103
implementation personnel costs alone
could thus cost a registrant $160,000.
The Commission believes these
estimates may be on the high end of the
range of potential costs, given that some
likely SDs are subject to prudential
regulation or other form of regulatory
oversight currently and will already
have some form of risk management and
business continuity program in place.104
By contrast, costs are expected to be
higher for those entities not currently
regulated or not currently implementing
risk management policies and
procedures. In this respect, one
commenter presented a report prepared
by NERA estimating that compliance
with the proposed rules for some
entities in this category would entail
annual incremental costs of $224,000.105
103 See section V.B. below for a discussion of the
Commission’s use of this wage rate.
104 The Commission notes that in 2006 the UK
FSA conducted a cost benefit analysis when
promulgating requirements related to ensuring
effective risk controls, including requirements for
implementing effective policies and procedures to
identify, manage, monitor, and report current and
possible risks. The UK FSA was adopting rules that
replaced existing guidance and concluded from
survey results that the incremental aggregate cost of
compliance for approximately 2000–2500 firms was
£10.5 to 14 million in one-off costs ($16.4 to 21.9
million at the current exchange rate, or $8,200 to
$10,950 per firm) and £7 to 9.2 million in ongoing
costs ($10.9 to 14.4 million at the current exchange
rate, or $5,450 to $7,200 per firm). See FSA
Consultation Paper 06/9, Organisational Systems
and Controls: Common Platform for Firms, Annex
2 (May 2006).
105 NERA, Cost-Benefit Analysis of the CFTC’s
Proposed Swap Dealer Definition Prepared for the
Working Group of Commercial Energy Firms,
December 20, 2011. In the late-filed comment
supplement, NERA estimates these costs for entities
‘‘engaged in production, physical distribution or
marketing of natural gas, power, or oil that also
engage in active trading of energy derivatives’’—

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The Commission also has estimated
potential costs to implement a tracking
and monitoring system for position
limits; the Commission anticipates that
a firm could choose to implement a
monitoring regime from a wide range of
potential compliance systems, based on
the specific, individual needs of the
firm.106 For example, a firm may elect
to use an automatic software system,
which may include high initial costs but
lower long-term operational and labor
costs. Conversely, a firm may decide to
use a less capital-intensive system that
requires more human labor to monitor
positions. Thus, taking this range into
account, the Commission anticipates, on
average, labor costs per entity ranging
from 40 to 1,000 annual labor hours,
$5,000 to $100,000 in total annualized
capital/start-up costs, and $1,000 to
$20,000 in annual operating and
maintenance costs.107 The Commission
contrasts this estimate with that
provided by one commenter stating that
compliance with proposed § 23.601 by
non-financial energy companies would
entail average incremental start-up costs
of $245,000 and average incremental
ongoing annual costs of $228,000.108
Other than as indicated with respect
to monitoring for position limits, the
limited cost data provided by
commenters discussed above, and costs
resulting from collections of information
subject to the Paperwork Reduction Act
(incorporated by reference herein), the
Commission has little or no reliable
quantitative data from which to
reasonably estimate the costs of
compliance with the duties and riskmanagement rules.109 The
termed ‘‘nonfinancial energy companies’’ in the
report. The figure cited includes costs to maintain
a risk management program, quarterly audits of the
program, and annual audits of swap trading
relationship documentation, the last of which is
required under a separate rulemaking proposal not
being adopted in this release.
106 See Position Limits for Futures and Swaps, 76
FR 71626, 71667 (Nov. 18, 2011).
107 These costs would likely be lower for firms
with positions far below the speculative limit, as
those firms may not need comprehensive, real-time
analysis of their swaps positions for position limit
compliance to observe whether they are at or near
the limit. Costs may be higher for firms with very
large or very complex positions, as those firms may
need comprehensive, real-time analysis for
compliance purposes. Due to the variation in both
number of positions held and degree of
sophistication in existing risk management systems,
it is not feasible for the Commission to provide a
greater degree of specificity as to the particularized
costs for SDs and MSPs.
108 NERA, Cost-Benefit Analysis of the CFTC’s
Proposed Swap Dealer Definition Prepared for the
Working Group of Commercial Energy Firms,
December 20, 2011. See also text accompanying
note 103 for a discussion of these figures.
109 Although the rules were adapted from existing
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Commission’s review of applicable
academic literature yielded no research
reports or studies directly relevant to its
considerations of costs of the final rules.
Moreover, because it largely refrained
from establishing prescriptive
requirements under § 23.600—requiring
certain policies and procedures while
leaving their design and formulation to
the discretion of each individual
registrant—the Commission believes
that many of the costs associated with
the rules will be highly specific to each
entity, and thus difficult to quantify for
an individual firm or on an aggregated
basis. Certain of the costs associated
with these rules addressing duties and
risk management requirements of SDs
and MSPs result from collections of
information subject to the Paperwork
Reduction Act. Costs attributable to
collections of information subject to the
PRA are discussed further in section
V.B.2. below. The Commission has also
considered these costs, which it
incorporates by reference herein, in its
section 15(a) analysis.

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Benefits
The Commission believes that the
central, driving role of SDs and MSPs in
swaps markets—markets that can be
systemically critical as recent events
have shown—requires that SDs and
MSPs give due regard to, and properly
manage, the risks they incur as part of
their day-to-day businesses. The impact
of an SD or MSP default may be greater
than the impact to the entity alone, and
of potentially profound significance to
the financial system broadly. Given this,
the Commission believes these
regulations prescribing internal risk
management requirements better assure
the protection of market participants
and the public.
In promulgating the regulations
governing the duties of SDs and MSPs,
the Commission has created a
framework that requires proper internal
oversight but also ensures that these
participants retain the flexibility to
comply in the manner best suited for
their individual needs. While the
Commission recognizes that the costs
incurred by participants to comply with
these regulations may be significant, the
Commission also believes that the
strength of critical market participants
like SDs and MSPs is a vital component
in the strength of the financial system as
a whole. By requiring entities to monitor
the risks arising from their operations
actively and rigorously, the Commission
including the Federal Reserve and the OCC, such
guidance has been built up incrementally over a
period of time and the overall costs of compliance
with such guidance has not been quantified.

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believes that an entity’s default risk will
decrease substantially. Should an
emergency situation—such as a natural
disaster—occur, the largest derivatives
market participants will have systems in
place to resume full operation within
one business day, mitigating the effects
of a major crisis for the financial system
as a whole. The Commission also
recognizes that, given the systemic
importance of these entities, ensuring
proper risk management within SDs and
MSPs helps to protect the public against
major market disruptions and financial
losses.
In addition, the registrants will
benefit from the required oversight of
their internal operations. The required
monitoring is designed to protect an
entity from ‘‘rogue’’ or unauthorized
trading. Further, the required
monitoring of applicable position limits
protects the entity from an unforeseen
violation that could lead to, among
other things, an enforcement action
from an exchange or the Commission.
Moreover, the regulations require
identification and monitoring of several
different kinds of risk, allowing entities
to realize and correct potential issues
before problems (and associated costs)
escalate. Finally, the stability of any
entity rests on its ability to manage the
risks inherent in its business; by
requiring stringent internal oversight,
the Commission believes these
regulations will aid in the growth and
competitiveness of SDs and MSPs by
ensuring the stability that flows from
the most basic forms of risk
management.
Section 15(a) Determination
1. Protection of Market Participants and
the Public
The Commission believes that
requiring prudent risk management
policies and procedures lessens the risk
of market disruptions and financial
losses that could greatly impact not only
a particular SD or MSP, but also other
market participants and the public at
large. The Commission also believes
that requiring entities to assess and
monitor their level of risk, as well as the
adequacy of their own risk management
policies and procedures, helps to: (i)
Protect the entity from undue impacts
from unanticipated market events, (ii)
ensure swift recovery after a disaster or
other emergency, and (iii) promotes the
stability of the entity. The business
practices of SDs and MSPs are of critical
importance to the integrity and stability
of the derivatives markets; this makes
proper oversight and risk mitigation
essential to the well-being of the
financial system.

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The Commission does not believe that
the costs associated with these rules
will have a detrimental effect on the
protection of market participants or the
public. It is possible that the costs
associated with these rules will require
that SDs and MSPs modify their
business decisions in order to allocate
more resources to risk management,
monitoring traders, business continuity,
and diligent supervision of personnel.
2. Efficiency, Competitiveness, and
Financial Integrity of Markets 110
The Commission believes that
effective internal risk management and
oversight helps protect the financial
integrity of individual SDs and MSPs.
Their financial integrity, in turn,
promotes the financial integrity of
derivatives markets by helping to foster
confidence in the stability of the
financial system. Further, the
regulations are designed to ensure that
SDs and MSPs can sustain their market
operations and meet their financial
obligations to market participants,
further protecting the financial integrity
of derivatives markets. Additionally, the
Commission believes that these
regulations, as carefully tailored to
minimize costs beyond those required
by the statute, will enhance the
efficiency and competitiveness of
markets to the extent that SDs and MSPs
have sound risk management programs
and proper monitoring of traders.
Monitoring traders to ensure that they
do not engage in manipulative or other
disruptive market behaviors is crucial to
the efficiency of markets.
3. Price Discovery
The Commission has identified no
likely material impact on price
discovery from the costs and benefits of
these duties and risk management rules.
4. Sound Risk Management
The regulations go to the heart of
sound risk management for key market
participants and for the swaps market
generally. The rules require SDs and
MSPs to establish policies and
procedures for: (i) Monitoring and
managing traders and all risks
associated with their swaps activities,
including market, credit, liquidity,
foreign currency, legal, and operational
risk; (ii) business continuity planning,
and (iii) diligent supervision. Such
policies and procedures will ensure that
the largest derivatives market
110 Although by its terms section 15(a)(2)(B) of the
CEA applies to futures markets only, the
Commission finds this factor useful in analyzing
regulations pertaining to swaps markets as well.
The Commission has identified no impact to futures
markets.

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participants understand the risks
associated with their swaps activities,
take steps to mitigate those risks when
appropriate, and are prepared for
managing crisis situations. In essence,
these rules create risk management
benefits by working to prevent SDs and
MSPs from having to default on their
financial obligations, potentially
threatening overall financial stability in
the process.
The costs associated with these rules
will likely require that SDs and MSPs
allocate more resources to risk
management, monitoring traders,
business continuity, and diligent
supervision of personnel. The
Commission does not foresee that the
allocation of these additional resources
will have a detrimental effect on sound
risk management.

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5. Other Public Interest Considerations
The Commission has not identified
any other public interest considerations
that could be impacted by these duties
and risk management requirements for
SDs and MSPs.
F. Conflicts-of-Interest Policies and
Procedures for SDs, MSPs, FCMs, and
IBs
Section 4s(j) of the CEA, as added by
section 731 of the Dodd-Frank Act, sets
forth certain duties for SDs and MSPs,
including the duty to implement
conflict-of-interest systems and
procedures. Specifically, section 4s(j)(5)
mandates that SDs and MSPs implement
conflict-of-interest systems and
procedures that establish safeguards to
ensure that research activities and the
provision of clearing services are
separated by appropriate informational
partitions from the review, pressure, or
oversight of persons whose involvement
in pricing, trading, or clearing activities
might potentially bias their judgment or
supervision. Section 4s(j)(5) further
requires that such systems and
procedures ‘‘address such other issues
as the Commission determines to be
appropriate.’’ The proposed regulations,
as set forth in the SD/MSP Conflicts
NPRM, addressed the statutory mandate
of section 4s(j)(5).
Similarly, section 732 of the DoddFrank Act amended section 4d of the
CEA by creating a new subsection (c),
which mandates that the Commission
‘‘require that futures commission
merchants and introducing brokers
implement conflict-of-interest systems
and procedures.’’ New section 4d(c)
mandates that such systems and
procedures establish firewalls between
research and trading or clearing. New
section 4d(c) further requires that such
systems and procedures ‘‘address such

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other issues as the Commission
determines to be appropriate.’’ The
proposed regulations, as set forth in the
FCM/IB Conflicts NPRM, addressed the
statutory mandate of section 4d(c).
As described in detail in the
preamble, the Commission, in preparing
these final rules, sought and
incorporated comment from the public.
In the SD/MSP Conflicts NPRM and the
FCM/IB Conflicts NPRM, the
Commission requested comment on the
Commission’s consideration of costs
and benefits and invited commenters to
provide data quantifying the costs and
benefits of the proposed regulations.111
The Commission received 29 comment
letters to the SD/MSP Conflicts NPRM
and 26 comment letters to the FCM/IB
Conflicts NPRM. Many commenters
provided comments addressing
identical provisions or issues in both
proposed rules. The Commission
considered each in formulating the final
rules, including any alternatives and
cost concerns. Of the comment letters
received, 21 letters addressed issues
relevant to the costs and benefits of the
proposed rules, but no letters provided
any quantitative data to support their
claims.
With regard to the conflicts
provisions, the comment letters focused
on 16 areas of the rule that are most
relevant to the Commission’s
consideration of costs and benefits. Each
of these areas is discussed below. A
more detailed discussion can be found
in section II.M. above.
1. Compliance Oversight by SROs
The Commission declines the
recommendation of commenters 112 to
delegate conflicts of interest oversight to
an SRO because sections 4d(c) and
4s(j)(5) of the CEA direct the
Commission exclusively to promulgate
such rules. In this regard, the CEA
differs from section 15D of the
Securities Exchange Act of 1934, which
mandates that conflict-of-interest rules
be adopted either by the SEC or by an
SRO. Therefore, the cost savings that the
commenters asserted would result from
111 See SD/MSP Conflicts NPRM, 75 FR at 71395
and FCM/IB Conflicts NPRM, 75 FR at 70157.
112 FIA, ISDA, SIFMA, and JP Morgan suggested
that the Commission instruct an appropriate SRO to
write detailed compliance requirements within a
framework set forth by the Commission because
SROs would be in a better position than the
Commission to address the likely need for future
amendments to the rule. The Commission presumes
that the commenters believe that this alternative
arrangement would streamline compliance
requirements resulting in cost savings. The
Commission notes, however, that the comments of
Michael Greenberger and UNITE HERE supported
monitoring and enforcement of the implementation
of conflict-of-interest policies and procedures by
the Commission, as opposed to SROs.

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the delegation of oversight and
rulemaking authority to an SRO are in
fact not an option that the Commission
may consider under the statutory
framework provided by the Congress.
2. Non-Research Personnel
EEI argued that the Commission
should limit the definition of nonresearch personnel 113 to only those
persons involved with trading, pricing,
or clearing activities because
implementing the restrictions on
communications between research
analysts and all non-research personnel
as the proposed rule more broadly
defined the term will be burdensome.
Sections 4d(c) and 4s(j)(5) of the CEA
require informational partitions between
research analysts and persons involved
in pricing, trading, or clearing activities.
The Commission recognizes that
extending the requirement for
informational partitions above the
statutory minimum to all non-research
personnel may cause registrants to
experience some incremental cost
increase, though EEI did not provide
any quantification. Notwithstanding
this, however, the Commission is
adopting the definition as proposed
because it believes doing so closes a
significant window that could be
exploited to evade the statutory
purpose—i.e., to ensure that research
reports published by registrants are free
from bias. The Commission believes that
informational partitions only between
research analysts and persons involved
in pricing, trading, or clearing activities
are unlikely to ensure that research
reports are free from bias because other
personnel may have similar motives for
influencing the content of research
reports, or may be subject to the
influence of pricing, trading, or clearing
personnel and thus present an avenue of
indirect influence on research
personnel. The Commission observes
that the definition and use of the term
‘‘non-research personnel’’ was adapted
from NASD rule 2711, which also
prohibits all non-research personnel
from reviewing or approving a securities
research report prior to publication.114
Thus, despite some potential
113 The proposed rule defined the term ‘‘nonresearch personnel’’ as ‘‘any employee of the
business trading unit or clearing unit, or any other
employee of the [SD] or [MSP] who is not directly
responsible for, or otherwise involved with,
research concerning a derivative, other than legal or
compliance personnel.’’
114 See NASD rule 2711(b)(2) (stating ‘‘no
employee of the investment banking department or
any other employee of the member who is not
directly responsible for investment research (‘nonresearch personnel’), other than legal or compliance
personnel, may review or approve a research report
of the member before its publication’’).

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incremental cost to registrants, the
Commission believes that ensuring
unbiased registrant research reports
accords with statutory intent and
justifies the increased burden.

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3. Public appearances by research
personnel
The proposed rules defined the term
‘‘public appearance’’ as ‘‘any
participation in a conference call,
seminar, forum (including an interactive
electronic forum) or other public
speaking activity before 15 or more
persons * * *.’’ FIA, ISDA, and SIFMA
argued that the definition of public
appearance should articulate that the
term ‘‘person’’ includes both a customer
that is a natural person and one that is
an entity. The Commission presumes
these commenters to be concerned that
requiring public-appearance disclosures
when the 15-person threshold is crossed
due to attendance by multiple
representatives of one entity increases
the disclosure burden with no attendant
increase in benefit. The Commission
agrees and is modifying the rule
accordingly.
4. Research department
FIA, ISDA, and SIFMA, in a joint
comment, objected that the imposition
of the rule’s restrictions to research
departments 115 of global affiliates
would create logistical difficulties and
expense for multinational firms; this
impact was not quantified by the
commenters. FIA, ISDA, and SIFMA
suggested that the Commission limit the
rules to requiring disclosure ‘‘on third
party research reports.’’ The
Commission believes that the rule helps
ensure that the research reports
produced by or on behalf of an SD,
MSP, FCM, or IB, on which consumers
may rely in making investment or risk
management decisions, are not biased in
favor of the financial interest of the SD,
MSP, FCM, or IB—a benefit. This, in
turn, promotes consumer confidence in
such reports—another benefit.
Therefore, because it believes that the
alternative suggested by FIA, ISDA, and
SIFMA would be unacceptably porous
and invite evasion by registrants that
move their research function to an
affiliate, the Commission is adopting the
rule as proposed. The Commission
believes that ensuring that the intended
benefits of the rule are not depleted
through evasion justifies any
incremental cost of extending the rule to
115 The proposed rules defined the term ‘‘research
department’’ as ‘‘any department or division that is
principally responsible for preparing the substance
of a research report relating to any derivative * * *
including a department or division contained in an
affiliate * * *.’’

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affiliates of registrants. In addition, the
Commission believes that the increased
costs are not as significant as posited by
the commenters. A registrant need not
examine the research functions of all of
its affiliates under these rules; rather,
the rules only require that a registrant
apply the informational partitions of the
rules to those research groups doing
research on behalf of an SD, MSP, FCM,
or IB.
5. Research Report
As proposed, the definition of the
term ‘‘research report’’ expressly
excluded four categories of
communications from coverage. After
considering the comments received, the
Commission is expanding the list of
exclusions as recommended to include
‘‘commentaries on economic, political
or market conditions’’ and ‘‘statistical
summaries of multiple companies’
financial data, including listings of
current ratings.’’ As modified, the
Commission believes the rule strikes a
reasonable balance between the need to
identify research reports on which an
investor or risk manager may rely in
making a decision to enter into a swap
or other derivative that may also be
subject to potential bias in favor of the
financial interest of an SD, MSP, FCM,
or IB, and those research reports on
which an investor or risk manager may
rely, but that are not likely to be subject
to such bias. The benefits of the rule as
modified are that the rules foster less
biased research reports without
burdening registrants with unnecessary
restrictions on those research reports
that, by their nature, are not likely to be
subject to bias. To maintain these
benefits, the Commission declines to
broaden the definitional exclusion as
suggested by commenters 116 to
communications the Commission
believes could represent the core focus
of a research department—e.g., asset
116 FIA, ISDA, and SIFMA argued for the
expansion of the exclusions that the Commission
has accepted. FIA/ISDA/SIFMA further argued that
communications produced by a business trading
unit labeled as a ‘‘trading/sales desk product’’ and
as ‘‘non-research’’ should be excluded from the
definitions of research report. In a separate
comment, JP Morgan expressed a general agreement
with the points raised in the FIA/ISDA/SIFMA
letter. EEI argued that the Commission should
exclude from the definition any communication
between an SD or MSP, and its regulator,
concerning hedging activity because firms with
small trading operations should be permitted to
publish occasional research reports to justify
trading decisions, without being subject the
proposed rules. NFA also argued that the definition
in proposed § 1.71(a)(9) was too broad and
suggested that the definition be limited in a number
of ways similar to NASD Rule 2711. Newedge also
argued that the definition was too broad and
suggested a more narrow definition of research
report.

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classes, economic variables commonly
referenced in derivatives, and on-therun swap rates—and thus be susceptible
to bias.
6. Conflicts of Interest Adequately
Addressed by Existing Commission and
NFA Rules; FCM de minimis Exception
NFA commented that existing NFA
rules address issues raised in proposed
§ 1.71, and that the rule could have
unintended consequences. K&L Gates
LLP (on behalf of Peregrine Financial
Group Inc.), ADM Investor Services Inc.,
John Stewart & Associates Inc., and
Stewart-Peterson Group Inc. each agreed
with NFA that existing rules of NFA and
the Commission are sufficient, and thus
the additional compliance costs
imposed by the rules are not justified.
The Commission believes that
sections 4d(c) and 4s(j)(5) of the CEA
require registrants to institute
safeguards beyond what has been
previously required in the rules of the
Commission and NFA, and, accordingly,
is adopting the rule substantially as
proposed. For example, the statutory
provisions require ‘‘structural and
institutional safeguards’’ to ensure that
research and trading functions are
‘‘separated by appropriate informational
partitions,’’ a requirement not imposed
by existing NFA or Commission rules.
Thus, to the extent institution of these
additional safeguards incur added costs,
these are attributable to the statutory
requirements imposed by Congress.
Moreover, by providing specificity
under the rules with respect to the
conflict-of-interest requirement and by
maintaining consistency with NASD
Rule 2711, the Commission believes that
the rule will minimize disruption to the
market and minimize the additional
compliance costs required by the CEA
because the rules rely on wellestablished standards.
7. FCM de minimis Exception
Newedge commented that FCMs
engaging in minimal proprietary trading
should not be subject to the burdens of
the rule relating to research analysts
because such a firm does not present a
risk of conflicts of interest. Again, the
Commission notes that sections 4d(c)
and 4s(j)(5) of the CEA require
registrants to institute ‘‘structural and
institutional safeguards’’ to ensure that
research and trading functions are
‘‘separated by appropriate informational
partitions,’’ and that neither of these
sections makes an allowance for a de
minimis amount of trading or research.
Thus, the Commission cannot adopt the
alternative approach suggested by
Newedge because the imposition of a de
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is inconsistent with the statutory
directive that Congress set forth.
Moreover, the Commission does not
believe that the limited nature of a
firm’s proprietary trading negates the
issues intended to be addressed through
the statutory mandate because a firm
engaged in trading solely on behalf of
customers can increase its commissions
by encouraging an increase in trading
activity through research reports.
8. Small IB Exception

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In the FCM/IB Conflicts NPRM, the
Commission invited comment on how
the proposed rules should apply to
FCMs and IBs, considering the varying
size and scope of the operations of such
firms. A number of commenters
requested relief for small IBs on grounds
that the burden to them would be high
and could discourage them from
providing research to the detriment of
customers seeking to hedge commercial
risk.117 Given the mandate of section
4d(c) of the CEA to establish
‘‘appropriate informational partitions’’
within all FCMs and IBs, the
Commission is not able to exempt small
firms from the statutory requirements.
The Commission, however, recognizes
that an IB’s size is a significant factor in
determining the ‘‘appropriateness’’ of
the informational partitions required by
section 4d(c). Thus, in light of the
burden to small IBs and the attendant
loss of research benefits for consumers
that could result, the Commission has
modified § 1.71(b) to set forth a separate
policies and procedures requirement for
small IBs designed to provide them
greater flexibility in determining the
appropriate informational partitions
required under their own
circumstances.118
117 NFA, National Introducing Brokers
Association, ADM Investor Services Inc., John
Stewart & Associates Inc., and Stewart-Peterson
Group Inc. each argued that implementing the
proposed rules would be prohibitively costly,
burdensome, and unnecessary for small IBs,
particularly for IBs dealing with agricultural
commodities where the IB may have only a few
employees engaged in both research and trading for
customers, and would force an unspecified number
of small IBs out of business. Chris Barnard noted
that small IBs lack the capacity to carry the
proportionately heavier regulatory burden set forth
in the proposed rule, and as such, some regulatory
mitigation would be beneficial based on number of
staff or revenues. Multiple commenters also
commented on the limited market price impact of
research reports created or distributed by small IBs.
118 The threshold to qualify for this small IB
alternative is $5 million or less in aggregate gross
revenues generated over the preceding 3 years from
activities as an IB. This approach is similar to that
taken in NASD Rule 2711 and was raised as a
possible alternative in the preamble of the proposed
rule.

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9. Restriction on Non-Research
Personnel From ‘‘Influencing the
Content’’ of Research Reports
The proposed rules provided that
non-research personnel shall not
influence the content of a research
report. In response to commenters’
concerns that the proposed standard
was unnecessarily broad and would
tend to chill all communications,
including those beneficial to research
integrity, between research and nonresearch personnel, the Commission is
modifying the rules in line with
suggested alternatives to provide instead
that non-research personnel shall not
direct the views and opinions expressed
in a research report.119 The Commission
believes that accepting this change will
reduce the compliance burden of
registrants because it directs compliance
efforts toward ensuring that the views
and opinions expressed in research
reports are those of the research analyst,
rather than attempting to prohibit all
influence.120
10. Restriction on Research Analyst
Supervision by Business Trading Unit
or Clearing Unit
The proposed rules prohibited (1)
supervision or control of a research
analyst by any employee of the
registrant’s business trading unit or
clearing unit, and (2) influence or
control over the evaluation or
compensation of a research analyst by
personnel engaged in pricing, trading, or
clearing activities. The intent of the
rules is to foster research free of bias
that may result from research analysts’
expectation of increased compensation
for producing research reports favorable
to the financial interests of personnel in
the business trading unit or clearing
unit—a benefit.
FIA, ISDA, and SIFMA
recommended—presumably on the basis
that requiring a separate reporting line
adds to the compliance burden—that
the restriction only apply to direct
supervision of research analysts, and
not to others further up the management
chain. No commenter provided
119 FIA, ISDA, SIFMA, and JP Morgan argued that
the proposed prohibition on ‘‘influencing the
content’’ should be eliminated because it would
impair ordinary communications between research
and non-research personnel. As an alternative, FIA/
ISDA/SIFMA suggested that non-research personnel
should be prohibited only from ‘‘directing the views
and opinions expressed in research reports.’’ Better
Markets argued that the rules should be expanded
to include any decision not to publish a report or
to refrain from including relevant information.
120 The Commission further modified the rules in
response to commenters to provide that nonresearch personnel shall not direct a research
analyst’s decision to publish a research report. The
Commission believes this is a burden-neutral
modification to provide clarification, however.

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quantitative information with respect to
the costs of such burden. The
Commission believes that it has
resolved the concerns of commenters
through (1) changes to the definitions of
‘‘business trading unit’’ and ‘‘clearing
unit’’ discussed in section II.M above,
and (2) using those definitions to
designate personnel who may not have
influence or control over the evaluation
or compensation of a research analyst.
As modified, the definitions reach only
those performing certain functions in
the unit and those supervising the
performance of those functions. The
Commission believes the threat to
research analyst independence that
would result from permitting
supervision by any member of the
business trading unit or clearing unit, as
defined in the final rules, justifies
adopting the rule as proposed.
11. Requirement That Legal/Compliance
Personnel Supervise Communication
Between Research and Non-Research
Personnel
The proposed rules permitted nonresearch personnel to review a research
report before its publication for limited
purposes, such as verifying factual
accuracy. Such review: (1) May only be
conducted through authorized legal or
compliance personnel, and (2) must be
properly documented. In this respect,
the rules maintain consistency with
NASD Rule 2711 and the Commission
believes that such consistency will
minimize compliance costs because the
rules rely on well-established standards.
In addition, the Commission notes that
the benefit of this provision is that it
maintains the independence of the
views and opinions expressed in
research reports while improving the
accuracy of such reports. The rules
accomplish these benefits by balancing
the need for some review of research
reports by non-research personnel,
while ensuring the review is limited in
scope by requiring the presence of legal
or compliance personnel.
EEI recommended that the
Commission exempt communications
that are factual in nature from oversight
by legal and compliance personnel,
arguing that such oversight
unnecessarily burdens legal/compliance
personnel. EEI did not further qualify or
quantify the costs implicated by the
proposed exemption. Upon
consideration of the alternative’s cost/
benefit ramifications, the Commission
determined to adopt the rule as
proposed. The Commission finds the
suggested alternative unacceptable for
several reasons. First, the Commission
does not believe that registrants will be
able to distinguish easily

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communications that are ‘‘factual in
nature’’ from those that are not, likely
resulting in more uncertainty and
needed review by legal and compliance
personnel, not less. In addition, the
Commission believes that allowing for
communications that are merely
‘‘factual in nature’’ opens an avenue for
evasion that could undermine the rules’
intended benefits.

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12. Restrictions on Research Analyst
Communications
The proposed rules provided that a
research analysts’ written or oral
communication relating to any
derivative must not omit any material
fact or qualification that would cause
the communication to be misleading to
a reasonable person. The requirement,
as proposed, applied to external
communications to a current or
prospective counterparty as well as
internal communications to any
employee of the registrant. The
Commission intends the rules to
promote research report integrity—i.e.,
help ensure that reports are both
unbiased in favor of a registrant’s
financial interests and factually accurate
in material respects. The Commission
anticipates that the cost attendant to
achieve the accuracy component of this
intended benefit is any increased time a
registrant spends ensuring that research
analysts’ reports are free of material
misleading inaccuracies.
FIA, ISDA, SIFMA, and JP Morgan
commented that the proposed rule
would materially burden an affected
firm’s operations because it applies to
internal communications as well as
external communications. Upon
consideration of the potentially
significant cost of including internal
communications relative to the limited
gain in intended benefits, the
Commission is modifying the rules to
exclude communications with
employees of the registrant from the
requirement.
13. Restriction on Influence of Business
Trading Unit and Clearing Unit on
Research Analyst Compensation
Proposed §§ 23.605(c)(3) and
1.71(c)(3) precludes (1) a registrant from
considering a research analyst’s
contribution to the trading or clearing
business as a factor in his or her
compensation review or approval, and
(2) a review or approval role for
business trading or clearing unit
personnel with respect to a research
analyst’s compensation. As articulated
above, the Commission believes that the
benefit of unbiased research flows
directly from a research analyst’s
independence, which is compromised if

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the analyst’s compensation is subject to
business trading or clearing unit
influence.
The Commission recognizes that the
rule, to some incremental extent, may
add to compliance costs, although no
commenter specifically articulated or
quantified this impact. After
considering the comments received,121
the Commission has determined to
revise the proposed rule to relieve the
compliance burden by permitting
communications to research department
management relating to client or
customer feedback, ratings, and other
indicators of a research analyst’s
performance. The Commission does not
believe that this relaxation will
negatively impact research
independence. The Commission
declines to further modify the rule,
however, based on its belief that
maintaining a firewall around research
analyst compensation decisions is
crucial to implementing effective
conflict-of-interest policies and
procedures and ensuring the benefits of
unbiased research reports. The
Commission also confirms that the rule
does not prohibit compensation
decisions from being subject to nondiscriminatory and non-prejudicial
firm-wide compensation guidelines.
14. Disclosure of Conflicts by Research
Analysts in Research Reports and Public
Appearances; Disclosure of Conflicts in
Third-Party Research Reports
Proposed §§ 23.605(c)(5)(i) and
1.71(c)(5)(i) required certain disclosures
in registrants’ research reports and at
research analysts’ public appearances.
Specifically, it required disclosure of
whether the analyst that prepared the
report or makes the appearance
maintains, from time to time, a financial
interest in the types of derivatives that
the analyst follows, the general nature of
such interest, and any other material
conflicts of interest of which the
research analyst has knowledge.
Additionally, as proposed,
§§ 23.605(c)(5)(iv) and 1.71(c)(5)(iv)
required that, if a registrant distributes
or makes available third-party research
121 FIA, ISDA, SIFMA, and JP Morgan contended
that research management should be able to solicit
input from business trading and clearing unit
personnel concerning the performance of research
personnel. FIA/ISDA/SIFMA, as well as Newedge,
further argued that research management decisions
should be subject to firm-wide compensation
guidelines. By contrast, Michael Greenberger argued
that research management should be prohibited
from soliciting any input of business trading and
clearing units concerning a research analyst’s
compensation or performance evaluation, even if
the influence is indirect or if research management
maintains the ability to make all final decisions on
such determinations. Better Markets commented
that the provision should be broadened.

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reports, each report be accompanied by
certain disclosures pertinent to conflicts
of interest. The required disclosures
benefit consumers of research reports
produced by SDs, MSPs, FCMs, and IBs
because they alert the consumers of
such reports to interests that may
influence the content of such reports,
allowing the consumer to make an
independent judgment as to their value.
Several commenters recommended
changes that could lessen the
incremental (though unquantified)
compliance costs of the rule by
curtailing the required disclosures.122
The Commission has considered these
comments and has determined that the
benefits of the rule will be maintained
without subjecting registrants to the
burden of determining and disclosing
financial interests that are maintained
‘‘from time to time.’’ Thus, the
Commission is modifying the language
of §§ 23.605(c)(5) and 1.71(c)(5) to
remove the phrase ‘‘from time to time,’’
such that a research analyst need only
disclose whether she maintains a
relevant financial interest at the time of
publication of the report or the time of
a public appearance. However, the
Commission is not adopting a de
minimis exception, due to the difficulty
of deciding when a financial interest is
de minimis in this context. A de
minimis exception would require a
registrant to determine the threshold
point at which a financial interest poses
a threat of conflicts of interest—a
nebulous standard; such determination
is likely to increase the costs of
compliance of the rule over the cost that
would be incurred to simply disclose all
financial interests.
Commenters also raised concerns
regarding the burden of required
disclosures when distributing research
reports produced by a third-party.123
The Commission considered the burden
of disclosure in this context in light of
maintaining the benefit of disclosure of
information necessary for consumers to
judge the content of research reports.
The Commission has determined not to
modify the rule in regard to third-party
research disclosures. It believes that
122 FIA, ISDA, and SIFMA argued that
§§ 23.605(c)(5)(i) and 1.71(c)(5)(i) should be limited
to disclosing whether a research analyst maintains
a relevant financial interest at the time of
publication of the report/time of public appearance,
rather than ‘‘from time to time’’ as provided in the
rule. EEI suggested that the Commission modify the
proposed rule to provide a de minimis exception to
the disclosure requirements, such that a research
analyst should be required only to identify relevant
financial interests.
123 FIA, ISDA, SIFMA, JP Morgan, and EEI argued
that the required disclosures with respect to thirdparty research reports are unnecessary because
third-parties are, by definition, independent.

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third-party research reports distributed
by a registrant may be interpreted as
carrying the endorsement of the
registrant and thus may present
conflicts-of-interest issues in the same
way as research reports originating with
the registrant’s own research analysts;
accordingly, the same level of disclosure
is appropriate.
Finally, commenters also contended
that the phrase ‘‘any other actual,
material conflict of interest of the
research analyst’’ is vague and would be
burdensome to implement, requiring
coordination among various business
units and the creation of special
databases in order to comply with the
rule. The Commission believes that the
cost concerns of commenters are
misplaced in this regard. The rules
require disclosure of ‘‘any other actual,
material conflicts of interest of the
research analyst or [SD, MSP, FCM, or
IB] of which the research analyst has
knowledge at the time of publication of
the research report or at the time of the
public appearance’’ (emphasis added).
Thus, the disclosure requirement is
limited to conflicts of which the
research analyst has knowledge, and the
SD, MSP, FCM, or IB need not construct
the databases suggested by commenters
in order to comply with the rule.
15. Separation of Clearing Unit From
Business Trading Unit
As proposed, § 23.605(d) and § 1.71(d)
prohibited interference by an SD or MSP
with the decisions of clearing members,
including FCMs, regarding the provision
of clearing services and activities. The
proposed rules also required
informational partitions between
business trading units and clearing
member personnel. In addition, the
proposals prohibited any employee of a
business trading unit from supervising
or controlling any employee of a
clearing member. The Commission
believes the benefits of the rules are
that, to the extent practicable, the rules
protect fair and open access to clearing
by ensuring that decisions to accept
clearing customers are not motivated
solely by considerations of trading
profits.
Commenters raised a number of cost
concerns related to operation of the rule,
as follows:
• Sales personnel should be able to
act for both the trading unit and the
clearing unit to offer a full range of
services to customers efficiently; 124
124 FIA/ISDA/SIFMA and JP Morgan argue that
sales personnel should be permitted to act for both
units. UBS Securities LLC also argued that the rule
inhibits the ability of a financial services firm to
operate its swap clearing business as a partnership
with its trading business in order to serve clients.

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• The rules will impair a registrant’s
ability to follow risk management best
practices by requiring independent risk
assessments in the trading unit and
clearing unit for the same counterparty,
rather than a consolidated risk
assessment; 125
• The rule should be limited to
prohibiting a trading unit from
obtaining information about the
transactions or positions of customers of
the clearing unit; 126
No commenter provided any
quantitative information regarding the
expected costs of complying with the
rules.
Having considered the costs of
compliance as presented by commenters
in light of the benefits of open access to
clearing, the Commission has
determined it appropriate to promulgate
the rules largely as they were originally
proposed. Despite the varying
incremental costs of any needed
corporate structure reorganization and
instituting informational partitions, the
Commission believes the separation of
the FCM clearing unit from the
interference or influence of an affiliated
SD or MSP is crucial to promoting open
access to clearing and securing the
benefits to market participants and the
stability of the financial system itself
expected to follow from increased
central clearing.127 Open access to
clearing will be essential for the
expansion of client clearing needed for
market participants to comply with the
mandatory clearing of swaps as
determined by the Commission under
section 723 of the Dodd-Frank Act.
Specifically, the Commission does not
believe that the rule language should be
changed to permit sales personnel to act
for both the trading unit and the
clearing unit. The risks associated with
this approach, in terms of potential
undue influence and interference with
Similarly, the FHLBs argued that the proposed rule
overly restricts the ability of SDs and MSPs to run
their trading and clearing operations and effectively
serve the needs of their end-user counterparties.
125 FIA/ISDA/SIFMA and the FHLBs argued that
the proposed rules would impair an SD’s/MSP’s
ability to follow risk management best practices.
NFA commented that § 1.71(d) is too broad and may
negatively impact a firm’s ability to share
information about customers to make credit and
risk determinations.
126 FIA/ISDA/SIFMA recommended that the
Commission not adopt the proposed rules, but
instead adopt a rule that prohibits an affiliated SD
or MSP from obtaining information from an
affiliated FCM’s clearing personnel concerning
transactions conducted by FCM clients with either
their own clients or with independent SDs or MSPs.
127 In September 2009, the G–20 Leaders agreed
in Pittsburgh that ‘‘all standardised OTC derivative
contracts should be traded on exchanges or
electronic trading platforms, where appropriate,
and cleared through central counterparties by end2012 at the latest.’’

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clearing decisions, has been wellsupported by commenters.128
However, in response to commenters’
concerns about an FCM’s ability to
manage a default scenario without the
benefit of the trading expertise in the
business trading unit, the Commission
is modifying proposed § 1.71(d)(2)(i) to
permit the business trading unit of an
affiliated SD or MSP to participate in
the activities of an FCM during an event
of default. Specifically, the business
trading unit personnel would be
permitted to participate in the activities
of the FCM, as necessary, during any
default management undertaken by a
derivatives clearing organization and for
the purposes of transferring, liquidating,
or hedging any proprietary or customer
positions as a result of an event of
default.
16. Undue Influence on Customers
As proposed, § 1.71(e) required that
FCMs and IBs adopt and implement
written policies and procedures that
mandate the disclosure of any material
incentives and any material conflicts of
interest regarding the decision of a
customer as to trade execution and/or
clearing of a derivatives transaction.
Proposed § 23.605(e) mandated that SDs
and MSPs adopt policies and
procedures requiring disclosure to
counterparties of any material
incentives and conflicts of interest
regarding the decision of a counterparty:
(1) Whether to execute a derivative on
a swap execution facility or designated
contract market; or (2) whether to clear
a derivative through a derivatives
clearing organization. The Commission
believes that the rules benefit
counterparties by ensuring that they are
adequately informed of any material
incentives or conflicts prior to the
execution of a transaction, and benefit
the market by promoting the efficient
use of trading facilities and clearing for
swap transactions.
Some commenters objected to the rule
on the grounds that existing
Commission regulations already impose
risk disclosure requirements on FCMs
and IBs. FIA, ISDA, SIFMA, and JP
Morgan argued that the Commission
could reduce the burden of the rules by
128 MFA and Pierpont Securities Holdings LLC
commented that they support the Commission’s
proposals. Swaps and Derivatives Market
Association contended that that the restrictions
correctly address key areas where conflicts arise,
and that the independence of clearing members is
essential to accomplish several policy goals of the
Dodd-Frank Act. Michael Greenberger also
expressed support for § 23.605(d), noting that
attempts to tie clearing decisions to trade execution
decisions would raise potential conflicts of interest,
which could serve to block access to clearing and
prevent competition among execution venues.

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requiring SDs and MSPs to provide
customers with an annual disclosure
document describing potential conflicts
that may exist among the firm, its
affiliates, clients, and employees.
After considering costs of compliance
with the rule in light of the benefits
outlined above, and the underlying
statutory requirements, the Commission
has determined it appropriate to adopt
the rules as originally proposed. The
Commission believes that the disclosure
of conflicts of interest in this context are
materially different from the risk
disclosures required of FCMs and IBs
under existing Commission regulations
and, therefore, existing regulations are
inadequate to secure the benefits of the
rule outlined above. In addition, the
Commission notes that the rule does not
prohibit an SD or MSP from providing
its customers with an annual disclosure
document, and the Commission
confirms that such would be permitted
assuming that such document is
sufficient to meet the requirements of
the rule.

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Costs
Sections 4d(c) and 4s(j)(5) of the CEA
require FCMs, IBs, SDs, and MSPs, to
adopt and implement certain conflict of
interest systems, procedures and
safeguards, including research firewalls.
The costs and benefits that necessarily
result from these basic statutory
requirements are considered to be the
‘‘baseline’’ against which the costs and
benefits of the Commission’s final rules
are compared or measured. The
‘‘baseline’’ level of costs includes the
costs that result from the following
activities required by the statute:
• FCMs and IBs must establish
structural and institutional safeguards to
ensure that the activities of any person
within the firm relating to research or
analysis of the price or market for any
commodity are separated by appropriate
informational partitions within the firm
from the review, pressure, or oversight
of persons whose involvement in
trading or clearing activities might
potentially bias the judgment or
supervision of the persons.
• SDs and MSPs must establish
structural and institutional safeguards to
ensure that the activities of any person
within the firm relating to research or
analysis of the price or market for any
commodity or swap are separated by
appropriate informational partitions
within the firm from the review,
pressure, or oversight of persons whose
involvement in pricing, trading, or
clearing activities might potentially bias
their judgment or supervision and
contravene the core principles of open

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access and the business conduct
standards described in the CEA.
• SDs and MSPs must establish
structural and institutional safeguards to
ensure that the activities of any person
within the firm acting in a role of
providing clearing activities or making
determinations as to accepting clearing
customers are separated by appropriate
informational partitions within the firm
from the review, pressure, or oversight
of persons whose involvement in
pricing, trading, or clearing activities
might potentially bias their judgment or
supervision and contravene the core
principles of open access and the
business conduct standards described in
the CEA.
Compliance with the statutory
baseline alone would result in costs for
FCMs, IBs, SDs, and MSPs. For
example, the requirement to establish
informational partitions would include
the cost of identifying personnel
involved in research or analysis of the
price or market for any commodity or
swap, identifying personnel involved in
pricing, trading, or clearing activities,
and designing and implementing
communication policies and
procedures.
Congress mandated that the
Commission adopt rules to implement
each of the statutory provisions. With
regard to its implementation decisions,
the Commission has determined the
following to be potential costs to FCMs,
IBs, SDs, and MSPs to comply with the
final regulations regarding conflicts-ofinterest policies and procedures:
• Identifying reports that qualify as
research reports;
• Maintaining records of public
appearances by research analysts; and
• Designing and implementing
policies and procedures regarding:
• Legal or compliance participation
in communications between research
analysts and non-research personnel
regarding the content of research
reports;
• Oversight of research analyst
communications regarding omissions of
material facts or qualifications that
would cause the communication to be
misleading to a reasonable person;
• Communication of any client or
customer feedback on research analyst
performance from the business trading
unit or clearing unit to research
department management;
• Implementing the prohibition on
promises of favorable research by
research analysts;
• Discovering, monitoring, and
disclosing financial interests maintained
by research analysts;
• Implementing the prohibition on
retaliation against research analysts;

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• Implementing the prohibition of
interference with or influence on
decisions with regard to the provision of
clearing services or activities; and
• Disclosing material incentives and
conflicts-of-interest regarding exchange
trading or clearing decisions by
counterparties.
In adhering to its mandate from
Congress, where possible the
Commission has attempted to alleviate
the burdens on affected entities. The
Commission has narrowed the
definitions of ‘‘business trading unit’’
and ‘‘clearing unit’’ to include fewer
registrant personnel affected by the
rules. The Commission has narrowed
the definition of ‘‘public appearance’’ to
include fewer appearances by research
analysts that would require the
disclosures mandated by the rules. The
Commission has broadened the number
of exclusions from the definition of
‘‘research report’’ such that there are
fewer subject areas that would be
covered by the rules. The Commission
has provided a separate regulatory
standard for small IBs that will lessen
the compliance burden on such firms.
The Commission also has narrowed the
prohibition on non-research personnel
involvement in producing content of
research reports, and removed the need
to police internal communications from
research analysts for omissions of
material facts or qualifications. The
Commission has permitted trading and
clearing units to provide client and
customer feedback on research analyst
performance to research department
management and removed the need to
determine and document financial
interests of research analysts maintained
‘‘from time to time’’ for disclosure
purposes. Finally, the Commission has
permitted business trading unit
personnel to participate in the activities
of an FCM, as necessary, during any
default management undertaken by a
derivatives clearing organization and for
the purposes of transferring, liquidating,
or hedging any proprietary or customer
positions as a result of an event of
default.
Other than costs resulting from
collections of information subject to the
Paperwork Reduction Act, incorporated
by reference herein, the Commission has
no reliable quantitative data from which
to reasonably estimate the costs of
compliance with these conflict of
interest rules.129 No commenter
provided any quantitative data on the
costs of compliance with the rules as
129 Although the rules were adapted from NASD
rule 2711, that rule was promulgated by an SRO
(now FINRA), which was not required to conduct
a cost-benefit analysis of the rule prior to
promulgation.

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proposed. The Commission’s review of
applicable academic literature yielded
no research reports or studies directly
relevant to its considerations of costs of
the final rules.
The Commission anticipates that
many entities may currently have,
pursuant to other regulation, the
informational partitions required by the
rules in place. The Commission notes
that dually registered FCMs and BDs are
more likely to have implemented such
informational partitions under other
regulatory regimes 130 than entities that
are subject to such requirements for the
first time. Costs, therefore, are expected
to be higher for those entities not
currently dually registered or not
currently implementing conflicts of
interest policies and procedures. Certain
of the costs associated with these
conflict of interest rules result from
collections of information subject to the
Paperwork Reduction Act. Costs
attributable to collections of information
subject to the PRA are discussed further
in section V.B.3. below. The
Commission has also considered these
costs, which it incorporates by reference
herein, in its section 15(a) analysis.

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Benefits
The Commission believes that the
proper informational partitions between
research and trading and between
clearing and trading, including
restrictions on communications,
supervision, and compensation
oversight, help to ensure that research
being released by SDs, MSPs, FCMs, and
IBs and decisions related to trade
execution and clearing are not tainted
by inappropriate incentives. Because
this research may be relied upon by a
public that views such entities as
experts in derivatives markets by virtue
of their intimate knowledge of the
130 In this respect, the Commission observes that
55% of current FCMs are also registered as BDs
with the SEC, and thus may already have
informational partitions between research and
trading as required under the rules of FINRA. See
letter from NFA, dated Jan. 18, 2011 (comment file
for 75 FR 70881 (Designation of a Chief Compliance
Officer; Required Compliance Polices; and Annual
Report of a FCM, SD, or MSP)). The Commission
also notes that in 2003 the UK FSA conducted a
cost benefit analysis when promulgating conflicts of
interest rules and guidance with respect to
investment research and issues of securities. The
UK FSA concluded that because UK firms were
required to comply with their existing statutory
obligations including management of conflicts of
interest when carrying out regulated activity, the
‘‘total compliance costs relating to [the FSA’s] new
proposed rule and supporting guidance on objective
investment research will be of no more than
minimal significance.’’ See FSA Consultation Paper
205, Conflicts of Interest: Investment Research and
Issues of Securities, Annex 1 (October 2003); FSA
Consultation Paper 171, Conflicts of Interest:
Investment Research and Issues of Securities,
Annex 5 (February 2003).

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products and markets, it is imperative
that the information released therein is
as accurate and free of conflicts of
interest as possible. Similarly, because
the importance of central clearing in
derivatives markets necessitates free and
open access to clearing, unrestrained by
any potential conflicts of interest, it is
imperative that access to clearing is not
impeded by any inappropriate
motivation. The rules adopted in this
release require entities to establish
appropriate policies and procedures to
accomplish these benefits.
In addition, by ensuring that
decisions on clearing activities remain
separate from decisions relating to trade
execution and other proprietary
activities, the final regulations promote
competitiveness in futures and swaps
markets by ensuring open access to
clearing. Central clearing is a pillar of
derivatives reform initiatives,
contributing heavily to the efficiency
and safety of derivatives markets;
barriers to clearing access may have an
adverse effect on that efficiency and
safety.
To the extent that a research report
informs the financial investment in
derivatives markets, protecting the
integrity of that report aids in the
protection of the financial integrity of
markets.
Moreover, requiring registrants to
disclose any potential conflicts of
interest further affords the public the
opportunity to make judgments
regarding the information provided to
them in the written reports and public
appearances of research analysts. The
Commission’s mission to ensure fair and
orderly markets relies in part on the
transparency of certain market
information, in order to provide
potential investors the accurate
information necessary to make informed
decisions.
Section 15(a) Determination
1. Protection of Market Participants and
the Public
The Commission believes that, as a
result of these rules, market participants
and the public are better protected from
the potential harm that may occur when
financial research reports are not
insulated from the bias of registrants’
own financial interests. This bias holds
strong potential to operate as an
incentive for registrants to produce and
distribute research reports tainted by
misleading, unbalanced, and/or
inaccurate information. Such tainted
reports, in turn, may induce market
participants to engage in a financial
transaction that they otherwise would
not. Thus, the Commission believes that

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20185

these regulations perform an important
consumer protection function in the
markets it regulates. While, in theory
regulation could discourage some SDs,
MSPs, FCMs, or IBs from making
research reports public, the Commission
believes the rules are carefully tailored
to minimize costs beyond those required
by the statute. The Commission also
believes that SDs, MSPs, FCMs, and IBs
likely will use research reports as a tool
to differentiate themselves from
competitors. In addition, the
Commission believes that by insulating
clearing services from pricing and
trading bias, the regulations foster fair
and open access to central clearing.
2. Efficiency, Competitiveness, and
Financial Integrity of Markets 131
The final rules promote the efficiency,
competitiveness, and financial integrity
of futures and swaps markets 132 by
prohibiting an entity’s trading personnel
from manipulating research reports or
otherwise biasing the information
contained in research reports to their
own financial advantage. To the extent
the research produced by registrants is
used to inform financial strategies, the
integrity of that research is beneficial to
the financial integrity of derivatives
markets. The final rules strive to ensure
the integrity of research performed by
Commission registrants. Sound research
also promotes market efficiency insofar
as the increased dissemination of
reliable, unbiased market information is
acted upon by market participants in
their decision-making. As discussed
above, the Commission does not believe
that the costs of these regulations, as
carefully tailored to minimize costs
beyond those required by the statute,
will materially decrease market
efficiency by leading to less sharing of
relevant market information,
particularly in light of the competitive
incentives to do so.
Because the final rules promote fair
and open access to central clearing, they
also promote the financial integrity of
derivatives markets—both futures and
swaps markets. Greater access to central
clearing ensures that more market
participants will have the option to
mitigate the counterparty credit risk that
they face when entering into derivatives
transactions. Protecting market
participants from discrimination in the
provision of clearing services will foster
131 Although by its terms CEA section 15(a)(2)(B)
applies to futures markets only, the Commission
finds this factor useful in analyzing regulations
pertaining to swaps markets as well.
132 Although by its terms CEA section 15(a)(2)(B)
applies to futures markets only, the Commission
finds this factor useful in analyzing regulations
pertaining to swaps markets as well.

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a competitive environment for the
provision of clearing services and afford
market participants greater choice in
clearing members. While the
Commission recognizes that some costs
are attendant to the required firewall
between trading and clearing, the
Commission does not believe that these
costs, as carefully tailored to minimize
costs beyond those required by the
statute, are sufficient to materially
inhibit the provision of clearing
services.

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3. Price Discovery
To the extent that insulating research
reports from registrant financial bias
results in hedgers and investors making
more accurately informed investment
decisions, reported trade and
transaction prices should better reflect
the intrinsic value. This promotes the
price discovery function of derivative
markets. In contrast, where there is no
check on the integrity of registrant
research materials and market actors
transact on the basis of misleading or
inaccurate information, resulting prices
may be distorted. Because the rules are
carefully tailored to minimize costs, the
Commission does not believe these rules
will reduce liquidity to hinder price
discovery.
4. Sound Risk Management
The final rules regarding
informational partitions between
clearing and trading will contribute to
sound risk management because the
separation of the FCM clearing unit
from the interference or influence of an
affiliated SD or MSP promotes open
access to clearing. Open access to
clearing will be essential for the
expansion of client clearing needed for
market participants to comply with the
mandatory clearing of swaps as
determined by the Commission under
section 723 of the Dodd-Frank Act. The
mandatory central clearing of swaps is
one of the primary responses to the 2008
financial crisis, as central clearing is
believed to promote sound risk
management in the swap markets. While
the Commission recognizes that some
costs are attendant to the required
firewall between trading and clearing,
the Commission does not believe that
these costs, as carefully tailored to
minimize costs beyond those required
by the statute, are sufficient to
materially inhibit the provision of
clearing services and the risk
management benefit these services
afford.
5. Other Public Interest Considerations
The Commission has not identified
any other public interest considerations

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impacted by these conflicts-of-interest
rules.
G. Designation of a Chief Compliance
Officer, Required Compliance Policies,
and Annual Report of an FCM, SD, or
MSP
The CCO NPRM proposed several
rules addressing chief compliance
officer (CCO) designation and certain
CCO requirements:
• Proposed § 3.3(a) codified the
statutory requirements that each FCM,
SD, and MSP designate a CCO and
prescribed certain qualifications for the
position.133
• Proposed § 3.3(d) codified the CCO
duties defined in section 4s(k)(2) for
SDs and MSPs, and extended their
application to FCMs.134
• Proposed § 3.3([e]) 135 codified the
requirements of section 4s(k)(3) of the
CEA for SDs and MSPs—i.e., that the
CCO annually prepare and sign a report
containing descriptions of: (i) The
registrant’s compliance with the CEA
and regulations promulgated under the
CEA, and (ii) each policy and procedure
of the CCO, including the code of ethics
and conflicts-of-interest policies—and
extended their application to FCMs
pursuant section 4d(d) of the CEA.
Of the 25 comment letters the
Commission received on the CCO
NPRM, 17 raised issues relevant to the
consideration of the proposed rules’
material costs and benefits; two of these
provided some quantitative data
relevant to costs and benefits.
The comments relevant to costs and
benefits can be classified with respect to
the following 10 aspects, each of which
is discussed below.136
1. Decision To Extend Same
Requirements to FCMs as SDs and MSPs
The Commission proposed uniform
rules applicable to SDs, MSPs, and
FCMs. After reviewing the comments
received,137 the Commission is adopting
133 Section 4d(d) of the CEA requires that each
FCM designate an individual to serve as its chief
compliance officer (CCO). Likewise, section 4s(k) of
the CEA requires that each SD and MSP designate
an individual to serve as its CCO.
134 Section 4d(d) of the CEA authorizes the
Commission to promulgate rules concerning the
duties of a CCO of an FCM.
135 The proposed regulations mis-numbered the
subsections of § 3.3 such that two subsections were
designated as ‘‘(d).’’ To avoid confusion, this release
re-designates such sections correctly in brackets.
136 A more detailed discussion of the comments
can be found in section II.N. above.
137 Comments from Rosenthal, Newedge, and
NFA advocated separate treatment for FCMs, given
the Commission’s separate statutory authority over
them. A number of other commenters, including
Better Markets, NSCP, and CII generally supported
extension of the same duties to FCMs (provided that
certain modifications were made to the proposed
rules).

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the same requirements for SDs, MSPs,
and FCMs. The Commission recognizes
commenters’ concerns (though not
substantiated with quantitative data)
that subjecting FCMs to the same CCO
requirements as applied to SDs and
MSPs by section 4s(k) of the CEA (as
codified in these rules) may increase
costs for FCMs as compared to a less
prescriptive approach. The Commission
believes these costs may vary widely
among FCMs, depending on the
activities in which an FCM engages and
the size and complexity of an FCM’s
operations.138 Lacking quantitative
information requested of commenters,
the Commission has looked to public
sources to estimate the boundaries of
this range. In this regard, it finds the
estimates contained in the SEC’s 2003
published final compliance program
rules for investment companies and
investment advisers informative and, in
lieu of FCM-specific information, a
reasonable proxy for estimating an FCM
compliance cost range.139 The SEC
estimated costs for developing a
compliance program, depending on the
manner chosen, ranging from $1,000 to
$200,000.140
Notwithstanding these costs, the
Commission believes the same
considerations and benefits, discussed
further below, that warrant these
regulations for SDs and MSPs, warrant
them for FCMs as well. As recent
Congressional hearings in the wake of
the MF Global bankruptcy have
highlighted, an FCM’s conduct holds
potential to cause severe negative
impact to market participants and the
public.141 In that the statutory
138 In this respect, the Commission observes that
55% of current FCMs are also registered as BDs
with the SEC, and thus will already have a CCO and
significant compliance regimes as required under
the rules of FINRA. See letter from NFA, dated Jan.
18, 2011 (comment file for 75 FR 70881
(Designation of a Chief Compliance Officer;
Required Compliance Polices; and Annual Report of
a FCM, SD, or MSP)). FCMs that do not currently
have a CCO or a compliance program may choose
to develop a program in-house if their activities are
limited and the regulatory requirements wellunderstood. Other FCMs may choose to purchase an
off-the-shelf compliance manual and adjust it to
correspond to their regulatory requirements. Still
others may hire a third-party compliance firm, a
law firm, or an accounting firm to draft a firmspecific manual. As of 2003, when the SEC
published final compliance program rules for
investment companies and investment advisers, the
costs for these options ranged from $1,000 to
$200,000. See Compliance Programs of Investment
Companies and Investment Advisers, 68 FR 74714
(Dec. 24, 2003).
139 See Compliance Programs of Investment
Companies and Investment Advisers, 68 FR 74714
(Dec. 24, 2003).
140 The SEC considered the same three alternative
compliance avenues as noted above for FCMs. See
id.
141 See Press Release, Senate Committee on
Agriculture, Nutrition & Forestry, Senator Pat

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requirements of the CEA and
Commission regulations under it seek to
prevent harm to market participants and
the public by FCMs, the Commission
believes that requiring a robust CCO
function within FCMs is an important
benefit of these regulations. A CCO will
serve as a focal point to better monitor
and assure FCM legal compliance.
Moreover, the Commission believes the
role of FCMs likely will grow in
importance as client clearing of swaps
increases, fostering commensurate
growth in the benefits of active
compliance monitoring by CCOs of
FCMs to the security and stability of
swaps markets. The Commission also
expects that consistent regulation of its
registrants is likely to benefit the
Commission’s regulatory mission by
increasing the efficiency of registrant
oversight.

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2. Harmonization With Other Regulatory
Regimes
After reviewing comments,142 the
Commission is modifying its proposal to
reduce the cost burden by harmonizing
the CCO requirements for SDs, MSPs,
and FCMs with the traditional
compliance model as reflected in other
regulatory regimes—including regimes
established by FINRA for broker-dealers
(BDs), the FHFA, and by the
Commission for RFEDs—to the extent
consistent with section 4s(k) of the
CEA.143 Specifically, the Commission
Roberts: We Need Answers on MF Global * * *
Futures Still Critical to Risk Management (Dec. 1,
2011), available at http://www.ag.senate.gov/
hearings/continuing-oversight-of-the-wall-streetreform-and-consumer-protection-act (prepared
remarks of Sen. Pat Roberts, ranking subcommittee
member, at December 1, 2011 Senate Committee on
Agriculture, Nutrition & Forestry).
142 See e.g., NFA’s comment letter and
representatives of market participants in a May
meeting with SEC and Commission staff (see
http://comments.cftc.gov/PublicComments/) were
concerned with differences between the
Commission’s proposed rules and FINRA’s rules
and recommended harmonization. The FHLBs
commented that they are subject to FHFA
regulation and requested that the Commission not
impose duplicative regulations for them. Edison
Electric Institute (EEI) urged the Commission to
follow the Federal Energy Regulatory Commission’s
approach by setting forth principles of an effective
compliance program while leaving the details to the
registrant. FIA and SIFMA noted that the more
traditional compliance model— RFEDs are required
to designate a CCO and prepare an annual
compliance certification under current Commission
regulations (see 17 CFR 5.18(j).)—would be
consistent with the approach the Commission took
with regard to RFEDs. FIA and SIFMA, along with
Newedge and Rosenthal, argued that the
Commission should harmonize its rules with those
of FINRA and defer to NFA’s experience in
determining the proper role for the CCO.
143 To the extent the other regulatory regimes
prescribe CCO rules more general than those
specifically required by section 4s(k), they do not
conform to statutory requirements and are not
implemented in the final rules. However, the

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has modified the rule to (1) require that
the CCO ‘‘administer’’ the compliance
policies of the registrant (rather than
establish compliance polices); (2)
confirm, as suggested by commenters,
that the CCO’s role in ‘‘resolving’’
conflicts of interest may involve actions
other than making the final decision; (3)
provide that the CCO must take
‘‘reasonable steps to ensure
compliance’’ (rather than simply
‘‘ensure compliance’’); and (4) permit
either the CCO or the CEO to make the
required certification of the annual
report.
3. Flexibility in Rule’s Structure
In the CCO NPRM, the Commission
requested comment on whether the
structure of the proposed rules allows
for sufficient flexibility, thereby
permitting FCMs, SDs, and MSPs to
control costs by tailoring their
compliance programs to their individual
circumstances. The comments received
raised the following issues with costbenefit implications:
• Allowing a CCO to perform other
duties in addition to compliance
duties; 144
• Designation of multiple CCOs with
defined areas of responsibility; 145
• Allowing a single officer to be CCO
for multiple affiliated entities; 146
• Allowing CCOs of multiple
affiliated entities to report to the board
of a holding company that controls all
affiliated entities; 147
• Allowing CCOs to consult with
other employees, outside consultants,
lawyers, and accountants in fulfilling
their duties; 148
• Requiring a senior CCO to have
responsibility for multiple affiliated
Commission believes the more specific
requirements of section 4s(k) are supplemental—not
contradictory—to the more general ‘‘policies,
procedures, and testing’’ requirements of the rules
of the other regulatory regimes.
144 NFA and the FHLBs commented that the rules
explicitly should permit the CCO to share any other
executive role, such as CEO, to provide flexibility
for smaller firms.
145 NFA also argued that the rules should
recognize that compliance expertise may reside
with more than one individual, and thus the
Commission should consider allowing an entity to
designate multiple CCOs, so that each CCO’s
primary area of responsibility is defined, and each
CCO should be required to perform duties and
responsibilities with respect to their defined area.
146 Newedge, Hess, and The Working Group
argued that affiliated FCMs, SDs, and MSPs that are
separate legal entities should be permitted to share
the same CCO to increase compliance efficiency.
147 The Working Group also argued and that the
CCO of affiliated registrants should be allowed to
report to a board of an affiliated entity that controls
both entities.
148 NFA also recommended that CCOs explicitly
be permitted to consult with other employees,
outside consultants, lawyers, and accountants.

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entities, even if each has its own CCO;
and 149
• Requiring the CCO to be located
remotely from the business trading
unit.150
Having considered these comments,
the Commission has taken steps to
reduce the cost burden on registrants by
expanding the flexibility allowed under
the proposed rule. Specifically, the
Commission agrees that firms,
especially small firms, could reduce
costs if a CCO were permitted to
perform additional duties and therefore
confirms that a CCO may share
additional executive responsibilities
and/or be an existing officer within the
entity. In addition, the final rule would
allow registrants to recognize cost
savings by not prohibiting multiple legal
entities from designating the same
individual as CCO. The Commission
also is not requiring the CCO to be
remotely located from the business
trading unit. Moreover, the Commission
is modifying the rule to permit either
the CCO or the CEO to make the
certification required in the annual
report, as requested by commenters.
This change will reduce the compliance
costs insofar as it may make it easier to
recruit and retain qualified candidates
for CCO. In response to NFA’s concern
about CCOs being able to rely on the
expertise of others, presumably in part
to reduce the cost of personally
developing the requisite expertise, the
Commission confirms that the
qualifying language ‘‘to the best of his
or her knowledge and reasonable belief’’
in the annual report certification
required by the rule permits the CCO or
CEO to rely on other experts for
statements made in the annual report.
With respect to two of the abovenoted issues, however, the statutory
language does not afford the
Commission flexibility to relax
requirements. Specifically, section 4s(k)
of the CEA requires the CCO to report
to each registrant’s board or senior
officer, rather than to the board or senior
officer of a consolidated corporate
parent, so the Commission is unable to
adjust the rule to permit the CCOs of
multiple affiliated entities to report to
the board of a holding company.
Similarly, the statutory language of
sections 4d(d) and 4s(k) of the CEA—
requiring FCMs, SDs, and MSPs to
‘‘designate an individual to serve as
chief compliance officer’’—provides the
149 Better Markets commented that a senior CCO
should have overall responsibility of each affiliated
and controlled entity, even if individual entities
within the group have CCOs.
150 Better Markets recommended that the rule
require the CCO office to be located remotely from
the trading floor.

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Commission no latitude to permit
designation of multiple CCOs with
delineated areas of responsibility. The
Commission notes that any costs of
these requirements are directly
attributable to the statutory
requirements of Congress, and not to
Commission action.

compliance with, the CEA and
Commission regulations. The
Commission believes that the rule as
modified will achieve the benefits of
consolidated compliance oversight
without imposing costs on registrants
that are unnecessary to achieve this
goal.

4. Limited Scope of the Rule

5. CCO Reporting Line

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Proposed § 3.3(a) required each SD,
MSP, and FCM to designate an
individual as a CCO and provide the
CCO with the full responsibility and
authority to develop and enforce, in
consultation with the board or senior
officer, appropriate policies and
procedures to fulfill the duties set forth
in the CEA and regulations. The
proposed rule also required the CCO to
establish policies and procedures
required to be established by a registrant
pursuant to the CEA and Commission
regulations. The Commission believes
that the benefits of the rule consist of
consolidating oversight of compliance
by FCMs, SDs, and MSPs in a single
individual, thereby reducing the risk
that compliance matters will be subject
to inconsistent policies and procedures
or that compliance matters will not
receive the attention necessary to be
effective.
Commenters 151 criticized the
proposed rule for two reasons, each
presumably based in part on the cost of
expanding the traditional role of a CCO:
• A CCO should not be viewed as an
enforcer of compliance polices; and
• A CCO should not be required to
develop all compliance policies.
The Commission agrees with
commenters that the rule could be
modified to maintain the benefits
identified above while imposing less
burden on registrants. The Commission
is therefore narrowing proposed § 3.3(a)
by (i) removing the requirement that a
CCO be provided with ‘‘full’’
responsibility and authority; (ii)
removing the requirement that a CCO
‘‘enforce’’ policies and procedures; (iii)
limiting the responsibilities of the CCO
to (a) the ‘‘swaps activities’’ of SDs and
MSPs and (b) FCMs’ derivatives
activities included in the definition of
FCM under section 1(a)(28) of the CEA;
and (iv) clarifying that a CCO need only
develop policies and procedures to
fulfill the duties set forth in, and ensure
151 Rosenthal commented that the Commission’s
rules should be revised in a manner that reflects the
view that the CCO is only an advisor to
management and should not be viewed as an
enforcer of policies within the FCM. EEI and
Newedge argued that the proposed rules go beyond
what is required by the CEA by inappropriately
imposing upon the CCO full responsibility to
develop and enforce all policies.

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Proposed § 3.3(a)(1) required that the
CCO report to the board of directors or
the senior officer of a registrant, that the
board or senior officer approve the
compensation of the CCO, and that the
board or senior officer meet with the
CCO at least once a year to discuss the
effectiveness of compliance policies and
their administration by the CCO.
Proposed § 3.3(a)(2) also prohibited the
board or senior officer of a registrant
from delegating its authority over the
CCO, including the authority to remove
the CCO. The Commission believes that
these aspects of the rule will ensure
CCO independence from influence,
interference, or retaliation from business
trading unit personnel and freedom
from conflicts of interest in performance
of the CCO’s duties. The Commission
believes CCO independence is crucial to
achieving the benefits of the CCO role
as envisioned under the statutory
provisions of the CEA because an
independent CCO is more likely to: (i)
Question business line decisions, (ii)
speak out on non-compliance issues and
raise them with senior management and
the board, and (iii) have stature within
the firm to successfully institute a
culture of compliance.
Commenters raised the following
issues with respect to the abovedescribed aspects of the proposed rule:
• The CCO should be permitted to
report to the governing body or senior
officer of a division, rather than to the
board; 152
• The CCO should be permitted to
report to a board committee, rather than
to the whole board; 153
• The CCO should be permitted to
report to the board of a holding
company; 154
152 Cargill recommended that the definition of
board of directors be expanded to include a
governing body of a division, such as a management
committee, and that the Commission add a
definition of ‘‘senior officer’’ to include a senior
officer of a division, because a division might be
more familiar with the swaps activities of an SD.
153 MetLife requested that the definition of board
of directors include expert committees of the whole
board.
154 The Working Group argued that the CCO
should be allowed to report to a board of an
affiliated entity.

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• The CCO should be permitted to
report to an officer other than the senior
officer; 155
• CCO compensation and termination
decisions should be reserved to the
independent members of the board; 156
• The CCO should be permitted to
report to the full board at any time,
without interference; 157 and
• The CCO should have the right to
address the board prior to
termination.158
Having considered the costs and
benefits implications of these issues, the
Commission is adopting the rule as
proposed. Section 4s(k) of the CEA
requires the CCO to ‘‘report directly’’ to
the board or the senior officer of the SD
or MSP. The Commission believes,
therefore, that despite the costs imposed
the statutory requirement that the CCO
report directly to the board or senior
officer does not permit a firm to have its
CCO report to a board committee, the
independent members of the board, the
board of a holding company, or any
officer other than the senior officer.
The Commission recognizes that
adopting some commenters’
recommendations would increase the
independence of the CCO. The
Commission has declined to modify the
rule to include such recommendations
because it believes the benefits outlined
above will be sufficiently assured by the
rule as adopted herein and thus the
additional burden of more stringent
independence requirements is
unnecessary at this time.
6. Qualifications of the CCO
As proposed, § 3.3(b) required the
CCO to have the background and skills
appropriate for fulfilling the
responsibilities of the position, and
prohibited an individual who is
statutorily disqualified under sections
8a(2) or 8a(3) of the CEA from serving.
The Commission rationale for this is
that a well-qualified CCO, without a
history of disqualifying attributes, is
155 EEI, FIA, SIFMA, NFA, and The Working
Group argued that the CCO should be permitted to
operate under the direction of corporate officers
other than the senior officer, as long as
independence and authority as a control function
is maintained.
156 Better Markets and Chris Barnard
recommended that decisions to designate or
terminate a CCO, as well as compensation
decisions, be prescribed solely by independent
members of the board, acting by majority vote.
157 NWC recommended that (1) the term ‘‘senior
officer’’ be defined as the CEO or chairman of the
board, (2) the rule should permit the CCO to report
to the full board at any time with no interference
from a board committee or a CEO, and (3) that the
rule should prohibit termination of the CCO unless
the CCO is presented the opportunity to address the
board.
158 Id.

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more likely to fulfill the duties of the
position successfully and have the
stature and experience to demand the
respect necessary to instill a culture of
compliance. The Commission believes
that an effective CCO serves an
important role in guarding against
registrant failures and misfeasance, and
the resulting losses to customers and
other market participants.
Commenters criticized the abovedescribed aspects of the proposed rule
as follows, but no commenter provided
any quantitative data to justify their
arguments:
• It is unnecessary to include
statutory disqualification as a
qualification for the CCO; 159
• ‘‘Background and skills appropriate
for fulfilling the responsibilities of the
position’’ is too vague a standard—
qualifications should be left to the
discretion of the firm; 160
• The Commission should require
CCOs to pass a specific compliance
examination and be licensed; 161 and
• The Commission should prohibit
members of a firm’s legal department
from acting as CCO due to potential
conflicts of interest.162
Based on the issues raised by
commenters, the Commission presumes
that commenters are concerned about
the cost of locating, recruiting, and
compensating a CCO that meets the
necessary qualifications, or about the
costs to the market if CCOs are not wellqualified and fail to fulfill their duties
under the CEA and rule. The
Commission estimates that a wellqualified CCO for an FCM, SD, or MSP
is likely to be compensated at
approximately $216,000 per year.163
159 NFA argued that the prohibition on
individuals who are disqualified by statute is
unnecessary because an SD, MSP, or FCM’s
registration could be denied or revoked under
section 8a(2)–(3) of the CEA if any principal of the
registrant is subject to a statutory disqualification.
160 Cargill commented that the requirement for a
CCO to have ‘‘the background and skills
appropriate’’ is a commendable aspirational goal
but is too vague a standard for Federal law, and is
best reserved as a business decision. The Working
Group also commented that wide latitude for
qualifications of a CCO is necessary.
161 Newedge recommended that CCOs be required
to pass a specific compliance examination and
obtain a specific compliance license, as is the case
in the securities world.
162 Better Markets argued that a CCO should not
be permitted to be an attorney that represents the
SD, MSP, or FCM, or its board because the potential
conflict would disqualify such an attorney.
163 The Commission staff estimates concerning
the wage rates are based on salary information for
the securities industry compiled by SIFMA. The
salary estimate was taken from SIFMA Report on
Management & Professional Earnings in the
Securities Industry 2010. Staff took an average of
the last two years of salary estimates for Chief
Compliance Officers, modified to account for
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Having considered the costs and
benefits implications of these issues, the
Commission is adopting the rule as
proposed. Given the duties and
responsibilities of the CCO as set forth
in the CEA and the rule, the
Commission believes that the cost to
FCMs, SDs, and MSPs to hire a wellqualified person to act as CCO are
appropriate given the critical role the
CCO will play in ensuring registrants
comply with the CEA and Commission
regulations. Moreover, the Commission
believes the qualifications required by
the rule as proposed are sufficient to
ensure the necessary level of CCO
qualification without need to adopt the
more restrictive CCO qualifications (e.g.,
an examination and licensing
requirement and/or legal counsel bar)
recommended by some commenters. To
maintain flexibility in the rule for the
wide variety of registrants that will be
affected, the Commission also is not
defining what the ‘‘background and
skills appropriate for fulfilling the
responsibilities of the position’’ would
be, leaving this determination to the
discretion of the registrant as
appropriate to their unique
circumstances.
7. Role of the CCO
As proposed, § 3.3 established a
number of duties for the CCO. Proposed
§ 3.3(d)(1) required the CCO to establish
the registrant’s compliance policies in
consultation with the board of directors
or senior officer. Proposed § 3.3(d)(2)
required the CCO, in consultation with
the board or senior officer, to resolve
any conflicts of interest that may arise.
Proposed § 3.3(d)(3) required the CCO to
review and ‘‘ensure compliance’’ by the
registrant with the registrant’s
compliance policies and all applicable
laws and regulations.
Commenters criticized the abovedescribed aspects of the proposed rule
as follows:
• Responsibility for resolving
conflicts of interest belongs more
appropriately to the board or senior
officer, not a CCO; 164
then adjusted upward based on the additional
responsibility demanded from SD, MSP, and FCM
CCOs as required by the CEA (as noted by
commenters).
164 NFA commented that resolution of conflicts of
interest should rest with the board or the senior
officer, in consultation with the CCO. FIA and
SIFMA argued that when Congress used the term
‘‘resolve any conflicts of interest that may arise,’’
Congress did not mean resolve in the executive or
managerial sense. Newedge commented that the
CEO and business line supervisors are in a better
position than the CCO to resolve conflicts.
Participants in the May Meeting with Commission
staff stated that resolving a conflict would
traditionally be interpreted as eliminating the
conflict, but that elimination is not always

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• Responsibility for ensuring
compliance belongs more appropriately
to the board or senior officer, not a
CCO; 165
• The transfer of regulatory
responsibility from executive officers to
the CCO may result in executive officers
spending less time and attention to
compliance matters; 166
• Firms will have difficulty retaining
a CCO who is willing to perform the
duties set forth in the rule.167
Having considered the cost and
benefit implications of these issues, the
Commission presumes that commenters
are concerned in part about the cost of
expanding their compliance
departments to fulfill duties currently or
traditionally handled by other executive
officers or departments. In response to
this concern, the Commission is
adopting the final rule as follows: (1)
The Commission is revising proposed
§ 3.3(d)(1) to track more closely the
statutory language of section 4s(k) and
require that the CCO ‘‘administer’’ the
compliance policies of the registrant; (2)
the Commission is not removing the
requirement that the CCO ‘‘resolve’’
conflicts of interest from the rule
because the requirement is provided for
in section 4s(k)(2)(C) of the CEA, but
confirms, as suggested by commenters,
that the CCO’s role in ‘‘resolving’’
conflicts of interest may involve actions
other than making the final decision;
and (3) the Commission is modifying
proposed § 3.3(d)(3) to provide that the
CCO must take ‘‘reasonable steps to
ensure compliance.’’
preferable and the compliance officer should not be
the actual decision maker in the resolution.
165 NSCP argued that ‘‘ensure compliance’’
imposes a level of responsibility on a CCO that
cannot be discharged and is inconsistent with the
customary role of a compliance officer. Hess argued
that the proposal concentrates too much of the
compliance function on a single individual and
recommended that the CCO should remain the
monitor of the compliance monitors. FIA, SIFMA,
The Working Group, Newedge, and NFA each
argued that requiring the CCO to ensure compliance
goes beyond existing compliance models and
creates a standard that is impossible to satisfy. FIA
and SIFMA further argued that the requirement to
remediate non-compliance issues acknowledges
that instances of noncompliance are not wholly
preventable by any person. FIA and SIFMA
recommended that ‘‘ensure compliance’’ should
mean taking reasonable steps to adopt, review, test,
and modify compliance policies. EEI and
participants in the May Meeting with Commission
staff stated that ensuring compliance could mean
that the CCO escalates a problem that has not been
resolved.
166 Newedge believes that any transfer of
regulatory responsibility currently held by
executive officers to the CCO could have the
unintended effect of reducing the amount of time
such officers spend on compliance matters.
167 NFA also argued that the rules improperly
redefine a CCO’s duties, and registrants will have
difficulty retaining CCOs who are willing to
perform these duties.

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The foregoing changes align the rule
to the duties of the CCO for SDs and
MSPs as set forth in the CEA, and, thus,
the costs of these requirements are
directly attributable to the statutory
requirements of Congress, and not to
Commission action. The Commission’s
decision to extend the same
requirements to CCOs for FCMs is
explained in detail above.

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8. Certification of the Annual Report by
the CCO ‘‘Under Penalty of Law’’
Proposed § 3.3(d)(6) required the CCO
of an SD, MSP, or FCM to prepare, sign,
and certify, under penalty of law, the
annual report specified in section
4s(k)(3) of the CEA.
Commenters criticized the abovedescribed aspects of the proposed rule
as follows:
• The CEO, not the CCO, should
certify the annual report; 168
• Requiring the CCO to certify the
annual report under penalty of law will
make it difficult for registrants to retain
a CCO and, thus, should not be
required; 169 and
• The required certification should be
subject to a materiality qualifier.170
168 Rosenthal commented that FINRA’s approach
to certification is preferable, i.e., the CEO certifies
that the firm has processes to establish, maintain,
review, test, and modify written compliance
policies and written supervisory procedures
reasonably designed to achieve compliance with
securities laws, regulations, and FINRA rules. FIA,
SIFMA, and Newedge each argued that section
4s(k)(3) of the CEA requires the CCO to sign the
annual report, but does not require the CCO to
certify the report. FIA, SIFMA, MFA, Newedge, and
NFA all recommended that the rule be revised to
require the CEO to certify the report. Participants
in the May Meeting with Commission staff stated
that requiring the CEO to make the certification
appropriately shares responsibility between
compliance and business management. FIA and
SIFMA recommended that, with respect to any
Commission registrant that is also a BD, the
Commission should require the CEO to make the
certification.
169 FIA and SIFMA felt that imposing criminal
liability for annual report certifications would
hinder the ability to fill the position of CCO. FIA
and SIFMA requested that the Commission clarify
that criminal liability for the certification will not
apply (absent a knowing and willful materially false
and misleading statement) because there is no
indication that Congress ever thought CCOs should
be subject to criminal liability. Similarly, NSCP
requested that the Commission clarify whether
‘‘under penalty of law’’ means liability under 18
U.S.C. 1001 for a false statement to a Federal officer.
Rosenthal argued that requiring the CCO to certify
under penalty of law will make the CCO liable for
firm infractions and will give disgruntled customers
a roadmap for frivolous lawsuits. Newedge also
believes that the requirement to certify under
penalty of law is not fair or practicable because
whoever certifies will have to rely on many
individuals to compile the report. On the other
hand, Hess commented that the certification
language strikes an appropriate balance such that
strict liability is not imposed for inadvertent errors.
170 NSCP commented that the certification that
the report is accurate and complete should have a
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Having considered the cost-benefit
implications of these issues and the
arguments raised by commenters, the
Commission is modifying the
requirement that the CCO make the
required certification of the annual
report to allow the registrant the
discretion to choose whether the CCO or
the CEO makes the certification. As
explained by commenters, this change
will make it easier and less costly for
registrants to recruit and retain
candidates for the position of CCO.
However, consistent with the
statutory text in section 4s(k)(3)(B)(ii) of
the CEA, the Commission is also
declining to add a materiality qualifier
to the certification, as suggested by
commenters. Moreover, not qualifying
certification on materiality is consistent
with the approach taken in final rules
for SDRs 171 and DCOs,172 and with
proposed CCO rules for SEFs; 173 the
Commission expects consistent
regulation of its registrants and
registered entities to benefit the
Commission’s regulatory mission by
increasing the efficiency of oversight.
The Commission believes that limiting
the CCO’s certification requirement with
the qualifier ‘‘to the best of his or her
knowledge and reasonable belief’’
sufficiently mitigates commenters’
liability costs concerns because the rule
would not impose liability for
compliance matters that are beyond the
certifying officer’s knowledge and
reasonable belief at the time of
certification.
Having modified the rule as described
above, and otherwise confined the rule
to the requirements of the CEA, the
Commission believes that the costs of
these requirements are directly
attributable to the statutory
requirements of Congress, and not to
Commission action. The Commission’s
decision to extend the same
requirements to CCOs for FCMs is
explained in detail above.
9. Content of the Annual Report
The proposed regulation required the
annual report to contain (1) a
description of the compliance by the
registrant with respect to the CEA and
regulations; (2) a description of each of
the registrant’s compliance policies;
(3) a review of each applicable
May Meeting with Commission staff urged the
Commission to adopt a standard for the annual
report certification that is reasonably attainable.
171 See Swap Data Repositories: Registration
Standards, Duties and Core Principles, 76 FR at
54584.
172 See Derivatives Clearing Organization General
Provisions and Core Principals, 76 FR at 69435.
173 See Core Principles and Other Requirements
for Swap Execution Facilities, 76 FR 1214, 1252
(Jan. 7, 2011).

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requirement under the CEA and
regulations, and, with respect to each,
identification of the policies that ensure
compliance, an assessment as to the
effectiveness of the policies, discussion
of areas of improvement, and
recommendations of potential or
prospective changes or improvements to
its compliance program and resources
devoted to compliance; (4) a description
of the registrant’s financial, managerial,
operational, and staffing resources set
aside for compliance with the CEA and
regulations, including any deficiencies
in such resources; (5) a delineation of
the roles and responsibilities of a
registrant’s board of directors or senior
officer, relevant board committees, and
staff in addressing any conflicts of
interest, including any necessary
coordination with, or notification of,
other entities, including regulators; and
(6) a certification of compliance with
sections 619 and 716 of the Dodd-Frank
Act (the Volcker Rule and Derivatives
Push-Out), and any rules adopted
pursuant to these sections. The
proposed rule also required FCMs, SDs,
and MSPs to maintain records of its
compliance policies, materials provided
to the board in connection with its
review of the annual compliance report,
and work papers that form the basis of
the annual compliance report.
The Commission believes the benefits
of the annual report result from the
focus on compliance with the CEA and
Commission regulations. The annual
requirement to compile in a single
document the results of a registrant’s
compliance policies and procedures
should serve as an efficient means to
focus the registrant’s board and senior
management on areas requiring
additional compliance resources or
changes to business practices; it also
will provide the Commission with a
detailed overview of the state of
compliance of the industry as a whole.
This annual and ongoing compliance
focus will result in increased industry
compliance, thereby increasing market
security and stability. A secure and
stable market fosters increased market
confidence and increased activity by
investors and hedgers managing risk.
Commenters raised the following
issues with respect to the abovedescribed aspects of the proposed rule:
• Overbreadth concerns with the
requirements for the content of the
annual report; 174
174 NSCP, The Working Group, EEI, and Hess
each argued that the level of detail contemplated by
the rule would impose unnecessary burdens on the
CCO with little offsetting benefits. NSCP argued
that a better approach would be to follow the SEC
requirements for annual reviews of compliance by
registered investment advisers. NSCP believes the

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• Concern that the annual report is
not subject to board approval or a board
addendum noting any disagreement
with the report; 175
• Concern that some requirements for
the content of the annual report are
inappropriate for a document that may
be publicly available; 176 and
• Concern that, absent a materiality
qualifier, the recordkeeping obligations
will be unduly burdensome.177
proposed rule is overbroad and discourages
reporting of compliance issues to the CCO.
Newedge argued that thousands of Federal, SRO,
and internal rules apply, so the report should
contain a summation of compliance, with details
only for areas of material noncompliance. FIA and
SIFMA argued that a one-size-fits-all approach to
the annual report requirements is not appropriate
because registrants vary in size and focus. FIA,
SIFMA, and The Working Group recommended that
the Commission specify the material issues that
should be discussed, or provide a standard form.
FIA, SIFMA, and NFA also argued that the report
should identify the policies that are reasonably
designed to result in compliance, not that ensure
compliance. Hess recommended that the annual
report contain only a summary of the registrant’s
compliance policies and procedures. CMC
commented that the scope of activities included in
the annual report should be limited to those
directly triggering the requirement of a CCO. EEI
argued that inclusion of descriptions of violations
in the report should be decided on a case-by-case
basis by the registrant’s governing body. NFA
requested that a materiality qualifier be added to
the requirement that registrants include a
description of non-compliance. FIA and SIFMA
argued that the CCO is not in a position to describe
the financial, material, operational, and staffing
resources set aside for compliance, rather the CCO
only should be required to describe the resources
of the compliance department and any
recommendations that the CCO has made to senior
management with regard to the same. FIA and
SIFMA argued that the Sarbanes-Oxley Act already
requires public companies to report the roles and
responsibilities of its board, senior officers, and
committees in resolving conflicts of interest, so the
Commission should allow such reporting to satisfy
this content requirement for the annual report. NFA
also recommended that the reporting of any
necessary coordination with, or notification of other
entities, including regulators, should be deleted.
NFA, FIA, and SIFMA recommended that the
certification of compliance with sections 619 and
716 of the Dodd-Frank Act be deleted, arguing that
the Commission should wait for the implementing
rulemakings for such sections before determining
certification requirements.
175 Better Markets recommended that the board
approve the annual report in its entirety or specify
where and why it disagrees with any provision, and
then CCOs should provide the report to the
Commission either as approved or with statements
of disagreement.
176 The Working Group argued that a description
of deficiencies in resources dedicated to
compliance would require a CCO to identify
potential shortcomings and report them in a
document likely to be available to the public, which
could materially hinder the CCO’s ability to
function as an integral member of the management
team.
177 The Working Group argued that retaining all
materials relating to the preparation of the report
will cause the CCO to retain all materials for fear
of an audit that second-guesses the CCO’s
materiality judgments, or the CCO will limit his or
her inquiries to avoid making a determination of
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In response to comments, the
Commission has reduced the cost
burden of the annual report by
modifying the rule as follows: (1)
Requiring a description of the
registrant’s policies and procedures,
rather than a description of the
compliance of the registrant; (2)
requiring identification of the
registrant’s policies and procedures that
‘‘are reasonably designed’’ to ensure
compliance, rather than those that
ensure compliance; (3) including a
required description of material noncompliance issues; (4) including a
materiality standard with respect to the
description of any deficiency in
compliance resources; (5) deleting the
proposed delineation of the roles and
responsibilities of a registrant’s board of
directors or senior officer, relevant
board committees, and staff in
addressing any conflicts of interest; and
(6) removing the requirement to certify
compliance with sections 619 and 716.
The Commission has not modified the
recordkeeping requirement because it
believes the rule sufficiently qualifies
the materials that must be retained by
stating that the records must be
‘‘relevant’’ to the annual report.
The Commission observes that section
4s(k) of the CEA requires the annual
report and specifies that it contain a
description of the compliance of the SD
or MSP with respect to the CEA, and a
description of each policy and
procedure of the SD or MSP of the CCO
(including the code of ethics and
conflict-of-interest policies). To the
extent that the rule also requires these
descriptions, the Commission believes
that the costs of these requirements are
attributable to statutory requirements
not subject to Commission discretion.
The Commission’s decision to extend
the same requirements to CCOs for
FCMs is explained in detail above.
Therefore, the Commission believes the
modified rule would impose modest
costs, attributable to the narrow
requirements of: (i) Listing any material
changes to compliance policies and
procedures; and (ii) describing the
financial, managerial, operational, and
staffing resources set aside for
compliance, including any material
deficiencies. The Commission believes
the benefits of these requirements
warrant the limited incremental costs to
comply.
Costs
Section 4s(k) requires SDs and MSPs
to designate a CCO and undertake
certain other compliance measures. The
materials to be retained should be only those
germane to the content of the compliance report.

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costs and benefits that necessarily result
from these basic statutory requirements
are considered to be the ‘‘baseline’’
against which the costs and benefits of
the Commission’s final rules are
compared or measured. The ‘‘baseline’’
level of costs includes the costs that
result from the following activities
required by the statute:
• Designating a CCO;
• Corporate governance changes to
require the CCO to report directly to the
board or senior officer;
• Reviewing the compliance of the SD
and MSP with section 4s of the CEA;
• Requiring the CCO, in consultation
with the board or the senior officer, to
resolve any conflicts of interest;
• Administration of each policy and
procedure required to be established
under section 4s;
• Ensuring compliance with the CEA
and Commission regulations relating to
swaps;
• Establishing procedures for the
handling, management response,
remediation, retesting, and closing of
non-compliance issues;
• Preparing and signing a compliance
report containing a description of
compliance and a description of each
policy and procedure of the SD or MSP;
and
• Furnishing the annual report to the
Commission along with each
appropriate financial report.
Similarly Section 4d(d) defines a
statutory ‘‘baseline’’ against which the
costs and benefits of the Commission’s
final rules are to be measures with
respect to FCMs. That ‘‘baseline’’ cost
level is defined by those costs that result
from an FCM’s CCO designation.
Compliance with the statutory
baselines alone will result in costs for
FCMs, SDs and MSPs. For example,
designating a CCO that reports to the
board or senior officer could include the
cost of board action and the salary of the
CCO. Similarly, preparing and signing a
compliance report containing a
description of compliance and each
compliance policy and procedure
entails the cost of the CCO’s time.
Congress mandated that the
Commission adopt rules to implement
each of the statutory provisions. The
following implementation decisions
may cause affected entities to incur
costs to comply with the final
regulations regarding designation of a
CCO, the duties of the CCO, and the
annual report:
• Extending the statutory and rule
requirements applicable to SDs and
MSPs to FCMs;
• Providing the CCO with authority to
develop, in consultation with the board

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or senior officer, appropriate policies
and procedures;
• Requiring the board or senior officer
to appoint the CCO, approve the CCO’s
compensation, and meet with the CCO
once a year;
• Requiring designation of a CCO
with the background and skills
appropriate for fulfilling the
responsibilities of the position and that
is not statutorily disqualified;
• Submission of a Form 8–R to the
Commission for the CCO as a principal
of the firm;
• Listing any material changes to
compliance policies and procedures in
the annual report; and
• Describing the financial,
managerial, operational, and staffing
resources set aside for compliance,
including any material deficiencies, in
the annual report.
As discussed, the Commission has
attempted, wherever possible, to
alleviate burdens for registrants while
remaining consistent with the CEA. The
Commission has taken steps to reduce
the responsibilities of the CCO and
lower staffing and corporate governance
costs for the entity by permitting the
CCO to perform other duties and act as
the CCO for more than one entity. The
Commission has removed the
requirement that the CCO be provided
with the authority to enforce
compliance policies and procedures,
limited the CCO’s duties to those
directly required by the CEA and
Commission regulations relating only to
the swaps activities of SDs and MSPs
and the derivatives activities included
in the definition of FCM under section
1(a)(28) of the CEA, and required the
CCO be responsible for administering,
not establishing, compliance policies.
The Commission also is permitting
either the CCO or the CEO to certify the
annual report.
The Commission estimates a base
salary for a Chief Compliance Officer in
the financial services industry at
approximately $216,000 per year, as
explained above. Because entities may
designate a current employee as the
CCO, some SDs, MSPs, or FCMs may
not need to hire an additional member
of staff. For example, entities currently
regulated by prudential authorities
already may have a CCO or another
employee who could serve as a CCO;
other entities may determine it is more
cost-effective based on their current
business models to designate a current
employee as CCO, perhaps adjusting
that individual’s salary accordingly.
Because of the wide variety of
possibilities in determining the
compensation of a CCO, the
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estimate a cost burden for the industry
of the statutory requirement to designate
a CCO.
One commenter presented a report
prepared by NERA stating that
designation of a CCO and preparation of
an annual compliance report by certain
entities would entail average
incremental start-up costs of $445,000
and average incremental ongoing annual
costs of $760,000.178 The Commission
observes that the incremental average
costs provided by NERA do not
differentiate between the costs of
compliance with proposed § 3.3 and the
costs of compliance with sections 4d(d)
and 4s(k) of the CEA absent Commission
rulemaking. Accordingly, the
Commission believes that the cost
estimates presented by NERA exceed
the incremental costs attributable to
Commission rulemaking. The NERA
report, however, provides insufficient
information to allow the Commission to
assess the magnitude of the excess.
Other than as indicated below with
respect to CCO compensation and costs
resulting from collections of information
subject to the Paperwork Reduction Act,
incorporated by reference herein, the
Commission has no reliable quantitative
data from which to reasonably estimate
the costs of compliance associated with
the CCO’s duties and the annual report
required by the rules in this release.
After conducting a review of applicable
academic literature, the Commission is
not aware of any research reports or
studies that are directly relevant to its
considerations of costs and benefits of
the final rules. The Commission
anticipates that many entities may
currently have a CCO pursuant to other
regulations. The Commission notes that
dually registered FCMs and BDs are
more likely to have a CCO 179 than
entities that are subject to such
requirement for the first time.180 Costs,
178 NERA, Cost-Benefit Analysis of the CFTC’s
Proposed Swap Dealer Definition Prepared for the
Working Group of Commercial Energy Firms,
December 20, 2011. In this late-filed comment
supplement, NERA concludes that cost-benefit
considerations compel excluding entities ‘‘engaged
in production, physical distribution or marketing of
natural gas, power, or oil that also engage in active
trading of energy derivatives’’—termed
‘‘nonfinancial energy companies’’ in the report—
from regulation as swap dealers, including § 3.3.
179 In this respect, the Commission observes that
55% of current FCMs are also registered as BDs
with the SEC, and thus may already have a CCO as
required under the rules of FINRA. See letter from
NFA, dated Jan. 18, 2011 (comment file for 75 FR
70881 (Designation of a Chief Compliance Officer;
Required Compliance Polices; and Annual Report of
a FCM, SD, or MSP)).
180 The Commission notes that in 2006 the UK
FSA conducted a cost benefit analysis when
promulgating requirements related to ensuring
effective compliance with the applicable regulatory
framework, including a requirement that a

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therefore, are expected to be higher for
those entities not currently dually
registered. Registrants that do not
currently have a CCO or a compliance
program may choose to develop a
program in-house if their activities are
limited and the regulatory requirements
well-understood. Other registrants may
choose to purchase an off-the-shelf
compliance manual and adjust it to
correspond to their regulatory
requirements. Still others may hire a
third-party compliance firm, a law firm,
or an accounting firm to draft a firmspecific manual. As of 2003, when the
SEC published final compliance
program rules for investment companies
and investment advisers, the costs for
these options ranged from $1,000 to
$200,000.181
Certain of the costs associated with
these CCO, compliance policy, and
annual report rules result from
collections of information subject to the
Paperwork Reduction Act. Costs
attributable to collections of information
subject to the PRA are discussed further
in section V.B.3. below. The
Commission has also considered these
costs, which it incorporates by reference
herein, in its section 15(a) analysis.
Benefits
The Commission believes that the
CCO rules will protect market
participants and the public by
promoting compliance with the CEA
and Commission regulations through (1)
the designation and effective
functioning of the CCO, and (2) the
establishment of a framework for
preparation of a meaningful annual
review of an FCM’s, SD’s, and MSP’s
compliance program. As a qualified,
impartial, accountable focal point, the
CCO is an effective vehicle to ensure
that vital market actors—SDs, MSPs,
and FCMs—comply with the law and
compliance officer be appointed that reports to the
governing body and has the necessary authority and
responsibility for the compliance oversight
function. The UK FSA was adopting rules that
replaced existing guidance and concluded from
survey results that the incremental aggregate cost of
compliance for approximately 2000–2500 firms was
£4.5 to 5.5 million in one-off costs ($7.1 to 8.6
million at the current exchange rate, or $3,550 to
$4,300 per firm) and £6.5 to 8.5 million in ongoing
costs ($10.1 to 13.3 million at the current exchange
rate, or $5,050 to $6,650 per firm). See FSA
Consultation Paper 06/9, Organisational Systems
and Controls: Common Platform for Firms, Annex
2 (May 2006).
181 See Compliance Programs of Investment
Companies and Investment Advisers, 68 FR 74714
(Dec. 24, 2003). The Commission notes that
significant differences in the activities and
structures of investment advisors and SDs/MSPs/
FCMs may create significant differences in the costs
incurred by the respective entities; these SEC
estimates provide at best an imperfect measure from
which to very roughly attempt to gauge compliance
costs for affected entities.

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regulations, including those designed to
contain systemic risk through
appropriate risk management efforts. In
this way, these rules foster financial
integrity and responsible risk
management practices to protect the
public from the adverse consequences of
FCM, SD, or MSP failure or misfeasance
that an effective compliance program
may help to prevent.
The annual compliance report will
help FCMs, SDs, MSPs, and the
Commission to assess whether the
registrant has mechanisms in place to
address adequately compliance
problems that could lead to a failure of
the registrant. It also will assist the
Commission in determining whether the
registrant remains in compliance with
the CEA and the Commission’s
regulations, including the customer
protection regime for segregation of
customer funds, supervision of trading
activities, and risk management. Such
compliance will protect market
participants and the public from market
disruptions and financial losses
resulting from the failure or misfeasance
of a registrant.
Section 15(a) Determination

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1. Protection of Market Participants and
the Public
The Commission believes that the
compliance measures specified in these
rules reinforce the CEA’s protections for
swap market participants, futures
markets participants, and the public.
Just as the CEA’s regulation of futures
and swaps transactions promotes the
‘‘national public interest by providing a
means for managing and assuming price
risks, discovering prices, or
disseminating pricing information
through trading in liquid, fair, and
financially secure trading facilities’’ 182
so do these rules by ensuring, through
a CCO, that entities are in compliance
with CEA regulations. Concentrating
compliance responsibility in one
individual with independent authority,
rather than dispersing it throughout an
organization (and thus potentially
diminishing accountability), is one
example of this. Compliance evaluation
and preparation of an annual report are
other examples. Thus, taken together,
these requirements set out a compliance
regime that endeavors to ensure
protection for market participants and
public that the CEA is intended to
provide. Moreover, to the extent that
provisions of the CEA diminish the
potential for harmful market disruptions
and attendant financial losses to market
participants and the general public as
182 Section

3(a) of the CEA.

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Congress intended in enacting the
Dodd-Frank Act, these rules enhance
that protection.
While the Commission recognizes
there are costs associated with this
rulemaking and the mandate from
Congress it represents, the Commission
believes that, as discussed above, it has
included measures to afford firms
flexibility in the designation of a CCO,
as well as other made other burdenreducing changes to the proposed rules.
It believes these measures minimize the
costs attributable to implementation
decisions within its statutory authority.
The Commission does not believe that
any such incremental costs undermine
effective protection of market
participants and the public, but rather
will be a worthwhile investment toward
enhancing that protection.
2. Efficiency, Competitiveness, and
Financial Integrity of Markets 183
Secure and stable SDs, MSPs, and
FCMs are critical components of the
efficient, competitive, and financially
sound functioning of derivatives
markets—futures and swaps. The
financial integrity of these markets, in
particular, is achieved through layers of
protection. Requirements for an
effective FCM, SD, and MSP compliance
program will add a new layer of
protection to ensure that registrants
remain compliant with the CEA and
Commission regulations, and in
particular those relating to risk
management, diligent supervision, and
system safeguards.
An effective CCO will provide
benefits to FCMs, SDs, and MSPs and
the markets they serve by implementing
and overseeing compliance measures
that enhance the safety and efficiency of
registrants and reduce systemic risk.
Reliable and financially sound FCMs,
SDs, and MSPs are essential for the
stability of the derivatives markets they
serve, and for the greater public, which
benefits from a sound financial system.
The Commission believes that to the
extent there are any incremental costs
associated with these rules attributable
to the implementation decisions within
its statutory authority, they are
competitively neutral. They do not favor
or disfavor any class of market
participant over others. In other words,
no entity should have a greater
advantage over another based on these
rules alone.
183 Although by its terms CEA section 15(a)(2)(B)
applies to futures markets only, the Commission
finds this factor useful in analyzing regulations
pertaining to swaps markets as well.

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3. Price Discovery
The Commission has identified no
likely material impact on price
discovery from the costs and benefits of
these rules pertaining to CCO
designation and related compliance
requirements.
4. Sound Risk Management
The Commission believes these rules
promote sound risk management. The
regulatory provisions that interpret or
implement the statutory requirements
for the CCO and annual report serve to
reinforce and ensure the effectiveness of
FCM, SD, and MSP compliance
programs, including their risk
management components. Compliance
with § 23.600 (risk management
program) and related regulations
encompasses, among other things,
policies and procedures for monitoring
and managing of credit exposures to
counterparties, market risk, liquidity
risk, settlement risk, and other
applicable risk exposures. Compliance
with § 1.14 (risk assessment
recordkeeping requirements for FCMs)
and related regulations encompasses,
among other things, policies and
procedures for monitoring and
managing of credit risk, market risk, and
other applicable risk exposures. The
CCO has responsibility to ensure that
the FCM, SD, or MSP is compliant with
these regulations. Costs attendant to
satisfying CCO and annual report
requirements in these rules represent an
investment towards improved risk
management, not a diminution from
them.
5. Other Public Interest Considerations
The Commission does not believe that
the rule will have a material effect on
public interest considerations other than
those identified above.
H. Conclusion
Having considered the costs and
benefits of the final rules in light of the
factors enumerated in section 15(a)(2) of
the CEA, the Commission is adopting
the rules as set forth in this release.
V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(RFA) 184 requires that agencies consider
whether the rules they propose will
have a significant economic impact on
a substantial number of small entities
and if so, provide a regulatory flexibility
analysis respecting the impact. The
Commission has already established
certain definitions of ‘‘small entities’’ to
184 5

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be used in evaluating the impact of its
rules on such small entities in
accordance with the RFA.185 SDs and
MSPs are new categories of registrant.
Accordingly, the Commission noted in
the proposals that it had not previously
addressed the question of whether such
persons were, in fact, small entities for
purposes of the RFA.
In this regard, the Commission
explained that it previously had
determined that FCMs should not be
considered to be small entities for
purposes of the RFA, based, in part,
upon FCMs’ obligation to meet the
minimum financial requirements
established by the Commission to
enhance the protection of customers’
segregated funds and protect the
financial condition of FCMs generally.
Like FCMs, SDs will be subject to
minimum capital and margin
requirements, and are expected to
comprise the largest global financial
firms—and the Commission is required
to exempt from designation as an SD
entities that engage in a de minimis
level of swaps dealing in connection
with transactions with or on behalf of
customers. Accordingly, for purposes of
the RFA for the proposals and future
rulemakings, the Commission proposed
that SDs not be considered ‘‘small
entities’’ for essentially the same
reasons that it had previously
determined FCMs not to be small
entities.
The Commission further explained
that it had also previously determined
that large traders are not ‘‘small
entities’’ for RFA purposes, with the
Commission considering the size of a
trader’s position to be the only
appropriate test for the purpose of large
trader reporting. The Commission then
noted that MSPs maintain substantial
positions in swaps, creating 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 the proposals and future
rulemakings, the Commission proposed
that MSPs not be considered ‘‘small
entities’’ for essentially the same
reasons that it previously had
determined large traders not to be small
entities.
The Commission concluded its RFA
analysis applicable to SDs and MSPs as
follows: ‘‘The Commission is carrying
out Congressional mandates by
proposing these rules. The Commission
is incorporating registration of SDs and
MSPs into the existing registration
structure applicable to other registrants.

In so doing, the Commission has
attempted to accomplish registration of
SDs and MSPs in the manner that is
least disruptive to ongoing business and
most efficient and expeditious,
consistent with the public interest, and
accordingly believes that these
registration rules will not present a
significant economic burden on any
entity subject thereto.’’
The Commission did not receive any
comments on its analysis of the
application of the RFA to SDs and
MSPs.
The final rules will also impact FCMs
and IBs, each of which is addressed
separately in the following paragraphs.
In its proposals, the Commission
explained that it had previously
established certain definitions of ‘‘small
entities’’ to be used in evaluating the
impact of the Commission’s rules on
such small entities in accordance with
the RFA. In the Commission’s ‘‘Policy
Statement and Establishment of
Definitions of ‘Small Entities’ for
Purposes of the Regulatory Flexibility
Act,’’ 186 the Commission concluded
that registered FCMs should not be
considered to be small entities for
purposes of the RFA. The Commission’s
determination in this regard was based,
in part, upon the obligation of registered
FCMs to meet the capital requirements
established by the Commission.
Likewise, the Commission determined
‘‘that, for the basic purpose of protection
of the financial integrity of futures
trading, Commission regulations can
make no size distinction among
registered FCMs.’’ 187 Thus, with respect
to registered FCMs, the Commission
believes that the proposed regulations
will not have a significant economic
impact on a substantial number of small
entities.
The Commission previously has
determined that, for purposes of the
RFA, the Commission should ‘‘evaluate
within the context of a particular rule
proposal whether all or some [IBs]
should be considered to be small
entities and, if so, to analyze the
economic impact on [IBs] of any such
rule at that time. Specifically, the
Commission recognizes that the [IB]
definition, even as narrowed to exclude
certain persons, undoubtedly
encompasses many business enterprises
of variable size.’’ 188 At present, IBs are
subject to various existing rules that
govern and impose minimum
requirements on their internal
compliance operations, based on the
nature of their business. The
186 47

FR 18618, Apr. 30, 1982.
at 18619.
188 48 FR 35248, 35276, Aug. 3, 1983.

Commission believes that the
amendments will merely augment the
existing compliance requirements of
such persons to address potential
conflicts of interest within such firms.
To the extent that certain IBs may be
considered to be small entities, the
Commission believes that the final rules
will not have a significant economic
impact.
The Commission did not receive any
comments on its analysis of the
application of the RFA to FCMs and IBs.
Accordingly, pursuant to Section
605(b) of the RFA, 5 U.S.C. 605(b), the
Chairman, on behalf of the Commission,
certifies that these rules and rule
amendments will not have a significant
economic impact on a substantial
number of small entities.
B. Paperwork Reduction Act
The Commission may not conduct or
sponsor, and a registrant is not required
to respond to, a collection of
information unless it displays a
currently valid Office of Management
and Budget (OMB) control number. The
Commission’s adoption of §§ 23.200
through 23.205 (Reporting,
Recordkeeping, and Daily Trading
Records), 23.600 (Risk Management
Program), 23.601 (Monitoring of
Position Limits), 23.602 (Diligent
Supervision), 23.603 (Business
Continuity and Disaster Recovery),
23.605 (Conflicts of Interest Policies and
Procedures for SDs and MSPs), 23.606
(General Information: Availability for
Disclosure and Inspection), 23.607
(Antitrust Considerations), 3.3 (Chief
Compliance Officer), and 1.71 (Conflicts
of Interest Policies and Procedures for
FCMs and IBs) impose new information
collection requirements on registrants
within the meaning of the Paperwork
Reduction Act.189
Accordingly, the Commission
requested and OMB assigned control
numbers for the required collections of
information. The Commission has
submitted this notice of final
rulemaking along with supporting
documentation for OMB’s review in
accordance with 44 U.S.C. 3507(d) and
5 CFR 1320.11. The title for these
collections of information are
‘‘Reporting, Recordkeeping, and Daily
Trading Records Requirements for Swap
Dealers and Major Swap Participants,
OMB control number 3038–0087,’’
‘‘Regulations Establishing and
Governing the Duties of Swap Dealers
and Major Swap Participants, OMB
control number 3038–0084,’’ ‘‘Conflicts
of Interest Policies and Procedures by
Swap Dealers and Major Swap

187 Id.
185 47

FR 18618 (Apr. 30, 1982).

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Participants, OMB control number
3038–0079,’’ ‘‘Annual Report for Chief
Compliance Officer of Registrants, OMB
control number 3038–0080,’’ and
‘‘Conflicts of Interest Policies and
Procedures by Futures Commission
Merchants and Introducing Brokers,
OMB control number 3038–0078.’’ 190
Many of the responses to this new
collection of information are mandatory.
The Commission protects 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 Act, 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.
The regulations require each
respondent to furnish certain
information to the Commission and to
maintain certain records.191 The
190 These collections include certain collections
required under the Business Conduct Standards
with Counterparties rulemaking, as stated in that
rulemaking. See Business Conduct Standards for
Swap Dealers and Major Swap Participants with
Counterparties, 77 FR 9734 (Feb. 17, 2012).
191 See 75 FR at 76674 (maintain transaction and
position records of swaps, including daily trading
records of swaps and related cash and forward
transactions; business records; records of data and
information reported to SDRs and for real time
public reporting purposes).
See 75 FR at 71404 (establish a risk management
program, including specific policies for compliance
with position limits and to ensure business
continuity and disaster recovery; policies to prevent
unreasonable restraints of trade and anticompetitive
burdens; establish systems to diligently supervise
the activities relating to its business; and make
certain information available for disclosure and
inspection by the Commission).
See 75 FR at 71395 (adopt conflicts of interest
policies and procedures; recordkeeping obligations
related to implementation of policies and
procedures designed to ensure compliance with
Commission regulations; document certain
communications between non-research and
research personnel; record of the basis for
determination of research personnel compensation;
provision of certain disclosures to recipients of
research reports).
See 76 FR at 70887 (prepare a Form 8–R
designating a CCO; draft and maintain certain
compliance policies and procedures; annually
prepare and furnish to the Commission an annual
report describing the registrant’s compliance
policies and resources and compliance with the
CEA and Commission regulations; amend
previously furnished annual reports, if necessary;
and maintain records related to compliance policies
and annual reports).
See 75 FR at 70157 (adopt conflicts of interest
policies and procedures; recordkeeping obligations
related to implementation of policies and
procedures designed to ensure compliance with

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Commission invited the public and
other Federal agencies to comment on
any aspect of the information collection
requirements discussed in the
Recordkeeping NPRM, the Duties
NPRM, the CCO NPRM, the SD/MSP
Conflicts NPRM, and the FCM/IB
Conflicts NPRM. Pursuant to 44 U.S.C.
3506(c)(2)(B), the Commission solicited
comments in order to: (i) Evaluate
whether the proposed collections of
information were 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 estimates of the burden of
the proposed collections 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 collections of information on
those who are to respond, including
through the use of automated collection
techniques or other forms of information
technology.
It is not currently known how many
SDs and MSPs will become subject to
these rules, and this will not be known
to the Commission until the registration
requirements for these entities become
effective. In its rule proposals, the
Commission took ‘‘a conservative
approach’’ to calculating the burden
hours of this information collection by
estimating that as many as 300 SDs and
MSPs would register.192 Since
publication of the proposals in late
2010, the Commission has met with
industry participants and trade groups,
discussed extensively the universe of
potential registrants with NFA, and
reviewed public information about SDs
active in the market and certain trade
groups. Over time, and as the
Commission has gathered more
information on the swaps market and its
participants, the estimate of the number
of SDs and MSPs has decreased. In its
FY 2012 budget drafted in February
2011, the Commission estimated that
140 SDs might register with the
Commission.193 After recently receiving
Commission regulations; document certain
communications between non-research and
research personnel; record of the basis for
determination of research personnel compensation;
provision of certain disclosures to recipients of
research reports).
192 75 FR at 76671, 75 FR at 71402, 75 FR at
71394, and 75 FR 70885.
193 CFTC, President’s Budget and Performance
Plan Fiscal Year 2010, p. 13–14 (Feb. 2011),
available at http://www.cftc.gov/ucm/groups/
public/@newsroom/documents/file/
cftcbudget2012.pdf. The estimated 140 SDs
includes ‘‘[a]pproximately 80 global and regional
banks currently known to offer swaps in the United
States;’’ ‘‘[a]pproximately 40 non-bank swap dealers
currently offering commodity and other swaps;’’

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additional specific information from
NFA on the regulatory program it is
developing for SDs and MSPs,194
however, the Commission believes that
approximately 125 SDs and MSPs,
including only a handful of MSPs, will
register. While the Commission
originally estimated there might be
approximately 300 SDs and MSPs,
based on new estimates provided by
NFA, the Commission now estimates
that there will be a combined number of
125 SDs and MSPs that will be subject
to new information collection
requirements under these rules.195
For purposes of the PRA, the term
‘‘burden’’ means the ‘‘time, effort, or
financial resources expended by persons
to generate, maintain, or provide
information to or for a Federal Agency.’’
In each of the NPRMs the Commission
estimated the cost burden of the
proposed regulations based upon an
average salary of $100 per hour. In
response to this estimate, The Working
Group commented that, inclusive of
benefit costs and allocated overhead, the
per hour average salary estimate for
compliance and risk management
personnel should be significantly higher
than $120. FIA and SIFMA stated that
some of the compliance policies
required by the proposed regulations
will be drafted by both in-house lawyers
and outside counsel, so the blended
hourly rate should be roughly $400.
The Commission notes that its
estimate of $100 per hour was based on
recent Bureau of Labor Statistics
findings, including the mean hourly
wage of an employee under occupation
code 23–1011, ‘‘Lawyers,’’ that is
employed by the ‘‘Securities and
Commodity Contracts Intermediation
and Brokerage Industry,’’ which is
$82.22. The mean hourly wage of an
employee under occupation code 11–
3031, ‘‘Financial Managers,’’ (which
includes operations managers) in the
same industry is $74.41.196 Taking these
data, the Commission then increased its
hourly wage estimate in recognition of
the fact that some registrants may be
large financial institutions whose
employees’ salaries may exceed the
mean wage. The Commission also
observes that SIFMA’s ‘‘Report on
and ‘‘[a]pproximately 20 new potential market
makers that wish to become swap dealers.’’ Id.
194 Letter from Thomas W. Sexton, Senior Vice
President and General Counsel, NFA to Gary
Barnett, Director, Division of Swap Dealer and
Intermediary Oversight, CFTC (Oct. 20, 2011) (NFA
Cost Estimates Letter).
195 NFA Letter (Oct. 20, 2011) (estimating that
there will be 125 SDs and MSPs required to register
with NFA).
196 See http://www.bls.gov/oes/2099/
mayowe23.1011.htm and http://www.bls.gov/oes/
current/oes113031.htm.

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Management & Professional Earnings in
the Securities Industry—2010’’
estimates the average wage of a
compliance attorney and a compliance
staffer in the U.S. at only $46.31 per
hour.
The Commission recognizes that some
registrants may hire outside counsel
with expertise in the various regulatory
areas covered by the regulations
discussed herein. While the
Commission is uncertain about the
billing rates that registrants may pay for
outside counsel, the Commission
believes that such counsel may bill at a
rate of several hundred dollars per hour.
Outside counsel may be able to leverage
its expertise to reduce substantially the
number of hours needed to fulfill a
requested assignment, but a registrant
that uses outside counsel may incur
higher costs than a registrant that does
not use outside counsel. Any
determination to use outside counsel is
at the discretion of the registrant.
Having considered the comments
received and having reviewed the
available data, the Commission has
determined that $100 per hour remains
a reasonable estimate of the per hour
average salary for purposes of its PRA
analysis. The Commission also notes
that this determination is consistent
with the Commission’s estimate for the
hourly wage for CCOs under the
recently adopted DCO final rules.197
The Commission received comments
related to the PRA for three of its notices
of proposed rulemaking: Recordkeeping,
Duties, and CCO. No comments were
received with regard to the two
Conflicts proposals.

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1. Recordkeeping NPRM
With respect to the voice recording
requirements of the Recordkeeping
NPRM, as explained in more detail
above, ATA commented that telephone
recording systems that are compliant
with all of these requirements would
impose a significant additional cost to
dealers. The Working Group commented
that the long-term electronic storage of
significant amounts of pre-execution
communications will prove costly over
the proposed five-year period. The
Working Group also commented that
requiring records of physical positions
linked with related swap transactions
would impose very expensive and
burdensome requirements on millions
of physical transactions that are
undertaken by commercial energy firms
that are also parties to swap
transactions.
197 See Derivatives Clearing Organization General
Provisions and Core Principals, 76 FR at 69428.

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With respect to the record retention
requirements in the Recordkeeping
NPRM, MFA commented that
maintaining records of transactions for 5
years following the termination,
expiration, or maturity of the
transactions would constitute an
additional administrative burden and
entail substantial additional cost. ISDA
& SIFMA also believe that
recordkeeping of all oral and written
communications that may lead to
execution of a swap for the life of a
swap plus five years could impose a
heavy cost burden to implement and
maintain, for only a small incremental
benefit and would be more supportive
of a voice recording obligation to retain
recordings for a minimum period of six
months. The Commission notes that it is
modifying the retention period for voice
recordings to one year, which should
minimize the burden on SDs and MSPs.
Notably, none of these commenters
suggested specific revised calculations
with regard to the Commission’s burden
estimate. Accordingly, the only change
that the Commission is making to its
estimation of burdens associated with
its Recordkeeping rules is the change to
reflect the new estimate of the number
of SDs and MSPs. The Commission now
estimates the burden to be 2096 hours,
at an annual cost of $209,600 [2096 ×
$100 per hour] for each SD and MSP,
and the aggregate hour burden cost for
all registrants is 262,000 burden hours
and $26,200,000 [262,000 × $100 per
hour].
In addition to the per hour burden
discussed above, the Commission
anticipated that SDs and MSPs may
incur certain start-up costs in
connection with the proposed
recordkeeping obligations. Such costs
would include the expenditures related
to developing and installing new
technology or reprogramming or
updating existing recordkeeping
technology and systems to enable the
SD or MSP to collect, capture, process,
maintain, and re-produce any newly
required records. Based on comments
received regarding system installation or
upgrades that may be needed to meet
the requirements of the rules, the
Commission is doubling its estimate of
programming burden hours associated
with technology improvements to be
320 hours, rather than 160 hours.
The Commission received no
comments with respect to its
programming wage estimate of $60 per
hour. Accordingly, the Commission has
revised only the estimate of the start-up
burden associated with the required
technological improvements with
respect to the number of burden hours.
The Commission estimates that the

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start-up burden would be $19,200 [$60
× 320 hours] per affected registrant or
$2,400,000 in the aggregate for all
registrants.
2. Duties NPRM
The burden associated with
regulations proposed in the Duties
NPRM will result from the development
of the required policies and procedures,
satisfaction of various reporting
obligations, and the documentation of
required testing.
The Working Group commented that
the Commission’s average personnel
cost estimate of $20,450 per effected
entity significantly understates the cost
of compliance with the proposed rules
for commercial firms that are deemed
SDs or MSPs. Specifically, the Working
Group stated that a commercial energy
firm will require at least five new
fulltime employees at 1,800 hours per
year, not the 204.5 hours per year
estimated by the Commission; and the
Commission’s analysis does not
consider any necessary information
technology expenditures or third-party
costs.
The Working Group also commented
that quarterly documentation of risk
management testing should be 200
personnel-hours per quarter at a cost of
$96,000 per year for each registrant,
rather than 1 personnel-hour per quarter
at a cost of $400 per year as estimated
by the Commission.
With respect to the reporting
requirements proposed in the Duties
NPRM, The Working Group argued that
Risk Exposure Reports should be
provided to senior management and
governing body annually, not quarterly
because quarterly reporting would be
too costly and burdensome.
With respect to the documentation of
testing requirements proposed in the
Duties NPRM, The Working Group
recommended that both the frequency
and the scope of audits of the risk
management program be left to the
discretion of registrants in order to
lessen the cost and administrative
burden imposed by the proposed rules.
Cargill recommended that testing of the
risk management program be required
annually rather than quarterly. Cargill
stated that a quarterly requirement is
excessive and unduly expensive.
MetLife stated that monthly testing of
position limit monitoring procedures
and quarterly testing of the risk
management program may be excessive,
costly, and overly burdensome for some
MSPs and that the frequency of testing
should be determined by the MSP based
on the extent of its swap activities.
In the Duties NPRM, the burden per
registrant was estimated to be 204.5

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hours per year, at an annual cost of
$20,450. Based on comments received,
as discussed above, the Commission is
changing the required risk management
testing from quarterly to annually. The
Commission also is accepting The
Working Group’s contention that it will
take more than 160 hours annually to
draft, file, and update the Risk
Management Program materials,
including the entity’s position limit
procedures and its business continuity
and disaster recovery plan. While the
Commission does not agree with the
estimate that the new rules will require
at least five new fulltime employees at
1,800 hours per year, the Commission
accepts that on average it will take 900
hours to comply with the information
collection required by these provisions.
The Commission also agrees with The
Working Group’s revised estimation of
200 hours for documentation of risk
management testing and is increasing its
estimate from four hours. Finally, the
Commission is increasing its estimate of
the burden hours associated with
quarterly documentation of position
limit compliance from two hours to 10
hours to account for the required
testing. Accordingly, the Commission
has revised its overall burden estimate
to be 1148.5 hours per year per
registrant, at an annual cost of $114,850.
The aggregate cost for all registrants
(with a revised estimate of 125 SDs and
MSPs) is 143,562.5 burden hours and
$14,356,250 [143,562.5 × $100 per
hour].
3. SD/MSP Conflicts NPRM and FCM/IB
Conflicts NPRM
The Commission received no
comments related to its estimates of the
information collection burden with
respect to either the SD/MSP Conflicts
NPRM or the FCM/IB Conflicts NPRM.
Accordingly, the only change that the
Commission is making to its estimation
of burdens associated with its Conflicts
rules is the change to reflect the new
estimate of the number of SDs and
MSPs. The Commission estimates the
overall burden to be 44.5 hours per year
per SD and MSP, at an annual cost of
$4,450 [44.5 × $100 per hour], and the
aggregate cost for all SDs and MSPs
(with a revised estimate of 125 SDs and
MSPs) is 5562.5 burden hours and
$556,250 [5562.5 × $100 per hour].
There are currently 159 registered FCMs
and 1,645 registered IBs that will be
required to comply with the proposed
conflicts of interest provisions (or a total
of 1,804 registrants). The Commission
estimates the burden to be 44.5 hours,
at an annual cost of $4,450 for each
FCM and IB, and the aggregate cost for
all FCMs and IBs is 80,278 burden hours

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and $8,027,800 [80,278 burden hours ×
$100 per hour].
4. CCO NPRM
With respect to the annual
compliance report requirement in the
CCO NPRM, NSCP commented the level
of detail required by the annual report
would impose unnecessary burdens on
the CCO with little offsetting benefits.
NSCP argues that a better approach
would be to require a review of the
adequacy of policies and the
effectiveness of their implementation.
EEI commented that the annual report
requirements would be so lengthy and
detailed that the usefulness of the
annual report would be greatly
diminished. The Working Group
recommended that the Commission
provide a standardized form for the
annual report because such would
mutually benefit the Commission and
registrants. The Working Group also
believes the annual report as proposed
would be unnecessarily exhaustive, and
without a materiality limitation, the
report would be of limited use to the
Commission and costly for firms to
produce. The Working Group also
objected to the requirement that firms
preserve all materials relating to the
preparation of an annual report because
such would not promote any
compliance policy other than
facilitating regulatory enforcement
actions. The Working Group believes
that the scope of provisions means that
a firm will spend considerable resources
to meet its obligations under the
compliance report, and preparation of
the report will be quite expensive
because the scope of policies and
procedures will be very broad. The
Working Group estimates that the
burden of preparing a report is, at a
minimum, 160 hours, 4 times the
Commission’s estimate.
FIA and SIFMA provided the
following revised cost assessment: Form
8–R and related matters are 10 hours,
not 1 hour; preparing, updating and
maintaining policies and procedures is
1000 hours, not 80 hours; preparing the
annual report is 500 hours not 40 hours;
annually amending the annual report is
50 hours and not 5 hours; and
recordkeeping is closer to 500 hours, not
10 hours. Therefore, FIA and SIFMA
estimate that the total cost per registrant
is closer to $800,000 and the total to the
industry is $350 million.
Despite the fact that FIA and SIFMA
did not provide an explanation for any
of their revised burden estimates, the
Commission is accepting their
arguments, in part, and is revising its
burden estimate to reflect some of their
comments.

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The Commission is not modifying the
amount of time required to prepare and
file a Form 8–R designating the chief
compliance officer. This form requests
only the information necessary about
the individual designated as CCO that is
necessary for the Commission to
appropriately exercise its statutory
registration and compliance oversight
functions. This information generally
includes the name, addresses, location
of records, regulatory and disciplinary
histories, and other similarly
straightforward matters—all of which
should be in the possession of the
applicant and readily available for the
applicant to provide. Most notably, the
PRA estimates provided for these forms
are averages that do not necessarily
reflect the actual time expended by each
and every individual to complete the
forms.
The Commission is modifying its
burden estimate for the amount of time
it will take to draft and update
compliance policies from 80 hours
annually to 900 hours, which reflects
half of a full-time employee’s time.
Additionally, the Commission is
revising the burden estimate associated
with preparing and furnishing to the
Commission an annual report that
describes the respondent’s compliance
policies and resources and the
respondent’s compliance with the CEA
and Commission regulations. The
Commission had estimated that it would
take 40 hours per year. The revised
estimate would double that number to
80 hours per year, which is in line with
estimates made by the DCO final
rulemaking. The Commission is
maintaining its original estimate for the
time required to amend a previously
furnished annual report when material
errors or omissions are identified at 5
hours annually, but the Commission is
doubling the time estimate required to
maintain records related to respondent’s
compliance policies and annual reports
from 10 hours to 20 hours. With regard
to recordkeeping required under the
CCO rules, the Commission notes that
much of the burden associated with this
requirement has been included in the
overall recordkeeping estimates for SDs
and MSPs, and in existing regulations
for FCMs, all of which require general
business records to be kept.
There are 159 FCMs currently
registered with the Commission and it is
anticipated that there will be
approximately 125 SDs and MSPs that
will register with the Commission.
Thus, the total number of respondents is
expected to be 284. Based on comments
received and the changes to the rules
discussed above, the Commission has
revised its estimate of the burden

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associated with the regulations to be
1,006 hours, at a cost of $100,600
annually for each respondent. Based
upon the above, the aggregate cost for all
respondents is 285,704 burden hours
[1,006 hours × 284 respondents] and
$28,570,400 [285,704 burden hours ×
$100 per hour].
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Conflicts
of interest, Reporting and recordkeeping
requirements.
17 CFR Part 3
Administrative practice and
procedure, Brokers, Commodity futures,
Major swap participants, Reporting and
recordkeeping requirements, Swap
dealers.
17 CFR Part 23
Antitrust, Commodity futures,
Conduct standards, Conflict of Interests,
Major swap participants, Reporting and
recordkeeping, Swap dealers, Swaps.
For the reasons stated in the
preamble, the CFTC amends 17 CFR
parts 1, 3, and 23 as follows:
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for part 1 is
revised to read as follows:

■

Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b,
6b–1, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m,
6n, 6o, 6p, 6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8,
9, 9a, 10a, 12, 12a, 12c, 13a, 13a–1, 16, 16a,
18, 19, 21, 23 and 24, as amended by Title
VII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Pub. L. 111–
203, 124 Stat. 1376 (July 21, 2010).

2. Section 1.71 is added to read as
follows:

■

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§ 1.71 Conflicts of interest policies and
procedures by futures commission
merchants and introducing brokers.

(a) Definitions. For purposes of this
section, the following terms shall be
defined as provided.
(1) Affiliate. This term means, with
respect to any person, a person
controlling, controlled by, or under
common control with, such person.
(2) Business trading unit. This term
means any department, division, group,
or personnel of a futures commission
merchant or introducing broker or any
of its affiliates, whether or not identified
as such, that performs, or personnel
exercising direct supervisory authority
over the performance of, any pricing
(excluding price verification for risk
management purposes), trading, sales,
marketing, advertising, solicitation,

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structuring, or brokerage activities on
behalf of a futures commission
merchant or introducing broker or any
of its affiliates.
(3) Clearing unit. This term means any
department, division, group, or
personnel of a futures commission
merchant or any of its affiliates, whether
or not identified as such, that performs,
or personnel exercising direct
supervisory authority over the
performance of, any proprietary or
customer clearing activities on behalf of
a futures commission merchant or any
of its affiliates.
(4) Derivative. This term means:
(i) A contract for the purchase or sale
of a commodity for future delivery;
(ii) A security futures product;
(iii) A swap;
(iv) Any agreement, contract, or
transaction described in section
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the
Act; and
(v) Any commodity option authorized
under section 4c of the Act; and (vi) any
leverage transaction authorized under
section 19 of the Act.
(5) Non-research personnel. This term
means any employee of the business
trading unit or clearing unit, or any
other employee of the futures
commission merchant or introducing
broker, other than an employee
performing a legal or compliance
function, who is not directly responsible
for, or otherwise not directly involved
in, research or analysis intended for
inclusion in a research report.
(6) Public appearance. This term
means any participation in a conference
call, seminar, forum (including an
interactive electronic forum) or other
public speaking activity before 15 or
more persons (individuals or entities),
or interview or appearance before one or
more representatives of the media,
radio, television or print media, or the
writing of a print media article, in
which a research analyst makes a
recommendation or offers an opinion
concerning a derivatives transaction.
This term does not include a passwordprotected Webcast, conference call or
similar event with 15 or more existing
customers, provided that all of the event
participants previously received the
most current research report or other
documentation that contains the
required applicable disclosures, and
that the research analyst appearing at
the event corrects and updates during
the public appearance any disclosures
in the research report that are
inaccurate, misleading, or no longer
applicable.
(7) Research analyst. This term means
the employee of a futures commission
merchant or introducing broker who is

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primarily responsible for, and any
employee who reports directly or
indirectly to such research analyst in
connection with, preparation of the
substance of a research report relating to
any derivative, whether or not any such
person has the job title of ‘‘research
analyst.’’
(8) Research department. This term
means any department or division that
is principally responsible for preparing
the substance of a research report
relating to any derivative on behalf of a
futures commission merchant or
introducing broker, including a
department or division contained in an
affiliate of a futures commission
merchant or introducing broker.
(9) Research report. This term means
any written communication (including
electronic) that includes an analysis of
the price or market for any derivative,
and that provides information
reasonably sufficient upon which to
base a decision to enter into a
derivatives transaction. This term does
not include:
(i) Communications distributed to
fewer than 15 persons;
(ii) Commentaries on economic,
political or market conditions;
(iii) Statistical summaries of multiple
companies’ financial data, including
listings of current ratings;
(iv) Periodic reports or other
communications prepared for
investment company shareholders or
commodity pool participants that
discuss individual derivatives positions
in the context of a fund’s past
performance or the basis for previouslymade discretionary decisions;
(v) Any communications generated by
an employee of the business trading unit
that is conveyed as a solicitation for
entering into a derivatives transaction,
and is conspicuously identified as such;
and
(vi) Internal communications that are
not given to current or prospective
customers.
(b) Policies and procedures. (1) Except
as provided in paragraph (b)(2) of this
section, each futures commission
merchant and introducing broker
subject to this rule must adopt and
implement written policies and
procedures reasonably designed to
ensure that the futures commission
merchant or introducing broker and its
employees comply with the provisions
of this rule.
(2) Small Introducing Brokers. An
introducing broker that has generated,
over the preceding 3 years, $5 million
or less in aggregate gross revenues from
its activities as an introducing broker
must establish structural and
institutional safeguards reasonably

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designed to ensure that the activities of
any person within the firm relating to
research or analysis of the price or
market for any commodity or derivative
are separated by appropriate
informational partitions within the firm
from the review, pressure, or oversight
of persons whose involvement in
trading or clearing activities might
potentially bias the judgment or
supervision of the persons.
(c) Research analysts and research
reports. (1) Restrictions on relationship
with research department. (i) Nonresearch personnel shall not direct a
research analyst’s decision to publish a
research report of the futures
commission merchant or introducing
broker, and non-research personnel
shall not direct the views and opinions
expressed in a research report of the
futures commission merchant or
introducing broker.
(ii) No research analyst may be subject
to the supervision or control of any
employee of the futures commission
merchant’s or introducing broker’s
business trading unit or clearing unit,
and no employee of the business trading
unit or clearing unit may have any
influence or control over the evaluation
or compensation of a research analyst.
(iii) Except as provided in paragraph
(c)(1)(iv) of this section, non-research
personnel, other than the board of
directors and any committee thereof,
shall not review or approve a research
report of the futures commission
merchant or introducing broker before
its publication.
(iv) Non-research personnel may
review a research report before its
publication as necessary only to verify
the factual accuracy of information in
the research report, to provide for nonsubstantive editing, to format the layout
or style of the research report, or to
identify any potential conflicts of
interest, provided that:
(A) Any written communication
between non-research personnel and
research department personnel
concerning the content of a research
report must be made either through
authorized legal or compliance
personnel of the futures commission
merchant or introducing broker or in a
transmission copied to such personnel;
and
(B) Any oral communication between
non-research personnel and research
department personnel concerning the
content of a research report must be
documented and made either through
authorized legal or compliance
personnel acting as an intermediary or
in a conversation conducted in the
presence of such personnel.

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(2) Restrictions on communications.
Any written or oral communication by
a research analyst to a current or
prospective customer relating to any
derivative must not omit any material
fact or qualification that would cause
the communication to be misleading to
a reasonable person.
(3) Restrictions on research analyst
compensation. A futures commission
merchant or introducing broker may not
consider as a factor in reviewing or
approving a research analyst’s
compensation his or her contributions
to the futures commission merchant’s or
introducing broker’s trading or clearing
business. Except for communicating
client or customer feedback, ratings and
other indicators of research analyst
performance to research department
management, no employee of the
business trading unit or clearing unit of
the futures commission merchant or
introducing broker may influence the
review or approval of a research
analyst’s compensation.
(4) Prohibition of promise of favorable
research. No futures commission
merchant or introducing broker may
directly or indirectly offer favorable
research, or threaten to change research,
to an existing or prospective customer
as consideration or inducement for the
receipt of business or compensation.
(5) Disclosure requirements. (i)
Ownership and material conflicts of
interest. A futures commission
merchant or introducing broker must
disclose in research reports and a
research analyst must disclose in public
appearances whether the research
analyst maintains a financial interest in
any derivative of a type, class, or
category that the research analyst
follows, and the general nature of the
financial interest.
(ii) Prominence of disclosure.
Disclosures and references to
disclosures must be clear,
comprehensive, and prominent. With
respect to public appearances by
research analysts, the disclosures
required by paragraph (c)(5) of this
section must be conspicuous.
(iii) Records of public appearances.
Each futures commission merchant and
introducing broker must maintain
records of public appearances by
research analysts sufficient to
demonstrate compliance by those
research analysts with the applicable
disclosure requirements under
paragraph (c)(5) of this section.
(iv) Third-party research reports. (A)
For the purposes of paragraph (c)(5)(iv)
of this section, ‘‘independent third-party
research report’’ shall mean a research
report, in respect of which the person or
entity producing the report:

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(1) Has no affiliation or business or
contractual relationship with the
distributing futures commission
merchant or introducing broker, or that
futures commission merchant’s or
introducing broker’s affiliates, that is
reasonably likely to inform the content
of its research reports; and
(2) Makes content determinations
without any input from the distributing
futures commission merchant or
introducing broker or from the futures
commission merchant’s or introducing
broker’s affiliates.
(B) Subject to paragraph (c)(5)(iv)(C)
of this section, if a futures commission
merchant or introducing broker
distributes or makes available any
independent third-party research report,
the futures commission merchant or
introducing broker must accompany the
research report with, or provide a web
address that directs the recipient to, the
current applicable disclosures, as they
pertain to the futures commission
merchant or introducing broker,
required by this section. Each futures
commission merchant and introducing
broker must establish written policies
and procedures reasonably designed to
ensure the completeness and accuracy
of all applicable disclosures.
(C) The requirements of paragraph
(c)(5)(iv)(B) of this section shall not
apply to independent third-party
research reports made available by a
futures commission merchant or
introducing broker to its customers:
(1) Upon request; or
(2) Through a Web site maintained by
the futures commission merchant or
introducing broker.
(6) Prohibition of retaliation against
research analysts. No futures
commission merchant or introducing
broker, and no employee of a futures
commission merchant or introducing
broker who is involved with the futures
commission merchant’s or introducing
broker’s trading or clearing activities,
may, directly or indirectly, retaliate
against or threaten to retaliate against
any research analyst employed by the
futures commission merchant or
introducing broker or its affiliates as a
result of an adverse, negative, or
otherwise unfavorable research report or
public appearance written or made, in
good faith, by the research analyst that
may adversely affect the futures
commission merchant’s or introducing
broker’s present or prospective trading
or clearing activities.
(7) Small Introducing Brokers. An
introducing broker that has generated,
over the preceding 3 years, $5 million
or less in aggregate gross revenues from
its activities as an introducing broker is

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exempt from the requirements set forth
in this paragraph (c).
(d) Clearing activities. (1) No futures
commission merchant shall permit any
affiliated swap dealer or major swap
participant to directly or indirectly
interfere with, or attempt to influence,
the decision of the clearing unit
personnel of the futures commission
merchant to provide clearing services
and activities to a particular customer,
including but not limited to a decision
relating to the following:
(i) Whether to offer clearing services
and activities to a particular customer;
(ii) Whether to accept a particular
customer for the purposes of clearing
derivatives;
(iii) Whether to submit a customer’s
transaction to a particular derivatives
clearing organization;
(iv) Whether to set or adjust risk
tolerance levels for a particular
customer;
(v) Whether to accept certain forms of
collateral from a particular customer; or
(vi) Whether to set a particular
customer’s fees for clearing services
based upon criteria that are not
generally available and applicable to
other customers of the futures
commission merchant.
(2) Each futures commission merchant
shall create and maintain an appropriate
informational partition between
business trading units of an affiliated
swap dealer or major swap participant
and clearing unit personnel of the
futures commission merchant to
reasonably ensure compliance with the
Act and the prohibitions specified in
paragraph (d)(1) of this section. At a
minimum, such informational partitions
shall require that:
(i) No employee of a business trading
unit of an affiliated swap dealer or
major swap participant may review or
approve the provision of clearing
services and activities by clearing unit
personnel of the futures commission
merchant, make any determination
regarding whether the futures
commission merchant accepts clearing
customers, or in any way condition or
tie the provision of trading services
upon or to the provision of clearing
services or otherwise participate in the
provision of clearing services by
improperly incentivizing or encouraging
the use of the affiliated futures
commission merchant. Any employee of
a business trading unit of an affiliated
swap dealer or major swap participant
may participate in the activities of the
futures commission merchant as
necessary for (A) participating in default
management undertaken by a
derivatives clearing organization during
an event of default; and (B) transferring,

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liquidating, or hedging any proprietary
or customer positions during an event of
default;
(ii) No employee of a business trading
unit of an affiliated swap dealer or
major swap participant shall supervise,
control, or influence any employee of a
clearing unit of the futures commission
merchant; and
(iii) No employee of the business
trading unit of an affiliated swap dealer
or major swap participant shall
influence or control compensation or
evaluation of any employee of the
clearing unit of the futures commission
merchant.
(e) Undue influence on customers.
Each futures commission merchant and
introducing broker must adopt and
implement written policies and
procedures that mandate the disclosure
to its customers of any material
incentives and any material conflicts of
interest regarding the decision of a
customer as to the trade execution and/
or clearing of the derivatives
transaction.
(f) Records. All records that a futures
commission merchant or introducing
broker is required to maintain pursuant
to this regulation shall be maintained in
accordance with Commission
Regulation § 1.31 and shall be made
available promptly upon request to
representatives of the Commission.
PART 3—REGISTRATION
3. The authority citation for part 3 is
revised to read as follows:

■

Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a,
2, 6a, 6b, 6b–1, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k,
6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 13b, 13c,
16a, 18, 19, 21, and 23, as amended by Title
VII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Pub. L. 111–
203, 124 Stat. 1376 (Jul. 21, 2010).

4. Amend § 3.1 by revising paragraph
(a)(1) and by adding paragraphs (h) and
(i) to read as follows:

■

§ 3.1

Definitions.

(a) * * *
(1) If the entity is organized as a sole
proprietorship, the proprietor and chief
compliance officer; if a partnership, any
general partner and chief compliance
officer; if a corporation, any director, the
president, chief executive officer, chief
operating officer, chief financial officer,
chief compliance officer, and any
person in charge of a principal business
unit, division or function subject to
regulation by the Commission; if a
limited liability company or limited
liability partnership, any director, the
president, chief executive officer, chief
operating officer, chief financial officer,
chief compliance officer, the manager,

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managing member or those members
vested with the management authority
for the entity, and any person in charge
of a principal business unit, division or
function subject to regulation by the
Commission; and, in addition, any
person occupying a similar status or
performing similar functions, having the
power, directly or indirectly, through
agreement or otherwise, to exercise a
controlling influence over the entity’s
activities that are subject to regulation
by the Commission;
*
*
*
*
*
(h) Swaps activities. Swaps activities
means, with respect to a registrant, such
registrant’s activities related to swaps
and any product used to hedge such
swaps, including, but not limited to,
futures, options, other swaps or
security-based swaps, debt or equity
securities, foreign currency, physical
commodities, and other derivatives.
(i) Board of directors. Board of
directors means the board of directors,
board of governors, or equivalent
governing body of a registrant.
■ 5. Add § 3.3 to read as follows:
§ 3.3

Chief compliance officer.

(a) Designation. Each futures
commission merchant, swap dealer, and
major swap participant shall designate
an individual to serve as its chief
compliance officer, and provide the
chief compliance officer with the
responsibility and authority to develop,
in consultation with the board of
directors or the senior officer,
appropriate policies and procedures to
fulfill the duties set forth in the Act and
Commission regulations relating to the
swap dealer’s or major swap
participant’s swaps activities, or to the
futures commission merchant’s business
as a futures commission merchant and
to ensure compliance with the Act and
Commission regulations relating to the
swap dealer’s or major swap
participant’s swaps activities, or to the
futures commission merchant’s business
as a futures commission merchant.
(1) The chief compliance officer shall
report to the board of directors or the
senior officer of the futures commission
merchant, swap dealer, or major swap
participant. The board of directors or
the senior officer shall appoint the chief
compliance officer, shall approve the
compensation of the chief compliance
officer, and shall meet with the chief
compliance officer at least once a year
and at the election of the chief
compliance officer.
(2) Only the board of directors or the
senior officer of the futures commission
merchant, swap dealer, or major swap
participant may remove the chief
compliance officer.

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(b) Qualifications. The individual
designated to serve as chief compliance
officer shall have the background and
skills appropriate for fulfilling the
responsibilities of the position. No
individual disqualified, or subject to
disqualification, from registration under
section 8a(2) or 8a(3) of the Act may
serve as a chief compliance officer.
(c) Submission with registration. Each
application for registration as a futures
commission merchant under § 3.10, a
swap dealer under § 23.21, or a major
swap participant under § 23.21, must
include a designation of a chief
compliance officer by submitting a Form
8–R for the chief compliance officer as
a principal of the applicant pursuant to
§ 3.10(a)(2).
(d) Chief compliance officer duties.
The chief compliance officer’s duties
shall include, but are not limited to:
(1) Administering the registrant’s
policies and procedures reasonably
designed to ensure compliance with the
Act and Commission regulations;
(2) In consultation with the board of
directors or the senior officer, resolving
any conflicts of interest that may arise;
(3) Taking reasonable steps to ensure
compliance with the Act and
Commission regulations relating to the
swap dealer’s or major swap
participant’s swaps activities, or to the
futures commission merchant’s business
as a futures commission merchant;
(4) Establishing procedures, in
consultation with the board of directors
or the senior officer, for the remediation
of noncompliance issues identified by
the chief compliance officer through a
compliance office review, look-back,
internal or external audit finding, selfreported error, or validated complaint;
(5) Establishing procedures, in
consultation with the board of directors
or the senior officer, for the handling,
management response, remediation,
retesting, and closing of noncompliance
issues; and
(6) Preparing and signing the annual
report required under paragraphs (e)
and (f) of this section.
(e) Annual report. The chief
compliance officer annually shall
prepare a written report that covers the
most recently completed fiscal year of
the futures commission merchant, swap
dealer, or major swap participant, and
provide the annual report to the board
of directors or the senior officer. The
annual report shall, at a minimum:
(1) Contain a description of the
written policies and procedures,
including the code of ethics and
conflicts of interest policies, of the
futures commission merchant, swap
dealer, or major swap participant;

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(2) Review each applicable
requirement under the Act and
Commission regulations, and with
respect to each:
(i) Identify the policies and
procedures that are reasonably designed
to ensure compliance with the
requirement under the Act and
Commission regulations;
(ii) Provide an assessment as to the
effectiveness of these policies and
procedures; and
(iii) Discuss areas for improvement,
and recommend potential or prospective
changes or improvements to its
compliance program and resources
devoted to compliance;
(3) List any material changes to
compliance policies and procedures
during the coverage period for the
report;
(4) Describe the financial, managerial,
operational, and staffing resources set
aside for compliance with respect to the
Act and Commission regulations,
including any material deficiencies in
such resources; and
(5) Describe any material noncompliance issues identified, and the
corresponding action taken.
(f) Furnishing the annual report to the
Commission. (1) Prior to furnishing the
annual report to the Commission, the
chief compliance officer shall provide
the annual report to the board of
directors or the senior officer of the
futures commission merchant, swap
dealer, or major swap participant for its
review. Furnishing the annual report to
the board of directors or the senior
officer shall be recorded in the board
minutes or otherwise, as evidence of
compliance with this requirement.
(2) The annual report shall be
furnished electronically to the
Commission not more than 90 days after
the end of the fiscal year of the futures
commission merchant, swap dealer, or
major swap participant, simultaneously
with the submission of Form 1–FR–
FCM, as required under § 1.10(b)(2)(ii),
simultaneously with the Financial and
Operational Combined Uniform Single
Report, as required under § 1.10(h), or
simultaneously with the financial
condition report, as required under
section 4s(f) of the Act, as applicable.
(3) The report shall include a
certification by the chief compliance
officer or chief executive officer of the
registrant that, to the best of his or her
knowledge and reasonable belief, and
under penalty of law, the information
contained in the annual report is
accurate and complete.
(4) The futures commission merchant,
swap dealer, or major swap participant
shall promptly furnish an amended
annual report if material errors or

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omissions in the report are identified.
An amendment must contain the
certification required under paragraph
(f)(3) of this section.
(5) A futures commission merchant,
swap dealer, or major swap participant
may request from the Commission an
extension of time to furnish its annual
report, provided the registrant’s failure
to timely furnish the report could not be
eliminated by the registrant without
unreasonable effort or expense.
Extensions of the deadline will be
granted at the discretion of the
Commission.
(6) A futures commission merchant,
swap dealer, or major swap participant
may incorporate by reference sections of
an annual report that has been furnished
within the current or immediately
preceding reporting period to the
Commission. If the futures commission
merchant, swap dealer, or major swap
participant is registered in more than
one capacity with the Commission, and
must submit more than one annual
report, an annual report submitted as
one registrant may incorporate by
reference sections in the annual report
furnished within the current or
immediately preceding reporting period
as the other registrant.
(g) Recordkeeping. (1) The futures
commission merchant, swap dealer, or
major swap participant shall maintain:
(i) A copy of the registrant’s policies
and procedures reasonably designed to
ensure compliance with the Act and
Commission regulations;
(ii) Copies of materials, including
written reports provided to the board of
directors or the senior officer in
connection with the review of the
annual report under paragraph (e) of
this section; and
(iii) Any records relevant to the
annual report, including, but not limited
to, work papers and other documents
that form the basis of the report, and
memoranda, correspondence, other
documents, and records that are created,
sent or received in connection with the
annual report and contain conclusions,
opinions, analyses, or financial data
related to the annual report.
(2) All records or reports that a futures
commission merchant, swap dealer, or
major swap participant are required to
maintain pursuant to this section shall
be maintained in accordance with § 1.31
and shall be made available promptly
upon request to representatives of the
Commission and to representatives of
the applicable prudential regulator, as
defined in 1a(39) of the Act.

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PART 23—SWAP DEALERS AND
MAJOR SWAP PARTICIPANTS
6. The authority citation for part 23 is
revised to read as follows:

■

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b–
1, 6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c,
16a, 18, 19, and 21 as amended by the DoddFrank Wall Street Reform and Consumer
Protection Act, Pub. L. 111–203, 124 Stat.
1376 (Jul. 21, 2010).

7. Add Subpart F, §§ 23.200, 23.201,
23.202, 23.203, 23.204, 23.205, and
23.206 to read as follows:

■

Subpart F—Reporting, Recordkeeping, and
Daily Trading Records Requirements for
Swap Dealers and Major Swap Participants
Sec.
23.200 Definitions.
23.201 Required records.
23.202 Daily trading records.
23.203 Records; retention and inspection.
23.204 Reporting to swap data repositories.
23.205 Real-time public reporting.
23.206 Delegation of authority to the
Director of the Division of Swap Dealer
and Intermediary Oversight to establish
an alternative compliance schedule to
comply with daily trading records.

Subpart F—Reporting, Recordkeeping,
and Daily Trading Records
Requirements for Swap Dealers and
Major Swap Participants

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§ 23.200

Definitions.

For purposes of subpart F, the
following terms shall be defined as
provided.
(a) Business trading unit means any
department, division, group, or
personnel of a swap dealer or major
swap participant or any of its affiliates,
whether or not identified as such, that
performs, or exercises supervisory
authority over the performance of, any
pricing (excluding price verification for
risk management purposes), trading,
sales, purchasing, marketing,
advertising, solicitation, structuring, or
brokerage activities on behalf of a
registrant.
(b) Clearing unit means any
department, division, group, or
personnel of a registrant or any of its
affiliates, whether or not identified as
such, that performs any proprietary or
customer clearing activities on behalf of
a registrant.
(c) Complaint means any formal or
informal complaint, grievance,
criticism, or concern communicated to
the swap dealer or major swap
participant in any format relating to,
arising from, or in connection with, any
trading conduct or behavior or with the
swap dealer or major swap participant’s
performance (or failure to perform) any
of its regulatory obligations, and

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includes any and all observations,
comments, remarks, interpretations,
clarifications, notes, and examinations
as to such conduct or behavior
communicated or documented by the
complainant, swap dealer, or major
swap participant.
(d) Executed means the completion of
the execution process.
(e) Execution means, with respect to
a swap, an agreement by the parties
(whether orally, in writing,
electronically, or otherwise) to the terms
of a swap that legally binds the parties
to such swap terms under applicable
law.
(f) Governing body. This term means:
(1) A board of directors;
(2) A body performing a function
similar to a board of directors;
(3) Any committee of a board or body;
or
(4) The chief executive officer of a
registrant, or any such board, body,
committee, or officer of a division of a
registrant, provided that the registrant’s
swaps activities for which registration
with the Commission is required are
wholly contained in a separately
identifiable division.
(g) Prudential regulator has the
meaning given to such term in section
1a(39) of the Commodity Exchange Act
and includes the Board of Governors of
the Federal Reserve System, the Office
of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation,
the Farm Credit Association, and the
Federal Housing Finance Agency, as
applicable to the swap dealer or major
swap participant.
(h) Registered entity has the meaning
given to such term in section 1a(40) of
the Commodity Exchange Act, and
includes boards of trade designated as
contract markets, derivatives clearing
organizations, swap execution facilities,
and swap data repositories.
(i) Related cash or forward
transaction means a purchase or sale for
immediate or deferred physical
shipment or delivery of an asset related
to a swap where the swap and the
related cash or forward transaction are
used to hedge, mitigate the risk of, or
offset one another.
(j) Swaps activities means, with
respect to a registrant, such registrant’s
activities related to swaps and any
product used to hedge such swaps,
including, but not limited to, futures,
options, other swaps or security-based
swaps, debt or equity securities, foreign
currency, physical commodities, and
other derivatives.
(k) Swap confirmation means the
consummation (electronically or
otherwise) of legally binding
documentation (electronic or otherwise)

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that memorializes the agreement of the
parties to all the terms of the swap. A
confirmation must be in writing
(whether electronic or otherwise) and
must legally supersede any previous
agreement (electronically or otherwise).
§ 23.201

Required records.

(a) Transaction and position records.
Each swap dealer and major swap
participant shall keep full, complete,
and systematic records, together with all
pertinent data and memoranda, of all its
swaps activities. Such records shall
include:
(1) Transaction records. Records of
each transaction, including all
documents on which transaction
information is originally recorded. Such
records shall be kept in a form and
manner identifiable and searchable by
transaction and by counterparty, and
shall include:
(i) All documents customarily
generated in accordance with market
practice that demonstrate the existence
and nature of an order or transaction,
including, but not limited to, records of
all orders (filled, unfilled, or cancelled);
correspondence; journals; memoranda;
ledgers; confirmations; risk disclosure
documents; statements of purchase and
sale; contracts; invoices; warehouse
receipts; documents of title; and
(ii) The daily trading records required
to be kept in accordance with § 23.202.
(2) Position records. Records of each
position held by each swap dealer and
major swap participant, identified by
product and counterparty, including
records reflecting whether each position
is ‘‘long’’ or ‘‘short’’ and whether the
position is cleared. Position records
shall be linked to transaction records in
a manner that permits identification of
the transactions that established the
position.
(3) Records of transactions executed
on a swap execution facility or
designated contract market or cleared
by a derivatives clearing organization.
Records of each transaction executed on
a swap execution facility or designated
contract market or cleared by a
derivatives clearing organization
maintained in compliance with the Act
and Commission regulations.
(b) Business records. Each swap
dealer and major swap participant shall
keep full, complete, and systematic
records of all activities related to its
business as a swap dealer or major swap
participant, including but not limited to:
(1) Governance. (i) Minutes of
meetings of the governing body and
relevant committee minutes, including
handouts and presentation materials;
(ii) Organizational charts for its
governing body and relevant

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committees, business trading unit,
clearing unit, risk management unit, and
all other relevant units or divisions;
(iii) Biographies or resumes of
managers, senior supervisors, officers,
and directors;
(iv) Job descriptions for manager,
senior supervisor, officer, and director
positions, including job responsibilities
and scope of authority;
(v) Internal and external audit, risk
management, compliance, and
consultant reports (including
management responses); and
(vi) Business and strategic plans for
the business trading unit.
(2) Financial records. (i) Records
reflecting all assets and liabilities,
income and expenses, and capital
accounts as required by the Act and
Commission regulations; and
(ii) All other financial records
required to be kept under the Act and
Commission regulations.
(3) Complaints. (i) A record of each
complaint received by the swap dealer
or major swap participant concerning
any partner, member, officer, employee,
or agent. The record shall include the
complainant’s name, address, and
account number; the date the complaint
was received; the name of all persons
identified in the complaint; a
description of the nature of the
complaint; the disposition of the
complaint, and the date the complaint
was resolved.
(ii) A record indicating that each
counterparty of the swap dealer or major
swap participant has been provided
with a notice containing the physical
address, email or other widely available
electronic address, and telephone
number of the department of the swap
dealer or major swap participant to
which any complaints may be directed.
(4) Marketing and sales materials. All
marketing and sales presentations,
advertisements, literature, and
communications, and a record
documenting that the swap dealer or
major swap participant has complied
with, or adopted policies and
procedures reasonably designed to
establish compliance with, all
applicable Federal requirements,
Commission regulations, and the rules
of any self-regulatory organization of
which the swap dealer or major swap
participant is a member.
(c) Records of data reported to a swap
data repository. With respect to each
swap, each swap dealer and major swap
participant shall identify, retain, and
produce for inspection all information
and data required to be reported in
accordance with part 45 of this chapter,
along with a record of the date and time

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the swap dealer or major swap
participant made the report.
(d) Records of real-time reporting
data. Each swap dealer and major swap
participant shall identify, retain, and
produce for inspection all information
and data required to be reported in
accordance with part 43 of this chapter,
along with a record of the date and time
the swap dealer or major swap
participant made the report.
§ 23.202

Daily trading records.

(a) Daily trading records for swaps.
Each swap dealer and major swap
participant shall make and keep daily
trading records of all swaps it executes,
including all documents on which
transaction information is originally
recorded. Each swap dealer and major
swap participant shall ensure that its
records include all information
necessary to conduct a comprehensive
and accurate trade reconstruction for
each swap. Each swap dealer and major
swap participant shall maintain each
transaction record in a manner
identifiable and searchable by
transaction and counterparty.
(1) Pre-execution trade information.
Each swap dealer and major swap
participant shall make and keep preexecution trade information, including,
at a minimum, records of all oral and
written communications provided or
received concerning quotes,
solicitations, bids, offers, instructions,
trading, and prices, that lead to the
execution of a swap, whether
communicated by telephone, voicemail,
facsimile, instant messaging, chat
rooms, electronic mail, mobile device,
or other digital or electronic media.
Such records shall include, but are not
limited to:
(i) Reliable timing data for the
initiation of the trade that would permit
complete and accurate trade
reconstruction; and
(ii) A record of the date and time, to
the nearest minute, using Coordinated
Universal Time (UTC), by timestamp or
other timing device, for each quotation
provided to, or received from, the
counterparty prior to execution.
(2) Execution trade information. Each
swap dealer and major swap participant
shall make and keep trade execution
records, including:
(i) All terms of each swap, including
all terms regarding payment or
settlement instructions, initial and
variation margin requirements, option
premiums, payment dates, and any
other cash flows;
(ii) The trade ticket for each swap
(which, together with the time of
execution of each swap, shall be

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immediately recorded electronically for
further processing);
(iii) The unique swap identifier, as
required by § 45.4(a), for each swap;
(iv) A record of the date and time of
execution of each swap, to the nearest
minute, using Coordinated Universal
Time (UTC), by timestamp or other
timing device;
(v) The name of the counterparty with
which each such swap was executed,
including its unique counterparty
identifier, as required by § 45.4(b);
(vi) The date and title of the
agreement to which each swap is
subject, including but not limited to,
any swap trading relationship
documentation and credit support
arrangements;
(vii) The product name of each swap,
including its unique product identifier,
as required by § 45.4(c);
(viii) The price at which the swap was
executed;
(ix) Fees or commissions and other
expenses, identified by transaction; and
(x) Any other information relevant to
the swap.
(3) Post-execution trade information.
Each swap dealer and major swap
participant shall make and keep records
of post-execution trade information
containing an itemized record of all
relevant post-trade processing and
events.
(i) Records of post-trade processing
and events shall include all of the
following, as applicable:
(A) Confirmation;
(B) Termination;
(C) Novation;
(D) Amendment;
(E) Assignment;
(F) Netting;
(G) Compression;
(H) Reconciliation;
(I) Valuation;
(J) Margining;
(K) Collateralization; and
(L) Central clearing.
(ii) Each swap dealer and major swap
participant shall make and keep a
record of all swap confirmations, along
with the date and time, to the nearest
minute, using Coordinated Universal
Time (UTC), by timestamp or other
timing device; and
(iii) Each swap dealer and major swap
participant shall make and keep a
record of each swap portfolio
reconciliation, including the number of
portfolio reconciliation discrepancies
and the number of swap valuation
disputes (including the time-toresolution of each valuation dispute and
the age of outstanding valuation
disputes, categorized by transaction and
counterparty);
(iv) Each swap dealer and major swap
participant shall make and keep a

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record of each swap portfolio
compression exercise in which it
participates, including the dates of the
compression, the swaps included in the
compression, the identity of the
counterparties participating in the
exercise, the results of the compression,
and the name of the third-party entity
performing the compression, if any; and
(v) Each swap dealer and major swap
participant shall make and keep a
record of each swap that it centrally
clears, categorized by transaction and
counterparty.
(4) Ledgers. Each swap dealer and
major swap participant shall make and
keep ledgers (or other records) reflecting
the following:
(i) Payments and interest received;
(ii) Moneys borrowed and moneys
loaned;
(iii) The daily calculation of the value
of each outstanding swap;
(iv) The daily calculation of current
and potential future exposure for each
counterparty;
(v) The daily calculation of initial
margin to be posted by the swap dealer
or major swap participant for each
counterparty and the daily calculation
of initial margin to be posted by each
counterparty;
(vi) The daily calculation of variation
margin payable to or receivable from
each counterparty;
(vii) The daily calculation of the value
of all collateral, before and after
haircuts, held by or posted by the swap
dealer or major swap participant;
(viii) All transfers of collateral,
including any substitutions of collateral,
identifying in sufficient detail the
amounts and types of collateral
transferred; and
(ix) All charges against and credits to
each counterparty’s account, including
funds deposited, withdrawn, or
transferred, and charges or credits
resulting from losses or gains on
transactions.
(b) Daily trading records for related
cash and forward transactions. Each
swap dealer and major swap participant
shall make and keep daily trading
records of all related cash or forward
transactions it executes, including all
documents on which the related cash or
forward transaction information is
originally recorded. Each swap dealer
and major swap participant shall ensure
that its records include all information
necessary to conduct a comprehensive
and accurate trade reconstruction for
each related cash or forward transaction.
Each swap dealer and major swap
participant shall maintain each
transaction record in a manner
identifiable and searchable by
transaction and by counterparty. Such

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records shall include, but are not
limited to:
(1) A record of all oral and written
communications provided or received
concerning quotes, solicitations, bids,
offers, instructions, trading, and prices,
that lead to the conclusion of a related
cash or forward transaction, whether
communicated by telephone, voicemail,
facsimile, instant messaging, chat
rooms, electronic mail, mobile device,
or other digital or electronic media;
(2) Reliable timing data for the
initiation of the transaction that would
permit complete and accurate trade
reconstruction;
(3) A record of the date and time, to
the nearest minute, using Coordinated
Universal Time (UTC), by timestamp or
other timing device, for each quotation
provided to, or received from, the
counterparty prior to execution;
(4) A record of the date and time of
execution of each related cash or
forward transaction, to the nearest
minute, using Coordinated Universal
Time (UTC), by timestamp or other
timing device;
(5) All terms of each related cash or
forward transaction;
(6) The price at which the related cash
or forward transaction was executed;
and
(7) A record of the daily calculation
of the value of the related cash or
forward transaction and any other
relevant financial information.
§ 23.203 Records; retention and
inspection.

(a) Location of records. (1) Records.
All records required to be kept by a
swap dealer or major swap participant
by the Act and by Commission
regulations shall be kept at the principal
place of business of the swap dealer or
major swap participant or such other
principal office as shall be designated
by the swap dealer or major swap
participant. If the principal place of
business is outside of the United States,
its territories or possessions, then upon
the request of a Commission
representative, the swap dealer or major
swap participant must provide such
records as requested at the place in the
United States, its territories, or
possessions designated by the
representative within 72 hours after
receiving the request.
(2) Contact information. Each swap
dealer and major swap participant shall
maintain for each of its offices a listing,
by name or title, of each person at that
office who, without delay, can explain
the types of records the swap dealer or
major swap participant maintains at that
office and the information contained in
those records.

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(b) Record retention. (1) The records
required to be maintained by this
chapter shall be maintained in
accordance with the provisions of
§ 1.31, except as provided in paragraphs
(b)(2) and (3) of this section. All records
required to be kept by the Act and by
Commission regulations shall be kept
for a period of five years from the date
the record was made and shall be
readily accessible during the first two
(2) years of the five-year period. All
such records shall be open to inspection
by any representative of the
Commission, the United States
Department of Justice, or any applicable
prudential regulator. Records relating to
swaps defined in section 1a(47)(A)(v)
shall be open to inspection by any
representative of the Commission, the
United States Department of Justice, the
Securities and Exchange Commission,
or any applicable prudential regulator.
(2) Records of any swap or related
cash or forward transaction shall be kept
until the termination, maturity,
expiration, transfer, assignment, or
novation date of the transaction, and for
a period of five years after such date.
Such records shall be readily accessible
until the termination, maturity,
expiration, transfer, assignment, or
novation date of the transaction and
during the first two years of the 5-year
period following such date. Provided,
however, that records of oral
communications communicated by
telephone, voicemail, mobile device, or
other digital or electronic media
pursuant to § 23.202(a)(1) and (b)(1)
shall be kept for a period of one year.
All such records shall be open to
inspection by any representative of the
Commission, the United States
Department of Justice, or any applicable
prudential regulator. Records relating to
swaps defined in section 1a(47)(A)(v)
shall be open to inspection by any
representative of the Commission, the
United States Department of Justice, the
Securities and Exchange Commission,
or any applicable prudential regulator.
(3) Records of any swap data reported
in accordance with part 45 of this
chapter shall be maintained in
accordance with the requirements of
§ 45.2 of this chapter.
§ 23.204 Reports to swap data
repositories.

(a) Reporting of swap transaction data
to swap data repositories. Each swap
dealer and major swap participant shall
report all information and data in
accordance with part 45 of this chapter.
(b) Electronic reporting of swap
transaction data. Each swap dealer and
major swap participant shall have the
electronic systems and procedures

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necessary to transmit electronically all
information and data required to be
reported in accordance with part 45 of
this chapter.
§ 23.205

Real-time public reporting.

(a) Real-time public reporting of swap
transaction and pricing data. Each swap
dealer and major swap participant shall
report all information and swap
transaction and pricing data required to
be reported in accordance with the realtime public recording requirements in
part 43 of this chapter.
(b) Electronic reporting of swap
transaction data. Each swap dealer and
major swap participant shall have the
electronic systems and procedures
necessary to transmit electronically all
information and data required to be
reported in accordance with part 43 of
this chapter.

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§ 23.206 Delegation of authority to the
Director of the Division of Swap Dealer and
Intermediary Oversight to establish an
alternative compliance schedule to comply
with daily trading records.

(a) The Commission hereby delegates
to the Director of the Division of Swap
Dealer and Intermediary Oversight or
such other employee or employees as
the Director may designate from time to
time, the authority to establish an
alternative compliance schedule for
requirements of § 23.202 that are found
to be technologically or economically
impracticable for an affected swap
dealer or major swap participant that
seeks, in good faith, to comply with the
requirements of § 23.202 within a
reasonable time period beyond the date
on which compliance by such swap
dealer or major swap participant is
otherwise required.
(b) A request for an alternative
compliance schedule under this section
shall be acted upon by the Director of
the Division of Swap Dealer and
Intermediary Oversight within 30 days
from the time such a request is received,
or it shall be deemed approved.
(c) Relief granted under this section
shall not cause a registrant to be out of
compliance or deemed in violation of
any registration requirements.
(d) Notwithstanding any other
provision of this section, in any case in
which a Commission employee
delegated authority under this section
believes it appropriate, he or she may
submit to the Commission for its
consideration the question of whether
an alternative compliance schedule
should be established. Nothing in this
section shall be deemed to prohibit the
Commission, at its election, from
exercising the authority delegated in
this section.

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8. Add Subpart J, consisting of
§§ 23.600 through 23.607, to read as
follows:

■

Subpart J—Duties of Swap Dealers and
Major Swap Participants
Sec.
23.600 Risk Management Program for swap
dealers and major swap participants.
23.601 Monitoring of position limits.
23.602 Diligent supervision.
23.603 Business continuity and disaster
recovery.
23.604 [Reserved]
23.605 Conflicts of interest policies and
procedures.
23.606 General information: availability for
disclosure and inspection.
23.607 Antitrust considerations.

Subpart J—Duties of Swap Dealers
and Major Swap Participants
§ 23.600 Risk Management Program for
swap dealers and major swap participants.

(a) Definitions. For purposes of
subpart J, the following terms shall be
defined as provided.
(1) Affiliate. This term means, with
respect to any person, a person
controlling, controlled by, or under
common control with, such person.
(2) Business trading unit. This term
means any department, division, group,
or personnel of a swap dealer or major
swap participant or any of its affiliates,
whether or not identified as such, that
performs, or personnel exercising direct
supervisory authority over the
performance of any pricing (excluding
price verification for risk management
purposes), trading, sales, marketing,
advertising, solicitation, structuring, or
brokerage activities on behalf of a
registrant.
(3) Clearing unit. This term means
any department, division, group, or
personnel of a registrant or any of its
affiliates, whether or not identified as
such, that performs, or personnel
exercising direct supervisory authority
over the performance of any proprietary
or customer clearing activities on behalf
of a registrant.
(4) Governing body. This term means:
(1) A board of directors;
(2) A body performing a function
similar to a board of directors;
(3) Any committee of a board or body;
or
(4) The chief executive officer of a
registrant, or any such board, body,
committee, or officer of a division of a
registrant, provided that the registrant’s
swaps activities for which registration
with the Commission is required are
wholly contained in a separately
identifiable division.
(5) Prudential regulator. This term has
the same meaning as section 1a(39) of
the Commodity Exchange Act and

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includes the Board of Governors of the
Federal Reserve System, the Office of
the Comptroller of the Currency, the
Federal Deposit Insurance Corporation,
the Farm Credit Association, and the
Federal Housing Finance Agency, as
applicable to the swap dealer or major
swap participant.
(6) Senior management. This term
means, with respect to a registrant, any
officer or officers specifically granted
the authority and responsibility to fulfill
the requirements of senior management
by the registrant’s governing body.
(7) Swaps activities. This term means,
with respect to a registrant, such
registrant’s activities related to swaps
and any product used to hedge such
swaps, including, but not limited to,
futures, options, other swaps or
security-based swaps, debt or equity
securities, foreign currency, physical
commodities, and other derivatives.
(b) Risk management program. (1)
Purpose. Each swap dealer and major
swap participant shall establish,
document, maintain, and enforce a
system of risk management policies and
procedures designed to monitor and
manage the risks associated with the
swaps activities of the swap dealer or
major swap participant. For purposes of
this regulation, such policies and
procedures shall be referred to
collectively as a ‘‘Risk Management
Program.’’
(2) Written policies and procedures.
Each swap dealer and major swap
participant shall maintain written
policies and procedures that describe
the Risk Management Program of the
swap dealer or major swap participant.
(3) Approval by governing body. The
Risk Management Program and the
written risk management policies and
procedures shall be approved, in
writing, by the governing body of the
swap dealer or major swap participant.
(4) Furnishing to the Commission.
Each swap dealer and major swap
participant shall furnish a copy of its
written risk management policies and
procedures to the Commission, or to a
futures association registered under
section 17 of the Act, if directed by the
Commission, upon application for
registration and thereafter upon request.
(5) Risk management unit. As part of
its Risk Management Program, each
swap dealer and major swap participant
shall establish and maintain a risk
management unit with sufficient
authority; qualified personnel; and
financial, operational, and other
resources to carry out the risk
management program established
pursuant to this regulation. The risk
management unit shall report directly to
senior management and shall be

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independent from the business trading
unit.
(c) Elements of the Risk Management
Program. The Risk Management
Program of each swap dealer and major
swap participant shall include, at a
minimum, the following elements:
(1) Identification of risks and risk
tolerance limits. (i) The Risk
Management Program should take into
account market, credit, liquidity, foreign
currency, legal, operational, settlement,
and any other applicable risks together
with a description of the risk tolerance
limits set by the swap dealer or major
swap participant and the underlying
methodology in written policies and
procedures. The risk tolerance limits
shall be reviewed and approved
quarterly by senior management and
annually by the governing body.
Exceptions to risk tolerance limits shall
be subject to written policies and
procedures.
(ii) The Risk Management Program
shall take into account risks posed by
affiliates and the Risk Management
Program shall be integrated into risk
management at the consolidated entity
level.
(iii) The Risk Management Program
shall include policies and procedures
for detecting breaches of risk tolerance
limits set by the swap dealer or major
swap participant, and alerting
supervisors within the risk management
unit and senior management, as
appropriate.
(2) Periodic Risk Exposure Reports. (i)
The risk management unit of each swap
dealer and major swap participant shall
provide to senior management and to its
governing body quarterly written reports
setting forth the market, credit,
liquidity, foreign currency, legal,
operational, settlement, and any other
applicable risk exposures of the swap
dealer or major swap participant; any
recommended or completed changes to
the Risk Management Program; the
recommended time frame for
implementing recommended changes;
and the status of any incomplete
implementation of previously
recommended changes to the Risk
Management Program. For purposes of
this regulation, such reports shall be
referred to as ‘‘Risk Exposure Reports.’’
The Risk Exposure Reports also shall be
provided to the senior management and
the governing body immediately upon
detection of any material change in the
risk exposure of the swap dealer or
major swap participant.
(ii) Furnishing to the Commission.
Each swap dealer and major swap
participant shall furnish copies of its
Risk Exposure Reports to the
Commission within five (5) business

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days of providing such reports to its
senior management.
(3) New product policy. The Risk
Management Program of each swap
dealer and major swap participant shall
include a new product policy that is
designed to identify and take into
account the risks of any new product
prior to engaging in transactions
involving the new product. The new
product policy should include the
following elements:
(i) Consideration of the type of
counterparty with which the new
product will be transacted; the product’s
characteristics and economic function;
and whether the product requires a
novel pricing methodology or presents
novel legal and regulatory issues.
(ii) Identification and analysis of all
relevant risks associated with the new
product and how they will be managed.
The risk analysis should include an
assessment, if relevant, of any product,
market, credit, liquidity, foreign
currency, legal, operational, settlement,
and any other risks associated with the
new product. Product risk
characteristics may include, if relevant,
volatility, non-linear price
characteristics, jump-to-default risk, and
any correlation between the value of the
product and the counterparty’s
creditworthiness.
(iii) An assessment, signed by a
supervisor in the risk management unit,
as to whether the new product would
materially alter the overall entity-wide
risk profile of the swap dealer or major
swap participant. If the new product
would materially alter the overall risk
profile of the swap dealer or major swap
participant, the new product must be
pre-approved by the governing body
before any transactions are effectuated.
(iv) A requirement that the risk
management unit review the risk
analysis to identify any necessary
modifications to the Risk Management
Program and implement such
modifications prior to engaging in
transactions involving the new product.
(v) Notwithstanding the foregoing, a
swap dealer’s or major swap
participant’s new product policy may
include provisions permitting limited
preliminary approval of new products—
(A) At a risk level that would not be
material to the swap dealer or major
swap participant; and
(B) Solely in order to provide the
swap dealer or major swap participant
with the opportunity to facilitate
development of appropriate operational
and risk management processes for such
product.
(4) Specific risk management
considerations. The Risk Management
Program of each swap dealer and major

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swap participant shall include, but not
be limited to, policies and procedures
necessary to monitor and manage the
following risks:
(i) Market risk. Market risk policies
and procedures shall take into account,
among other things:
(A) Daily measurement of market
exposure, including exposure due to
unique product characteristics,
volatility of prices, basis and correlation
risks, leverage, sensitivity of option
positions, and position concentration, to
comply with market risk tolerance
limits;
(B) Timely and reliable valuation data
derived from, or verified by, sources
that are independent of the business
trading unit, and if derived from pricing
models, that the models have been
independently validated by qualified,
independent external or internal
persons; and
(C) Periodic reconciliation of profits
and losses resulting from valuations
with the general ledger.
(ii) Credit risk. Credit risk policies and
procedures shall take into account,
among other things:
(A) Daily measurement of overall
credit exposure to comply with
counterparty credit limits;
(B) Monitoring and reporting of
violations of counterparty credit limits
performed by personnel that are
independent of the business trading
unit; and
(C) Regular valuation of collateral
used to cover credit exposures and
safeguarding of collateral to prevent
loss, disposal, rehypothecation, or use
unless appropriately authorized.
(iii) Liquidity risk. Liquidity risk
policies and procedures shall take into
account, among other things:
(A) Daily measurement of liquidity
needs;
(B) Assessing procedures to liquidate
all non-cash collateral in a timely
manner and without significant effect
on price; and
(C) Application of appropriate
collateral haircuts that accurately reflect
market and credit risk.
(iv) Foreign currency risk. Foreign
currency risk policies and procedures
shall take into account, among other
things:
(A) Daily measurement of the amount
of capital exposed to fluctuations in the
value of foreign currency to comply
with applicable limits; and
(B) Establishment of safeguards
against adverse currency fluctuations.
(v) Legal risk. Legal risk policies and
procedures shall take into account,
among other things:
(A) Determinations that transactions
and netting arrangements entered into
have a sound legal basis; and

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(B) Establishment of documentation
tracking procedures designed to ensure
the completeness of relevant
documentation and to resolve any
documentation exceptions on a timely
basis.
(vi) Operational risk. Operational risk
policies and procedures shall take into
account, among other things:
(A) Secure and reliable operating and
information systems with adequate,
scalable capacity, and independence
from the business trading unit;
(B) Safeguards to detect, identify, and
promptly correct deficiencies in
operating and information systems; and
(C) Reconciliation of all data and
information in operating and
information systems.
(vii) Settlement risk. Settlement risk
policies and procedures shall take into
account, among other things:
(A) Establishment of standard
settlement instructions with each
counterparty;
(B) Procedures to track outstanding
settlement items and aging information
in all accounts, including nostro and
suspense accounts; and
(C) Procedures to ensure timely
payments to counterparties and to
resolve any late payments.
(5) Use of central counterparties. Each
swap dealer and major swap participant
shall establish policies and procedures
relating to its use of central
counterparties. Such policies and
procedures shall:
(i) Require the use of central
counterparties where clearing is
required pursuant to Commission
regulation or order, unless the
counterparty has properly invoked a
clearing exemption under Commission
regulations;
(ii) Set forth the conditions for the
voluntary use of central counterparties
for clearing when available as a means
of mitigating counterparty credit risk;
and
(iii) Require diligent investigation into
the adequacy of the financial resources
and risk management procedures of any
central counterparty through which the
swap dealer or major swap participant
clears.
(6) Compliance with margin and
capital requirements. Each swap dealer
and major swap participant shall satisfy
all capital and margin requirements
established by the Commission or
prudential regulator, as applicable.
(7) Monitoring of compliance with
Risk Management Program. Each swap
dealer and major swap participant shall
establish policies and procedures to
detect violations of the Risk
Management Program; to encourage
employees to report such violations to

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senior management, without fear of
retaliation; and to take specified
disciplinary action against employees
who violate the Risk Management
Program.
(d) Business trading unit. Each swap
dealer and major swap participant shall
establish policies and procedures that,
at a minimum:
(1) Require all trading policies be
approved by the governing body of the
swap dealer or major swap participant;
(2) Require that traders execute
transactions only with counterparties
for whom credit limits have been
established;
(3) Provide specific quantitative or
qualitative limits for traders and
personnel able to commit the capital of
the swap dealer or major swap
participant;
(4) Monitor each trader throughout
the trading day to prevent the trader
from exceeding any limit to which the
trader is subject, or from otherwise
incurring unauthorized risk;
(5) Require each trader to follow
established policies and procedures for
executing and confirming all
transactions;
(6) Establish means to detect
unauthorized trading activities or any
other violation of policies and
procedures;
(7) Ensure that all trade discrepancies
are documented and, other than
immaterial, clerical errors, are brought
to the immediate attention of
management of the business trading
unit;
(8) Ensure that broker statements and
payments to brokers are periodically
audited by persons independent of the
business trading unit;
(9) Ensure that use of trading
programs is subject to policies and
procedures governing the use,
supervision, maintenance, testing, and
inspection of the program; and
(10) Require the separation of
personnel in the business trading unit
from personnel in the risk management
unit.
(e) Review and testing. (1) Risk
Management Programs shall be
reviewed and tested on at least an
annual basis, or upon any material
change in the business of the swap
dealer or major swap participant that is
reasonably likely to alter the risk profile
of the swap dealer or major swap
participant.
(2) The annual reviews of the Risk
Management Program shall include an
analysis of adherence to, and the
effectiveness of, the risk management
policies and procedures, and any
recommendations for modifications to
the Risk Management Program. The

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annual testing shall be performed by
qualified internal audit staff that are
independent of the business trading unit
being audited or by a qualified third
party audit service reporting to staff that
are independent of the business trading
unit. The results of the quarterly
reviews of the Risk Management
Program shall be promptly reported to
and reviewed by, the chief compliance
officer, senior management, and
governing body of the swap dealer or
major swap participant.
(3) Each swap dealer and major swap
participant shall document all internal
and external reviews and testing of its
Risk Management Program and written
risk management policies and
procedures including the date of the
review or test; the results; any
deficiencies identified; the corrective
action taken; and the date that
corrective action was taken. Such
documentation shall be provided to
Commission staff, upon request.
(f) Distribution of risk management
policies and procedures. The Risk
Management Program shall include
procedures for the timely distribution of
its written risk management policies
and procedures to relevant supervisory
personnel. Each swap dealer and major
swap participant shall maintain records
of the persons to whom the risk
management policies and procedures
were distributed and when they were
distributed.
(g) Recordkeeping. (1) Each swap
dealer and major swap participant shall
maintain copies of all written approvals
required by this section.
(2) All records or reports that a swap
dealer or major swap participant is
required to maintain pursuant to this
regulation shall be maintained in
accordance with Commission
Regulation § 1.31 and shall be made
available promptly upon request to
representatives of the Commission and
to representatives of applicable
prudential regulators.
§ 23.601

Monitoring of position limits.

(a) Each swap dealer and major swap
participant shall establish and enforce
written policies and procedures that are
reasonably designed to monitor for and
prevent violations of applicable position
limits established by the Commission, a
designated contract market, or a swap
execution facility, and to monitor for
and prevent improper reliance upon any
exemptions or exclusions from such
position limits. For purposes of this
regulation, such policies and procedures
shall be referred to as ‘‘Position Limit
Procedures.’’ The Position Limit
Procedures shall be incorporated into

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the Risk Management Program of the
swap dealer or major swap participant.
(b) For purposes of the Position Limit
Procedures, each swap dealer and major
swap participant shall convert all swap
positions into equivalent futures
positions using the methodology set
forth in Commission regulations.
(c) Each swap dealer and major swap
participant shall provide training to all
relevant personnel on applicable
position limits on an annual basis and
shall promptly notify personnel upon
any change to applicable position limits.
Each swap dealer and major swap
participant shall maintain records of
such training and notifications
including the substance of the training,
the identity of those receiving training,
and the identity of those notified of
changes to applicable position limits.
(d) Each swap dealer and major swap
participant shall diligently monitor its
trading activities and diligently
supervise the actions of its partners,
officers, employees, and agents to
ensure compliance with the Position
Limit Procedures of the swap dealer or
major swap participant.
(e) The Position Limit Procedures of
each swap dealer and major swap
participant shall implement an early
warning system designed to detect and
alert its senior management when
position limits are in danger of being
breached (such as when trading has
reached a percentage threshold of the
applicable position limit, and when
position limits have been exceeded).
Any detected violation of applicable
position limits shall be reported
promptly to the firm’s governing body.
Any detected violation of applicable
position limits, other than on-exchange
violations reported to the Commission
by a designated contract market or a
swap execution facility, shall be
reported promptly to the Commission.
Each swap dealer and major swap
participant shall maintain a record of
any early warning received, any
position limit violation detected, any
action taken as a result of either, and the
date action was taken.
(f) Each swap dealer and major swap
participant that transacts in instruments
for which position limits have been
established by the Commission, a
designated contract market, or a swap
execution facility shall test its Position
Limit Procedures for adequacy and
effectiveness at least once each calendar
quarter and maintain records of such
tests; the results thereof; any action that
is taken as a result thereof including,
without limitation, any
recommendations for modifications to
the firm’s Position Limit Procedures;
and the date action was taken.

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(g) Each swap dealer and major swap
participant shall document its
compliance with applicable position
limits established by the Commission, a
designated contract market, or a swap
execution facility in a written report on
a quarterly basis. Such report shall be
promptly reported to and reviewed by
the chief compliance officer, senior
management, and governing body of the
swap dealer or major swap participant,
and shall include, without limitation, a
list of all early warnings received, all
position limit violations, the action
taken in response, the results of the
quarterly position limit testing required
by this regulation, any deficiencies in
the Position Limit Procedures, the status
of any pending amendments to the
Position Limit Procedures, and any
action taken to amend the Position
Limit Procedures to ensure compliance
with all applicable position limits. Each
swap dealer and major swap participant
shall retain a copy of this report.
(h) On an annual basis, each swap
dealer and major swap participant shall
audit its Position Limit Procedures as
part of the audit of its Risk Management
Program required by Commission
regulations.
(i) All records required to be
maintained pursuant to these
regulations shall be maintained in
accordance with Commission
Regulation § 1.31 and shall be made
available promptly upon request to
representatives of the Commission and
to representatives of applicable
prudential regulators.
§ 23.602

Diligent supervision.

(a) Supervision. Each swap dealer and
major swap participant shall establish
and maintain a system to supervise, and
shall diligently supervise, all activities
relating to its business performed by its
partners, members, officers, employees,
and agents (or persons occupying a
similar status or performing a similar
function). Such system shall be
reasonably designed to achieve
compliance with the requirements of the
Commodity Exchange Act and
Commission regulations.
(b) Supervisory System. Such
supervisory system shall provide, at a
minimum, for the following:
(1) The designation, where applicable,
of at least one person with authority to
carry out the supervisory
responsibilities of the swap dealer or
major swap participant for all activities
relating to its business as a swap dealer
or major swap participant.
(2) The use of reasonable efforts to
determine that all supervisors are
qualified and meet such standards of
training, experience, competence, and

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such other qualification standards as the
Commission finds necessary or
appropriate.
§ 23.603 Business continuity and disaster
recovery.

(a) Business continuity and disaster
recovery plan required. Each swap
dealer and major swap participant shall
establish and maintain a written
business continuity and disaster
recovery plan that outlines the
procedures to be followed in the event
of an emergency or other disruption of
its normal business activities. The
business continuity and disaster
recovery plan shall be designed to
enable the swap dealer or major swap
participant to continue or to resume any
operations by the next business day
with minimal disturbance to its
counterparties and the market, and to
recover all documentation and data
required to be maintained by applicable
law and regulation.
(b) Essential components. The
business continuity and disaster
recovery plan of a swap dealer or major
swap participant shall include the
following components:
(1) Identification of the documents,
data, facilities, infrastructure, personnel
and competencies essential to the
continued operations of the swap dealer
or major swap participant and to fulfill
the obligations of the swap dealer or
major swap participant.
(2) Identification of the supervisory
personnel responsible for implementing
each aspect of the business continuity
and disaster recovery plan and the
emergency contacts required to be
provided pursuant to this regulation.
(3) A plan to communicate with the
following persons in the event of an
emergency or other disruption, to the
extent applicable to the operations of
the swap dealer or major swap
participant: employees; counterparties;
swap data repositories; execution
facilities; trading facilities; clearing
facilities; regulatory authorities; data,
communications and infrastructure
providers and other vendors; disaster
recovery specialists and other persons
essential to the recovery of
documentation and data, the
resumption of operations, and
compliance with the Commodity
Exchange Act and Commission
regulations.
(4) Procedures for, and the
maintenance of, back-up facilities,
systems, infrastructure, alternative
staffing and other resources to achieve
the timely recovery of data and
documentation and to resume
operations as soon as reasonably

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possible and generally within the next
business day.
(5) Maintenance of back-up facilities,
systems, infrastructure and alternative
staffing arrangements in one or more
areas that are geographically separate
from the swap dealer’s or major swap
participant’s primary facilities, systems,
infrastructure and personnel (which
may include contractual arrangements
for the use of facilities, systems and
infrastructure provided by third parties).
(6) Back-up or copying, with
sufficient frequency, of documents and
data essential to the operations of the
swap dealer or major swap participant
or to fulfill the regulatory obligations of
the swap dealer or major swap
participant and storing the information
off-site in either hard-copy or electronic
format.
(7) Identification of potential business
interruptions encountered by third
parties that are necessary to the
continued operations of the swap dealer
or major swap participant and a plan to
minimize the impact of such
disruptions.
(c) Distribution to employees. Each
swap dealer and major swap participant
shall distribute a copy of its business
continuity and disaster recovery plan to
relevant employees and promptly
provide any significant revision thereto.
Each swap dealer and major swap
participant shall maintain copies of the
business continuity and disaster
recovery plan at one or more accessible
off-site locations. Each swap dealer and
major swap participant shall train
relevant employees on applicable
components of the business continuity
and disaster recovery plan.
(d) Commission notification. Each
swap dealer and major swap participant
shall promptly notify the Commission of
any emergency or other disruption that
may affect the ability of the swap dealer
or major swap participant to fulfill its
regulatory obligations or would have a
significant adverse effect on the swap
dealer or major swap participant, its
counterparties, or the market.
(e) Emergency contacts. Each swap
dealer and major swap participant shall
provide to the Commission the name
and contact information of two
employees who the Commission can
contact in the event of an emergency or
other disruption. The individuals
identified shall be authorized to make
key decisions on behalf of the swap
dealer or major swap participant and
have knowledge of the firm’s business
continuity and disaster recovery plan.
The swap dealer or major swap
participant shall provide the
Commission with any updates to this
information promptly.

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(f) Review and modification. A
member of the senior management of
each swap dealer and major swap
participant shall review the business
continuity and disaster recovery plan
annually or upon any material change to
the business. Any deficiencies found or
corrective action taken shall be
documented.
(g) Testing and audit. Each business
continuity and disaster recovery plan
shall be tested annually by qualified,
independent internal personnel or a
qualified third party service. The date
the testing was performed shall be
documented, together with the nature
and scope of the testing, any
deficiencies found, any corrective action
taken, and the date that corrective
action was taken. Each business
continuity and disaster recovery plan
shall be audited at least once every three
years by a qualified third party service.
The date the audit was performed shall
be documented, together with the nature
and scope of the audit, any deficiencies
found, any corrective action taken, and
the date that corrective action was
taken.
(h) Business continuity and disaster
recovery plans required by other
regulatory authorities. A swap dealer or
major swap participant shall comply
with the requirements of this regulation
in addition to any business continuity
and disaster recovery requirements that
are imposed upon the swap dealer or
major swap participant by its prudential
regulator or any other regulatory or selfregulatory authority.
(i) Recordkeeping. The business
continuity and disaster recovery plan of
the swap dealer and major swap
participant and all other records
required to be maintained pursuant to
this section shall be maintained in
accordance with Commission
Regulation § 1.31 and shall be made
available promptly upon request to
representatives of the Commission and
to representatives of applicable
prudential regulators.
§ 23.604

[Reserved]

§ 23.605 Conflicts of interest policies and
procedures.

(a) Definitions. For purposes of this
section, the following terms shall be
defined as provided.
(1) Affiliate. This term means, with
respect to any person, a person
controlling, controlled by, or under
common control with, such person.
(2) Business trading unit. This term
means any department, division, group,
or personnel of a swap dealer or major
swap participant or any of its affiliates,
whether or not identified as such, that

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performs, or personnel exercising direct
supervisory authority over the
performance of, any pricing (excluding
price verification for risk management
purposes), trading, sales, marketing,
advertising, solicitation, structuring, or
brokerage activities on behalf of a swap
dealer or major swap participant or any
of its affiliates.
(3) Clearing unit. This term means
any department, division, group, or
personnel of a swap dealer or major
swap participant or any of its affiliates,
whether or not identified as such, that
performs, or personnel exercising direct
supervisory authority over the
performance of, any proprietary or
customer clearing activities on behalf of
a swap dealer or major swap participant
or any of its affiliates.
(4) Derivative. This term means:
(i) A contract for the purchase or sale
of a commodity for future delivery;
(ii) A security futures product;
(iii) A swap;
(iv) Any agreement, contract, or
transaction described in section
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the
Act;
(v) Any commodity option authorized
under section 4c of the Act; and
(vi) Any leverage transaction
authorized under section 19 of the Act.
(5) Non-research personnel. This term
means any employee of the business
trading unit or clearing unit, or any
other employee of the swap dealer or
major swap participant, other than an
employee performing a legal or
compliance function, who is not
directly responsible for, or otherwise
not involved in, research or analysis
intended for inclusion in a research
report.
(6) Public appearance. This term
means any participation in a conference
call, seminar, forum (including an
interactive electronic forum) or other
public speaking activity before 15 or
more persons (individuals or entities),
or interview or appearance before one or
more representatives of the media,
radio, television or print media, or the
writing of a print media article, in
which a research analyst makes a
recommendation or offers an opinion
concerning a derivatives transaction.
This term does not include a passwordprotected Webcast, conference call or
similar event with 15 or more existing
customers, provided that all of the event
participants previously received the
most current research report or other
documentation that contains the
required applicable disclosures, and
that the research analyst appearing at
the event corrects and updates during
the public appearance any disclosures
in the research report that are

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inaccurate, misleading, or no longer
applicable.
(7) Research analyst. This term means
the employee of a swap dealer or major
swap participant who is primarily
responsible for, and any employee who
reports directly or indirectly to such
research analyst in connection with,
preparation of the substance of a
research report relating to any
derivative, whether or not any such
person has the job title of ‘‘research
analyst.’’
(8) Research department. This term
means any department or division that
is principally responsible for preparing
the substance of a research report
relating to any derivative on behalf of a
swap dealer or major swap participant,
including a department or division
contained in an affiliate of a swap dealer
or major swap participant.
(9) Research report. This term means
any written communication (including
electronic) that includes an analysis of
the price or market for any derivative,
and that provides information
reasonably sufficient upon which to
base a decision to enter into a
derivatives transaction. This term does
not include:
(i) Communications distributed to
fewer than 15 persons;
(ii) Commentaries on economic,
political, or market conditions;
(iii) Statistical summaries of multiple
companies’ financial data, including
listings of current ratings;
(iv) Periodic reports or other
communications prepared for
investment company shareholders or
commodity pool participants that
discuss individual derivatives positions
in the context of a fund’s past
performance or the basis for previouslymade discretionary decisions;
(v) Any communications generated by
an employee of the business trading unit
that is conveyed as a solicitation for
entering into a derivatives transaction,
and is conspicuously identified as such;
and
(vi) Internal communications that are
not given to current or prospective
customers.
(b) Policies and procedures. Each
swap dealer and major swap participant
subject to this rule must adopt and
implement written policies and
procedures reasonably designed to
ensure that the swap dealer or major
swap participant and its employees
comply with the provisions of this rule.
(c) Research analysts and research
reports. (1) Restrictions on relationship
with research department. (i) Nonresearch personnel shall not direct a
research analyst’s decision to publish a
research report of the swap dealer or

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major swap participant, and nonresearch personnel shall not direct the
views and opinions expressed in a
research report of the swap dealer or
major swap participant.
(ii) No research analyst may be subject
to the supervision or control of any
employee of the swap dealer’s or major
swap participant’s business trading unit
or clearing unit, and no employee of the
business trading unit or clearing unit
may have any influence or control over
the evaluation or compensation of a
research analyst.
(iii) Except as provided in paragraph
(c)(1)(iv) of this section, non-research
personnel, other than the board of
directors and any committee thereof,
shall not review or approve a research
report of the swap dealer or major swap
participant before its publication.
(iv) Non-research personnel may
review a research report before its
publication as necessary only to verify
the factual accuracy of information in
the research report, to provide for nonsubstantive editing, to format the layout
or style of the research report, or to
identify any potential conflicts of
interest, provided that:
(A) Any written communication
between non-research personnel and
research department personnel
concerning the content of a research
report must be made either through
authorized legal or compliance
personnel of the swap dealer or major
swap participant or in a transmission
copied to such personnel; and
(B) Any oral communication between
non-research personnel and research
department personnel concerning the
content of a research report must be
documented and made either through
authorized legal or compliance
personnel acting as an intermediary or
in a conversation conducted in the
presence of such personnel.
(2) Restrictions on communications.
Any written or oral communication by
a research analyst to a current or
prospective counterparty relating to any
derivative must not omit any material
fact or qualification that would cause
the communication to be misleading to
a reasonable person.
(3) Restrictions on research analyst
compensation. A swap dealer or major
swap participant may not consider as a
factor in reviewing or approving a
research analyst’s compensation his or
her contributions to the swap dealer’s or
major swap participant’s trading or
clearing business. Except for
communicating client or customer
feedback, ratings, and other indicators
of research analyst performance to
research department management, no
employee of the business trading unit or

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clearing unit of the swap dealer or major
swap participant may influence the
review or approval of a research
analyst’s compensation.
(4) Prohibition of promise of favorable
research. No swap dealer or major swap
participant may directly or indirectly
offer favorable research, or threaten to
change research, to an existing or
prospective counterparty as
consideration or inducement for the
receipt of business or compensation.
(5) Disclosure requirements. (i)
Ownership and material conflicts of
interest. A swap dealer or major swap
participant must disclose in research
reports and a research analyst must
disclose in public appearances:
(A) Whether the research analyst
maintains a financial interest in any
derivative of a type, class, or, category
that the research analyst follows, and
the general nature of the financial
interest; and
(B) Any other actual, material
conflicts of interest of the research
analyst or swap dealer or major swap
participant of which the research
analyst has knowledge at the time of
publication of the research report or at
the time of the public appearance.
(ii) Prominence of disclosure.
Disclosures and references to
disclosures must be clear,
comprehensive, and prominent. With
respect to public appearances by
research analysts, the disclosures
required by this paragraph (c)(5) must
be conspicuous.
(iii) Records of public appearances.
Each swap dealer and major swap
participant must maintain records of
public appearances by research analysts
sufficient to demonstrate compliance by
those research analysts with the
applicable disclosure requirements
under this paragraph (c)(5).
(iv) Third-party research reports. (A)
For the purposes of this paragraph
(c)(5)(iv), ‘‘independent third-party
research report’’ shall mean a research
report, in respect of which the person or
entity producing the report:
(1) Has no affiliation or business or
contractual relationship with the
distributing swap dealer or major swap
participant, or that swap dealer’s or
major swap participant’s affiliates, that
is reasonably likely to inform the
content of its research reports; and
(2) Makes content determinations
without any input from the distributing
swap dealer or major swap participant
or that swap dealer’s or major swap
participant’s affiliates.
(B) Subject to paragraph (c)(5)(iv)(C)
of this section, if a swap dealer or major
swap participant distributes or makes
available any independent third-party

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research report, the swap dealer or
major swap participant must accompany
the research report with, or provide a
Web address that directs the recipient
to, the current applicable disclosures, as
they pertain to the swap dealer or major
swap participant, required by this
section. Each swap dealer and major
swap participant must establish written
policies and procedures reasonably
designed to ensure the completeness
and accuracy of all applicable
disclosures.
(C) The requirements of paragraph
(c)(5)(iv)(B) of this section shall not
apply to independent third-party
research reports made available by a
swap dealer or major swap participant
to its customers:
(1) Upon request; or
(2) Through a Web site maintained by
the swap dealer or major swap
participant.
(6) Prohibition of retaliation against
research analysts. No swap dealer or
major swap participant, and no
employee of a swap dealer or major
swap participant who is involved with
the swap dealer’s or major swap
participant’s pricing, trading, or clearing
activities, may, directly or indirectly,
retaliate against or threaten to retaliate
against any research analyst employed
by the swap dealer or major swap
participant or its affiliates as a result of
an adverse, negative, or otherwise
unfavorable research report or public
appearance written or made, in good
faith, by the research analyst that may
adversely affect the swap dealer’s or
major swap participant’s present or
prospective pricing, trading, or clearing
activities.
(d) Clearing activities. (1) No swap
dealer or major swap participant shall
directly or indirectly interfere with or
attempt to influence the decision of the
clearing unit of any affiliated clearing
member of a derivatives clearing
organization to provide clearing services
and activities to a particular customer,
including but not limited to a decision
relating to the following:
(i) Whether to offer clearing services
and activities to a particular customer;
(ii) Whether to accept a particular
customer for the purposes of clearing
derivatives;
(iii) Whether to submit a customer’s
transaction to a particular derivatives
clearing organization;
(iv) Whether to set or adjust risk
tolerance levels for a particular
customer;
(v) Whether to accept certain forms of
collateral from a particular customer; or
(vi) Whether to set a particular
customer’s fees for clearing services
based upon criteria that are not

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generally available and applicable to
other customers of the swap dealer or
major swap participant.
(2) Each swap dealer and major swap
participant shall create and maintain an
appropriate informational partition, as
specified in section 4s(j)(5)(A) of the
Act, between business trading units of
the swap dealer or major swap
participant and clearing units of any
affiliated clearing member of a
derivatives clearing organization to
reasonably ensure compliance with the
Act and the prohibitions specified in
paragraph (d)(1) of this section. At a
minimum, such informational partitions
shall require that no employee of a
business trading unit of a swap dealer
or major swap participant shall
supervise, control, or influence any
employee of the clearing unit of any
affiliated clearing member of a
derivatives clearing organization.
(e) Undue influence on
counterparties. Each swap dealer and
major swap participant must adopt and
implement written policies and
procedures that mandate the disclosure
to its counterparties of any material
incentives and any material conflicts of
interest regarding the decision of a
counterparty:
(1) Whether to execute a derivative on
a swap execution facility or designated
contract market; or
(2) Whether to clear a derivative
through a derivatives clearing
organization.
(f) All records that a swap dealer or
major swap participant is required to
maintain pursuant to this regulation
shall be maintained in accordance with
Commission Regulation § 1.31 and shall
be made available promptly upon
request to representatives of the
Commission and to representatives of
the applicable prudential regulator, as
defined in 7 U.S.C. 1a(39).
§ 23.606 General information: availability
for disclosure and inspection.

(a) Disclosure of information. (1) Each
swap dealer and major swap participant
shall make available for disclosure to
and inspection by the Commission and
its prudential regulator, as applicable,
all information required by, or related
to, the Commodity Exchange Act and
Commission regulations, including:
(i) The terms and condition of its
swaps;
(ii) Its swaps trading operations,
mechanisms, and practices;
(iii) Financial integrity and risk
management protections relating to
swaps; and
(iv) Any other information relevant to
its trading in swaps.

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20211

(2) Such information shall be made
available promptly, upon request, to
Commission staff and the staff of the
applicable prudential regulator, at such
frequency and in such manner as is set
forth in the Commodity Exchange Act,
Commission regulations, or the
regulations of the applicable prudential
regulator.
(b) Ability to provide information. (1)
Each swap dealer and major swap
participant shall establish and maintain
reliable internal data capture,
processing, storage, and other
operational systems sufficient to
capture, process, record, store, and
produce all information necessary to
satisfy its duties under the Commodity
Exchange Act and Commission
regulations. Such systems shall be
designed to produce the information
within the time frames set forth in the
Commodity Exchange Act and
Commission regulations or upon
request, as applicable.
(2) Each swap dealer and major swap
participant shall establish, implement,
maintain, and enforce written
procedures for the capture, processing,
recording, storage, and production of all
information necessary to satisfy its
duties under the Commodity Exchange
Act and Commission regulations.
(c) Record retention. All records or
reports that a swap dealer or major swap
participant is required to maintain
pursuant to this regulation shall be
maintained in accordance with
Commission Regulation § 1.31 and shall
be made available promptly upon
request to representatives of the
Commission and to representatives of
applicable prudential regulators.
§ 23.607

Antitrust considerations.

(a) No swap dealer or major swap
participant shall adopt any process or
take any action that results in any
unreasonable restraint of trade, or
impose any material anticompetitive
burden on trading or clearing, unless
necessary or appropriate to achieve the
purposes of the Commodity Exchange
Act.
(b) Consistent with its obligations
under paragraph (a) of this section, each
swap dealer and major swap participant
shall adopt policies and procedures to
prevent actions that result in
unreasonable restraint of trade, or
impose any material anticompetitive
burden on trading or clearing.
Issued in Washington, DC, on February 23,
2012, by the Commission.
David A. Stawick,
Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations:

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Appendices to Swap Dealer and Major
Swap Participant Recordkeeping and
Reporting, Duties, and Conflicts of
Interest Policies and Procedures;
Futures Commission Merchant and
Introducing Broker Conflicts of Interest
Policies and Procedures; Swap Dealer,
Major Swap Participant, and Futures
Commission Merchant Chief
Compliance Officer—Commission
Voting Summary and Statements of
Commissioners
Appendix 1—Commission Voting
Summary
On this matter, Chairman Gensler and
Commissioners Chilton and Wetjen voted in
the affirmative; Commissioners Sommers and
O’Malia voted in the negative.

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Appendix 2—Statement of Chairman
Gary Gensler
I support the internal business conduct
rule, which will lower the risk that swap
dealers pose to the rest of the economy.
These rules are the result of a critical reform
in the Dodd-Frank Wall Street reform and
Consumer Protection Act (Dodd-Frank Act)
where Congress gave the Commodity Futures
Trading Commission (CFTC) authority to
write rules overseeing swap dealer business
conduct. This rule is a collection of five
CFTC proposals in four key areas.
First, the final rule establishes a number of
duties for swap dealers (SDs) and major swap
participants (MSPs), including a risk
management program with policies and
procedures to monitor and manage the risks
associated with their swap activities. Among
the requirements are: (a) Ensuring the risk
management program takes into account
market risk, credit risk, liquidity risk, foreign
currency risk, legal risk, operational risk,
settlement risk, and risk posed by traders; (b)
establishing a system of diligent supervision
by qualified personnel over the SD and MSP
activities; and (c) ensuring risk management
issues are elevated within management.
Second, the final rule establishes firewalls
to protect against conflicts of interest that can
arise between trading and research units of
SDs, MSPs, futures commission merchants
(FCMs), and introducing brokers. In addition,
the rules establish a firewall between clearing
and trading that will protect against conflicts
of interest relating to a firm’s clearing
activities. A 2009 Commission study on
harmonization between the Securities and
Exchange Commission and the CFTC
recommended that the Commission establish
these firewalls, which are based upon similar
protections in the securities markets.
Third, the final rule establishes the
reporting, recordkeeping and daily trading
requirements for SDs and MSPs. Importantly,
this section creates an audit trail detailing the
full history of trades so the SD or MSP can
better ensure compliance internally, and,
when appropriate, the CFTC can be a more
effective cop on the beat.
Fourth, the final rule establishes
requirements for the designation of a chief
compliance officer of SDs, MSPs and FCMs.
This compliance officer will ensure that the

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firm’s policies and procedures comply with
the CEA and Commission regulations. The
officer will prepare an annual report
describing the registrant’s compliance with
its own policies, as well as CEA and
Commission regulations.

Appendix 3—Statement of
Commissioner Scott O’Malia
The latest issue of The Economist features
an article titled ‘‘Over-regulated America’’ 198
that features as its archetype for excessive
and badly-written regulation our own DoddFrank Act. The problem, the article points
out, is that rules that sound reasonable on
their own may impose a huge collective
burden due, in part, to their complexity. Part
of the problem is that we, as The Economist
points out, are under the impression that we
can anticipate and regulate for every
eventuality. In our hubris, The Economist
warns, our overreaching tends to defeat our
good intentions and creates loopholes and
perhaps unintentional safe-harbors, leaving
our rules ineffectual and subject to abuse.
The solution The Economist offers isn’t so
unfamiliar, at least to this Commissioner. It
is rather simple. It is just that: Rules need to
be simple. Echoing President Obama’s 2011
Executive Order 13563 ‘‘Improving
Regulation and Regulatory Review’’ 199
(which applies equally to independent
Federal agencies such as the Commodity
Futures Trading Commission (the
‘‘Commission’’ or ‘‘CFTC’’) per a subsequent
Executive Order 200), The Economist advises
that we ought to cut out the verbiage and
focus on writing rules that articulate broad
goals and prescribe only what is strictly
necessary to achieve them.
In my own words, in several prior
statements, I have argued that we must
ensure that regulations are accessible,
consistent, written in plain language, guided
by empirical data, and are easily understood.
I cautioned that, with each piecemeal
rulemaking, we risk creating redundancies
and inconsistencies that result in costs—both
opportunity costs and economic costs—
without corresponding benefits. Consistent
with Executive Order 13563, which reaffirms
prior guidance on the subject of regulatory
review issued in the 1993 Executive Order
12866 201 as well as Office of Management
and Budget (‘‘OMB’’) guidance to Federal
agencies with respect to said Executive
Order,202 agencies like the CFTC must go out
of their way to ensure responsible
rulemaking by, among other things,
undertaking thorough cost-benefit analyses,
both qualitatively and quantitatively, to
ensure that new rules do not impose
unreasonable costs.
I accepted wholeheartedly the mission put
upon this administration by the President to
198 Over-regulated America, Economist, Feb. 18,
2012, at 9.
199 Exec. Order No. 13,563, 76 FR 3821 (Jan. 21,
2011).
200 Exec. Order No. 13,579, 76 FR 41,587 (July 14,
2011).
201 Exec. Order No. 12,866, 58 FR 51,735 (Oct. 4,
1993).
202 OMB Circular A–4, available at http://
www.whitehouse.gov/sites/default/files/omb/assets/
regulatory_matters_pdf/a-4.pdf.

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‘‘[T]o root out regulations that conflict, that
are not worth the cost, or that are just plain
dumb.’’ 203 Today, in furtherance of that
mission, I will not support the final rules
governing various internal business conduct
standards for futures commission merchants,
introducing brokers, swap dealers and major
swaps participants (the ‘‘Internal Business
Conduct Rules’’). These rules fail to articulate
necessary and clear performance objectives,
are needlessly complex, and create a
collective burden without the benefit of even
an appropriate baseline cost-benefit analysis.
The fact that OMB’s Office of Information
and Regulatory Affairs 204 has concurred 205
with our determination that this set of rules
qualifies as a ‘‘Major Rule’’ under the
Congressional Review Act with an annual
effect on the economy of more than $100
million without a fulsome discussion of
anticipated costs, let alone an analysis based
on reasoned assumptions or evaluation of the
impacts of this rulemaking against the prestatutory baseline, is regulatory malpractice
in my book. While we set the bar low here
at the Commission for our cost-benefit
analyses, and accept what is ‘‘reasonably
feasible,’’ this rulemaking is nothing but
unreasonably feeble.
After reviewing the Internal Business
Conduct Rules, I have reached a tipping
point and can no longer tolerate the
application of such weak standards to
analyzing the costs and benefits of our
rulemakings. Our inability to develop a
quantitative analysis, or to develop a
reasonable comparative analysis of legitimate
options, hurts the credibility of this
Commission and undermines the quality of
our rules. I believe it is time for professional
help, and I will be following up this
statement with a letter to the Director of the
OMB seeking an independent review of the
Internal Business Conduct Rules to
determine whether or not this rulemaking
fully complies with the President’s Executive
Orders and the OMB guidance found in OMB
Circular A–4. To the extent that OMB finds
any concerns with the Commission’s
economic analysis, I hope that it will provide
specific recommendations as to how the
Commission can improve its cost-benefit
analysis and analytical capabilities.
Lest anyone think that I am inadvertently
waiving a work-product or other privilege,
the Commission’s May 13, 2011 internal Staff
Guidance on Cost-Benefit Considerations for
Final Rulemakings under the Dodd-Frank Act
(‘‘Staff Guidance’’) was made public as
Exhibit 2 to the CFTC’s Office of Inspector
General’s June 13, 2011 Review of CostBenefit Analyses Performed by the CFTC in
203 Barack Obama, Toward a 21st-Century
Regulatory System, Wall St. J., Jan. 18, 2011, at A17.
204 The Office of Information and Regulatory
Affairs (‘‘OIRA’’), among other things, reviews draft
regulations under Executive Order 12866. See
Office of Information and Regulatory Affairs
(‘‘OIRA’’) Q & As, available at: http://
www.whitehouse.gov/omb/OIRA_QsandAs.
205 I use this term loosely since the only
verification we received at the Commission was a
perfunctory email from an OMB employee stating,
‘‘OMB concurs that the rule is major.’’ It is unclear
as to what data OMB could have relied upon in
reaching its conclusion.

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Connection with Rulemakings Undertaken
Pursuant to the Dodd-Frank Act, which is
available on the CFTC’s Web site.206 While
it is not my intent to walk you through the
Staff Guidance (or the Inspector General’s
report for that matter), I do think it warrants
attention for the inattention it gives to both
the principles of Executive Orders 13563 and
12866 and OMB guidance found in Circular
A–4 (‘‘OMB Circular A–4’’). More
specifically, and among other things, the
Staff Guidance provides that each rulemaking
team should, ‘‘incorporate the principles of
Executive Order 13563 to the extent they are
consistent with section 15(a) [of the
Commodity Exchange Act] and it is
reasonably feasible to do so.’’ Keep in mind
that while Section 15(a) of the Commodity
Exchange Act requires the CFTC to consider
the costs and benefits of its proposed
regulations, the Commission has interpreted
the language of section 15(a) to neither
require quantification of such costs and
benefits, nor to require the agency to
determine whether the benefits exceed costs
or whether the proposed rules are the most
cost-effective means of reaching goals.207
‘‘Rather, section 15 simply requires the
Commission to ‘consider the costs and
benefits’ of its action.’’ 208 That was a direct
quote from the Federal Register.
Further, under the Staff Guidance—and
clearly consistent with the Commission’s
interpretation of section 15—rulemaking
teams need only quantify costs and benefits
‘‘to the extent it is reasonably feasible and
appropriate to address comments received.’’
As additional guidance, staff is advised that
‘‘reasonably feasible and appropriate’’ means
‘‘the extent to which (i) certain analyses,
quantitative or qualitative, is [sic] needed to
address comments received (‘‘appropriate’’)
and (ii) whether such an analysis may be
performed with available resources
(‘‘reasonably feasible’’). Accordingly, our
interpretation of our duties pursuant to
section 15(a) and Staff Guidance provides
that we need not quantify the costs or
benefits of our rules unless we need to do so
in order to respond to comments, and that we
can do so with whatever resources are
immediately at our fingertips. As for the
Executive Orders, it appears that we will
incorporate their principles only when they
neatly align with our own interpretation of
section 15(a), and only when we can do so
without utilizing the resources immediately
within our coffers.
Setting the bar this low is pretty
remarkable. Indeed, former Commissioner
and Acting Chairman William P. Albrecht
recently remarked that expecting any
detailed cost-benefit analysis of the proposed
206 Office of the Inspector General of the
Commodity Futures Trading Commission, A
Review of Cost-Benefit Analyses performed by the
Commodity Futures Trading Commission in
Connection with Rulemakings Undertaken Pursuant
to the Dodd-Frank Act, June 13, 2011, available at:
www.cftc.gov/ucm/groups/public/@aboutcftc/
documents/file/oig_investigation_061311.pdf.
207 A New Regulatory Framework for Trading
Facilities, Intermediaries and Clearing
Organizations, 66 FR 14,262, 14,267 (March 9,
2001).
208 Id.

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Dodd-Frank rules is impossible in part
because, ‘‘[T]he CFTC has never had to
develop CBA expertise.’’ 209 Commissioner
Albrecht advised that, ‘‘A good starting point
might be to require more detailed analysis of
the costs of alternative means of
accomplishing a particular goal. This would
help the agency develop CBA expertise and
should, over time, lead to a deeper
understanding of the costs of regulation.’’ 210
I believe that Commissioner Albrecht’s
advice is already well-articulated in both
Executive Orders and OMB Circular A–4 as
incorporated directly into the Staff Guidance.
However, the Commission skirts these
requirements and apparently refuses to
develop expertise. Instead, the Commission
limits itself to responding to comments, but
only when it doesn’t require any analysis
beyond that which it did for the proposal.
Additionally, as in today’s final
rulemaking, the Commission has determined,
in contradiction of OMB guidance directly on
point, that in setting the baseline for
comparison of the costs and benefits of
regulatory alternatives, it may set the
‘‘baseline’’ to incorporate the costs of
statutorily mandated rulemakings, regardless
of how the CFTC has interpreted the
statutory goals and regardless of the existence
of alternative means to comply with such
goals. Thereby, the Commission is relying on
an arbitrary presumption that, ‘‘To the extent
that * * * new regulations reflect the
statutory requirements of the Dodd-Frank
Act, they will not create costs and benefits
beyond those resulting from Congress’s
statutory mandates in the Dodd-Frank
Act.’’ 211 What does this mean? Well,
according to the Commission in this
rulemaking, it means that for commenters
who ‘‘posit that there is no benefit to be
derived from internal business conduct
standards as mandated by Congress and that
the mandated provisions do not generate
sufficient benefits relative to costs or
contribute to the purposes (e.g. mitigating
systemic risk and enhancing transparency) of
the Dodd-Frank Act. * * * these
commenters’ concerns fall outside the
Commission’s regulatory discretion to
implement sections 4s and 4d of the CEA and
fail to raise issues subject to consider[ation]
under section 15(a).’’ 212 That is, the
Commission will ignore comments related to
required rulemaking provisions that mirror
statutory language in spite of the fact that the
Commission always has some level of
discretion in determining the means to
achieve such mandates. Rather the
209 William P. Albrecht, Cost Benefit Analysis and
the Commodity Futures Trading Commission
(‘‘CFTC’’), Discussion Paper, May 2011, available at
http://www.rff.org/RFF/Documents/RFF-DP-1124.pdf.
210 Id. at 9.
211 See Swap Dealer and Major Swap Participant
Recordkeeping and Reporting, Duties, and Conflicts
of Interest Policies and Procedures; Futures
Commission Merchant and Introducing Broker
Conflicts of Interest Policies and Procedures; Swap
Dealer, Major Swap Participant, and Futures
Commission Merchant Chief Compliance Officer,
Final Rule, at Section IV of the Preamble.
212 Id. at Section IV of the Cost Benefit
Considerations, note 64.

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Commission will consider comments on new
regulations ‘‘that reflect the Commission’s
own determinations regarding
implementation of the Dodd-Frank Act’s
provisions. * * * It is these other costs and
benefits * * * that the Commission
considers with respect to the section 15(a)
factors.’’ 213 It is unacceptable that the
Commission ignores pre-Dodd-Frank reality
and establishes its own economic baseline for
its rulemakings. This practice defies not only
common sense, but rigorous and competent
economic analysis as well.
I will briefly highlight how these rules not
only fail to include a rational, rigorous, and
sustainable cost-benefit analysis, but fail to
articulate necessary and clear performance
objectives, are complex, and create an
unjustifiable cumulative burden within this
rule and when considered with other CFTC
regulations and those of prudential
regulators.
I believe the Commission has failed to
carefully and precisely identify a clear
baseline against which the Commission
measured costs and benefits and the range of
alternatives under consideration in this rule.
Specifically, the Commission’s cost-benefit
analysis with regard to this rule fails to
comply with the basic direction in OMB
Circular A–4 to establish an appropriate
baseline that includes an evaluation of the
pre-statutory baseline in light of the range of
Commission discretion as to the manner in
which the rules implement the statutory
goals of section 4s.214 The circular also
directs the Commission to consider
alternatives available ‘‘for the key attributes
or provisions of the rule.’’ 215 The Circular
goes on to recommend that, ‘‘It is not
adequate simply to report a comparison of
the agency’s preferred option to the chosen
baseline. Whenever you report the benefits
and the costs of alternative options, you
should present both total and incremental
benefits and costs.’’ 216 It is at this most basic
level of analysis where the Commission has
failed to provide alternative options for
consideration or has failed to justify its
choice of regulation with a specific costbenefit analysis.
In two examples articulated by the
Commission, the Internal Business Conduct
Rules dismisses out of hand, and without
specific justification the concerns raised by
two commenters: (1) The Federal Home Loan
Banks who raised concerns regarding
compliance burdens and duplicative nature
of regulations for comparably regulated
entities; and (2) The Working Group of
Commercial Energy Firms, which raised
concerns that the rules failed to provide
benefits with regard to risk management and
compliance that matched, much less
exceeded, the cost of compliance. Both
concerns were dismissed without
consideration of alternatives and without any
attempt to quantify the cited costs.
With regard to recordkeeping
requirements, the Internal Business Conduct
Rules impose a substantial burden on Swap
213 Id.

at Section IV of the Preamble.
Circular A–4 at 15–16.
215 Id. at 16.
216 Id.
214 OMB

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Dealers (‘‘SDs’’) and Major Swap Participants
(‘‘MSPs’’) to maintain extensive audio
recordings including the requirement to tag
each taped conversation and make it
searchable by transaction and counterparty.
Understandably, section 4s(g) does require
the maintenance of such daily trading
records for each counterparty and that they
be identifiable with each swap transaction.
However, in spite of enormous technological
challenges it is unclear as to whether or not
the Commission undertook any independent
effort to determine the technical challenges
of implementing such a system, including,
whether such technology currently exists, the
costs of acquiring and installing such
technology, and whether such a system could
be developed and/or installed within the
timetable set by the Commission. The
Commission has failed the fundamental test
in Circular A–4 to establish an appropriate
baseline and consider a range of alternatives
with associated costs and benefits. Although
the Commission modified its original
proposal to not require each telephone record
to be kept as a single file, it fails to quantify
the specific cost of complying with a costly
and technically challenging mandate.
Moreover, in determining that such audio
recordings are to be maintained for a oneyear period, the Commission provides no
analytical support for this retention period
over a more reasonable six-month period
other than to say that such period will be
‘‘most useful for the Commission’s
enforcement purposes.’’ 217
Further, the Commission also ignored
commenters’ requests to allow firms to rely
on swap data repositories (‘‘SDRs’’) for
recordkeeping requirements. The analysis
states:
The Commission considered this
alternative to its recordkeeping rules, but
determined that it is premature at this time
to permit SDs and MSPs to rely solely on
SDRs to meet their recordkeeping obligations
under the rules. * * * At present, SDRs are
new entities under the Dodd-Frank Act with
no track record of operations; and, for
particular swap asset classes, SDRs have yet
to be established.218
In addition to finalizing rules governing
registration standards, duties and core
principles for SDRs,219 the Commission has
already voted on the final rules that establish
and compel the reporting of swap transaction
information to SDRs for purposes of real-time
public reporting (the ‘‘Real-Time Reporting
Rule’’) and to ensure that complete data
concerning swaps is available to regulators
throughout the existence of each swap and
for fifteen years following termination.220 In
217 See Swap Dealer and Major Swap Participant
Recordkeeping and Reporting, Duties, and Conflicts
of Interest Policies and Procedures; Futures
Commission Merchant and Introducing Broker
Conflicts of Interest Policies and Procedures; Swap
Dealer, Major Swap Participant, and Futures
Commission Merchant Chief Compliance Officer,
Final Rule, at Section IV of the Preamble.
218 Id.
219 Swap Data Repositories: Registration
Standards, Duties and Core Principles, 76 FR 54,538
(Sept. 1, 2011) (to be codified at 17 CFR partart 49).
220 Real-Time Public Reporting of Swap
Transaction Data, 76 FR 1,182 (Jan. 9, 2012) (to be

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addition, the track record of entities that will
likely be our first registered SDRs is
considered proven as data from these
repositories in both rates and credit have
been used to establish the foundation for
today’s re-proposal of Procedures to Establish
Appropriate Minimum Block Sizes For Large
Notional Off-Facility Swaps and Block
Trades; Further Measures to Protect the
Identities of Parties to Swap Transactions
(the ‘‘Block Proposal’’).
If the Commission truly has doubts as to
the fidelity and reliability SDR data, then it
ought not to have relied upon it in a
proposed rulemaking. That being said,
although the analysis seems to indicate that
the Commission considered alternatives, it is
curious as to how the Commission came to
the conclusion that the Internal Business
Conduct Rules are cost-effective, given that
they require firms to keep duplicative and
redundant trade records when all trades must
be reported to an SDR and stored by the SDR
for the life of the swap, plus an additional
fifteen years—which is ten years more than
our rules require that such records be kept by
registrants.
I would also point out that the Real-Time
Reporting Rule provides that a party to a
publicly-reportable swap transaction satisfies
its real-time reporting requirements by
executing the swap on or pursuant to the
rules of an exchange or swap execution
facility.221 That is, SDs and MSPs, among
others, may rely on exchanges and swap
execution facilities to report all on-exchange
trades; there is no mandated separate
reporting requirement. However, the Internal
Business Conduct Rules undermine this
relief by requiring redundant recordkeeping
and by mandating that SDs and MSPs save
all transaction records and by failing to trust
our own regulatory-creation to actually serve
as a repository for all trade data as
envisioned by Dodd-Frank Act. I have serious
concerns about the Commission’s ability to
monitor and reconcile two sets of records,
which is the rationale put forth in this final
rule.
Ironically, the SDRs were created in the
Dodd-Frank Act to facilitate market
transparency and reporting. The Commission
could provide greater transparency into its
own cost-benefit analysis by disclosing its
assumptions and data to support its
conclusions. OMB Circular A–4 outlines
standards for transparency with the following
direction, ‘‘A good analysis should be
transparent and your results must be
reproducible. You should clearly set out the
basic assumptions, methods and data
underlying the analysis and discuss the
uncertainties associated with your
estimates.’’ 222 It goes on to recommend that,
‘‘To provide greater access to your analysis,
you should generally post it, with all the
supporting documents, on the internet so the

public can review the findings.’’ 223 I
presume the Commission feels that this level
of compliance is not appropriate, given that
the commenters failed to demand it, and is
simply not reasonably feasible.
One of my major criticisms is that the
Internal Business Conduct Rules, and, in
particular, section 23.600—Risk Management
Program for Swap Dealers and Major Swap
Participants, attempt to cover every possible
contingency instead of articulating goals and
performance objectives. Section 4s(j)(2)
simply requires that the SD or MSP
‘‘establish robust and professional risk
management systems adequate for managing
the day-to-day business of the swap dealer or
major swap participant.’’ Could anyone truly
argue that that provision could not stand
largely on its own as a performance
objective? Did the Commission need to
specify to the nth degree the behavior and
manner of compliance that SDs and MSPs
must adopt in order to meet that objective?
And in doing so, has the Commission created
loopholes and unintentional safe harbors for
those who meet the regulatory requirements,
but still manage to violate other provisions of
the Commodity Exchange Act and
regulations?
Another concern is that the Internal
Business Conduct Rules do not provide for
substituted compliance with any of these
requirements for SDs and MSPs for which the
CFTC is not their prudential regulator. While
one distinct part of the preamble regarding
rules pertaining to business continuity and
disaster recovery suggest that if an SD or
MSP is subject to other rules that meet the
requirements of the Commission’s rule, then
such SD or MSP would be in compliance
with the Commission’s rule, the rules
themselves do not evidence any attempts to
coordinate our regulatory requirements with
those of our fellow prudential regulators
through the explicit provision for substituted
compliance. More egregiously, section
23.603(h)—Business Continuity and Disaster
Recovery Plans Required by Other Regulatory
Authorities, specifically requires SDs and
MSPs to comply with the business continuity
and disaster recovery requirements of this
regulation ‘‘in addition to any business
continuity and disaster recovery
requirements that are imposed on the swap
dealer or major swap participant by its
prudential regulator or any other regulatory
or self-regulatory authority.’’ 224 There is no
quantification or qualification of costs and
benefits of this regulatory decision, and I am
not surprised.
I believe our reasonably ‘‘feasible
standard’’ as articulated in our own Staff
Guidance has caused us to miss any marker
for identifying and using the best, most
innovative and least burdensome tools to
meet the regulatory ends laid out in section
4s of the Commodity Exchange Act. We
223 Id.

codified at 17 CFR part 43); Swap Data
Recordkeeping and Reporting Requirements, 76 FR
2,136 (Jan. 13, 2012) (to be codified at 17 CFR
partpart 45).
221 Real-Time Public Reporting of Swap
Transaction Data, 76 FR 1,182, 1,244 (Jan. 9, 2012)
(to be codified at 17 CFR part 43).
222 OMB Circular A–4 at 17.

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224 Swap Dealer and Major Swap Participant
Recordkeeping and Reporting, Duties, and Conflicts
of Interest Policies and Procedures; Futures
Commission Merchant and Introducing Broker
Conflicts of Interest Policies and Procedures; Swap
Dealer, Major Swap Participant, and Futures
Commission Merchant Chief Compliance Officer,
Final Rule, at § 23.603(h).

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Federal Register / Vol. 77, No. 64 / Tuesday, April 3, 2012 / Rules and Regulations
should be held accountable for not only
failing to even attempt to meet the goals set
by the President, but for deliberately
eschewing them. I agree with Chairman
Albrecht that the CFTC ought to be required
to undertake more rigorous cost-benefit
analyses. I believe all of our analyses should
be more rigorous. While it may not solve all
of our problems with putting out complex
and inefficient regulations, as noted by
Chairman Albrecht, it should help.225 I will
be sending a letter to Acting OMB Director
Jeffrey Zients requesting his assistance in
determining just how far off the baseline the
Commission has fallen. If OMB Circular A–
4 means anything at all, then OMB should
take action and hold the Commission to the
Circular’s standards.

Appendix 4—Statement of Chairman
Gensler and Commissioners Chilton
and Wetjen
The Commission fully considered all
comments and the costs and benefits of its
actions in this rulemaking. The preamble of
this Federal Register release specifically
addresses issues concerning compliance
burdens and recordkeeping requirements.
Indeed, the preamble addresses the
comments received in response to, and
proffers the Commission’s rationale for, each
of the final rules promulgated herein. The
final rules also contain numerous examples
in which the recommendations of
commenters have been adopted and
incorporated into the final rule text. Further,
all comments relevant to the Commission’s
consideration of costs and benefits were
expressly addressed in the Commission’s
discussion of its cost-benefit considerations.
With respect to comments received in
response to the recordkeeping rules, for
example, the Commission is aware that the
technology exists to implement a recording
system as required under section 4s(g) of the
Commodity Exchange Act (CEA). Indeed,
other regulatory regimes across the globe
already require such recording. As explained
in the preamble to the proposed
recordkeeping rules, in 2008, the United
Kingdom’s Financial Services Authority
(FSA) implemented rules relating to the
recording and retention of voice
conversations and electronic
communications, including a recent
determination that all financial service firms
will be required to record any relevant

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225 Albrecht,

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communication by employees on their work
cell phones.226 The FSA implemented this
requirement based on significant
technological advancements in recent years,
particularly with respect to the cost of
capturing and retaining copies of electronic
material, including telephone
communications, which have made
recordkeeping requirements for digital and
electronic communications more
economically feasible and systemically
prudent. Similar rules mandating the
recording of certain voice and/or telephone
conversations have been promulgated by the
Hong Kong Securities and Futures
Commission and by the Autorite´ des Marche´s
Financiers in France, and have been
recommended by the International
Organization of Securities Commissions
(IOSCO).227 Moreover, as noted on the
Commission’s Web site, Commission staff
met with two firms that provide elements of
the technology needed for compliance with
the recording rules under section 4s(g). These
meetings, as well as the international
requirements, informed the Commission’s
response to comments received.
In addition, one commenter asked that
swap dealers (SDs) and major swap
participants (MSPs) be permitted to rely
upon swap data repositories (SDRs) to retain
records beyond the time periods that
registrants currently retain such records. In
concluding that SDs and MSPs must retain
their own records as well as submit a certain
subset of data to SDRs, the Commission did
not call into question the integrity of its final
swap data reporting rules or SDRs
themselves; rather, the Commission
determined that the retention of such records
by SDs and MSPs is necessary for purposes
of risk management and monitoring the
entity’s trading activities for unlawful
conduct, among other things. Certain trade
226 75 FR 76666, 76668–69 (Dec. 9, 2010)
(Reporting, Recordkeeping, and Daily Trading
Records Requirements for Swap Dealers and Major
Swap Participants) (citing Financial Services
Authority, ‘‘Policy Statement: Telephone
Recording: Recording of voice conversations and
electronic communications,’’ (March 2008)).
227 Id. at 76669 (citing Code of Conduct for
Persons Licensed by or Registered with the
Securities and Futures Commission para. 3.9 (2010)
(H.K.); General Regulation of the Autorite´ des
Marche´s Financiers art. 313–51 (2010) (Fr.); and
Press Release, International Organization of
Securities Commissions, ‘‘IOSCO Publishes
Recommendations to Enhance Commodity Futures
Markets Oversight,’’ (Mar. 5, 2009), http://
www.iosco.org/news/pdf/IOSCONEWS137.pdf).

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20215

execution information that is critical for risk
management and monitoring purposes, such
as reconciliations to the general ledger, will
not be retained at SDRs.
With regard to cost-benefit considerations
of these elements of the recordkeeping rules,
as well as for all of the final rules, the
Commission strove to limit the burden on
SDs and MSPs to the extent reasonably
possible. For instance, as originally
proposed, the recording requirement
(discussed above) included a provision that
would have required each transaction record
to be maintained as a separate electronic file.
The Commission dropped this requirement
and clarified that the rule permits the data to
be stored in databases that do not need to be
tagged with transaction and counterparty
identifiers so long as the SD or MSP can
readily access and identify records by
running a search on the data. By making this
change, the Commission responded to
comments and limited the rule’s
requirements to those dictated by statute,228
reducing the burden to the extent reasonably
possible.
Additionally, during the February 23, 2011
public meeting at which the Commission
adopted these final rules, there was
discussion of a concern relating to the
technological and economic feasibility of the
recordkeeping requirements. Responding to
the concern, the Commission adopted 5 CFR
23.206, which delegates to the Director of the
Division of Swap Dealer and Intermediary
Oversight ‘‘the authority to establish an
alternative compliance schedule for
requirements of § 23.202 that are found to be
technologically or economically
impracticable for an affected swap dealer or
major swap participant that seeks, in good
faith, to comply with the requirements of
§ 23.202 within a reasonable time period
beyond the date on which compliance by
such swap dealer or major swap participant
is otherwise required.’’
In sum, in this rulemaking the Commission
has adequately addressed comments and
considered the costs and benefits of its
actions as required by section 15(a) of the
CEA.
[FR Doc. 2012–5317 Filed 4–2–12; 8:45 am]
BILLING CODE 6351–01–P
228 See, e.g., CEA § 4s(g)(3) (‘‘Each registered swap
dealer and major swap participant shall maintain
daily trading records for each counterparty in a
manner and form that is identifiable with each
swap transaction.’’).

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