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Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 1, 23, 37, 38, and 39
RIN 3038–0092, –0094
Customer Clearing Documentation,
Timing of Acceptance for Clearing, and
Clearing Member Risk Management
Commodity Futures Trading
Commission.
ACTION: Final rule.
AGENCY:
The Commodity Futures
Trading Commission (‘‘Commission’’ or
‘‘CFTC’’) is adopting rules to implement
new statutory provisions enacted by
Title VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
These rules address: The documentation
between a customer and a futures
commission merchant that clears on
behalf of the customer; the timing of
acceptance or rejection of trades for
clearing by derivatives clearing
organizations and clearing members;
and the risk management procedures of
futures commission merchants, swap
dealers, and major swap participants
that are clearing members. The rules are
designed to increase customer access to
clearing, to facilitate the timely
processing of trades, and to strengthen
risk management at the clearing member
level.
DATES: This rule will become effective
October 1, 2012.
FOR FURTHER INFORMATION CONTACT: John
C. Lawton, Deputy Director, 202–418–
5480, [email protected], and Christopher
A. Hower, Attorney-Advisor, 202–418–
6703, [email protected], Division of
Clearing and Risk, and Camden Nunery,
Economist, 202–418–5723, Office of the
Chief Economist, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW.,
Washington, DC 20581; and Hugh J.
Rooney, Assistant Director, 312–596–
0574, [email protected], Division of
Clearing and Risk, Commodity Futures
Trading Commission, 525 West Monroe
Street, Chicago, Illinois 60661.
SUPPLEMENTARY INFORMATION:
SUMMARY:
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Table of Contents
I. Background
II. Customer Clearing Documentation
A. Introduction
B. Summary of Comments
C. Discussion
III. Time Frames for Acceptance Into Clearing
A. Swap Dealer and Major Swap
Participant Submission of Trades
B. Swap Execution Facility and Designated
Contract Market Processing of Trades
C. Clearing Member and Clearing
Organization Acceptance for Clearing
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D. Post-Trade Allocation of Bunched
Orders
IV. Clearing Member Risk Management
A. Introduction
B. Components of the Rule
V. Effective Dates
A. Summary of Comments
B. Discussion
VI. Consideration of Costs and Benefits
VII. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
I. Background
On July 21, 2010, President Obama
signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(‘‘Dodd-Frank Act’’).1 Title VII of the
Dodd-Frank Act amended the
Commodity Exchange Act (‘‘CEA’’ or
‘‘Act’’) 2 to establish a comprehensive
new regulatory framework for swaps.
The legislation was enacted to reduce
risk, increase transparency, and promote
market integrity within the financial
system by, among other things: (1)
Providing for the registration and
comprehensive regulation of swap
dealers and major swap participants; (2)
imposing clearing and trade execution
requirements on standardized derivative
products; (3) creating rigorous
recordkeeping and real-time reporting
regimes; and (4) enhancing the
Commission’s rulemaking and
enforcement authorities with respect to,
among others, all registered entities and
intermediaries subject to the
Commission’s oversight. Title VII also
includes amendments to the federal
securities laws to establish a similar
regulatory framework for security-based
swaps under the authority of the
Securities and Exchange Commission
(‘‘SEC’’).
A fundamental premise of the DoddFrank Act is that the use of properly
regulated central clearing can reduce
systemic risk. Another tenet of the
Dodd-Frank Act is that open access to
clearing by market participants will
increase market transparency and
promote market efficiency by enabling
market participants to reduce
counterparty risk and by facilitating the
offset of open positions. The
Commission has adopted extensive
regulations addressing open access and
risk management at the derivatives
clearing organization (‘‘DCO’’) level.3
Clearing members provide the portals
through which market participants gain
access to DCOs. Clearing members also
1 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (2010).
2 7 U.S.C. 1 et seq.
3 Derivatives Clearing Organization General
Provisions and Core Principles, 76 FR 69334 (Nov.
8, 2011).
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provide the first line of risk
management. Accordingly, in three
related rulemakings, the Commission
proposed regulations to increase
customer access to clearing,4 to facilitate
the timely processing of trades,5 and to
strengthen risk management at the
clearing member level.6 In addition, in
a fourth rulemaking, the Commission
proposed regulations relating to the
allocation of bunched orders.7 The
Commission is issuing final rules in
each of these areas.
More specifically, the regulations
contained in this Adopting Release were
proposed in four separate notices of
proposed rulemaking (‘‘NPRMs’’).
Sections 1.72, 1.74, 23.608, 23.610,
39.12(a)(1)(iv), and 39.12(b)(7) were
proposed in Customer Clearing
Documentation and Timing of
Acceptance for Clearing,8 sections
23.506, 37.702(b), and 38.601(b) were
proposed in Requirements for
Processing, Clearing, and Transfer of
Customer Positions,9 sections 1.73 and
23.609 were proposed in Clearing
Futures Commission Merchant Risk
Management,10 and 1.35(a–1)(5)(iv) was
proposed in Adaptation of Regulations
to Incorporate Swaps.11 The
Commission is finalizing the rules
contained in this Adopting Release
together because they address three
overarching, closely-connected aims: (1)
Non-discriminatory access to
counterparties and clearing; (2) straightthrough processing; and (3) effective
risk management among clearing
members. Each of these provides
substantial benefits for the markets and
market participants.
II. Customer Clearing Documentation
A. Introduction
As discussed in the notice of
proposed rulemaking,12 industry groups
have developed a template for use by
swap market participants in negotiating
execution-related agreements with
counterparties to swaps that are
intended to be cleared.13 The template
4 Customer Clearing Documentation and Timing
of Acceptance for Clearing, 76 FR 45730 (Aug. 1,
2011).
5 Requirements for Processing, Clearing, and
Transfer of Customer Positions, 76 FR 13101 (Mar.
10, 2011).
6 Clearing Member Risk Management, 76 FR
45724 (Aug. 1, 2011).
7 Adaption of Regulations to Incorporate Swaps,
76 FR 33066 (Jun. 7, 2011).
8 See 76 FR 45730 (Aug. 1, 2011).
9 See 76 FR 13101 (Mar. 10, 2011).
10 See 76 FR 45724 (Aug. 1, 2011).
11 See 76 FR 33066 (Jun. 6, 2011).
12 See 76 FR 45730 at 45731, Aug. 1, 2011.
13 See http://www.futuresindustry.org/downloads/
ClearedDerivativesExecutionAgreement_June
142001.pdf.
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Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations
includes optional annexes that make the
clearing member to one or both of the
executing parties a party to the
agreement (the trilateral agreements).
The trilateral agreements contain
provisions that would permit a
customer’s futures commission
merchant (‘‘FCM’’), in consultation with
the swap dealer (‘‘SD’’) that is the
customer’s counterparty, to establish
specific credit limits for the customer’s
swap transactions with the SD. The
provisions further provide that the FCM
will only accept for clearing those
transactions that fall within these
specific limits. The limits set for trades
with the SD or MSP might be less than
the overall limits set for the customer
for all trades cleared through the FCM.
The result would be to create a
‘‘sublimit’’ for the customer when
trading with that SD or MSP.
When a trade is rejected for clearing,
the parties to that trade may incur
significant costs. As the clearing of
swaps increases pursuant to the DoddFrank Act, the likelihood and size of
such potential costs could also increase,
according to the proponents of the
trilateral agreements. The trilateral
agreements were intended to limit these
potential costs.
The Commission expressed concern
in the notice of proposed rulemaking
that such arrangements potentially
conflict with the concepts of open
access to clearing and competitive
execution of transactions.14 To address
these concerns and to provide further
clarity in this area, the Commission
proposed § 1.72 relating to FCMs,
§ 23.608 relating to SDs and MSPs, and
§ 39.12(a)(1)(vi) relating to DCOs. These
regulations would prohibit
arrangements involving FCMs, SDs,
MSPs, or DCOs that would (a) disclose
to an FCM, SD, or MSP the identity of
a customer’s original executing
counterparty; (b) limit the number of
counterparties with whom a customer
may enter into a trade; (c) restrict the
size of the position a customer may take
with any individual counterparty, apart
from an overall credit limit for all
positions held by the customer at the
FCM; (d) impair a customer’s access to
execution of a trade on terms that have
a reasonable relationship to the best
terms available; or (e) prevent
compliance with specified time frames
for acceptance of trades into clearing.
B. Summary of Comments
The Commission received a total of 38
comment letters directed specifically at
14 Id.
at 45732.
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the proposed documentation rules.15 Of
the 38 commenters, 30 supported the
proposed rules.16 They included asset
managers, market makers, trading
platforms, clearing organizations, bank/
dealers, a non-profit organization, and a
private citizen. Within this group, some
commenters addressed only certain
aspects of the rules and were silent on
other sections and some requested
clarification of certain provisions.
Eight commenters expressed
opposition.17 They include bank/
dealers, an association of electric
utilities, and an asset manager. Within
this group as well, some commenters
addressed only certain aspects of the
rules and were silent on other sections
and some requested clarification of
certain provisions.
Three commenters in support—Arbor,
Citadel, and Eris—urged the
Commission to make these rules a top
15 Comment files for each proposed rulemaking
can be found on the Commission Web site,
www.cftc.gov. Commenters include: Chris Barnard
(‘‘Barnard’’); MarkitSERV (‘‘Markit’’); Swaps &
Derivatives Market Association (‘‘SDMA’’); Better
Markets; IntercontinentalExchange, Inc. (‘‘ICE’’);
ISDA FIA (‘‘ISDA’’); The Alternative Investment
Management Association Ltd. (‘‘AIMA’’); CME
Group Inc. (‘‘CME’’); Morgan Stanley; Edison
Electric Institute (‘‘EEI’’); State Street Corporation
(‘‘State Street’’); New York Portfolio Clearing
(‘‘NYPC’’); Asset Management Group of the
Securities Industry and Financial Markets
Association (‘‘SIFMA’’); Vanguard;
AllianceBernstein L.P. (‘‘Alliance Bernstein’’);
Minneapolis Grain Exchange, Inc. (‘‘MGEX’’);
Atlantic Trading USA LLC; Belvedere Trading;
Bluefin Trading, LLC; Chopper Trading LLC; CTC
Trading Group, LLC; DRW Holdings, LLC; Eagle
Seven, LLC; Endeavor Trading, LLC; Flow Traders
US LLC; Geneva Trading USA, LLC; GETCO; Hard
Eight Futures; HTG Capital Partners; IMC Financial
Markets; Infinium Capital Management LLC; Kottke
Associates, LLC; Marquette Partners, LP; Nico
Holdings LLC; Optiver US LLC; RGM Advisors,
LLC; Templar Securities, LLC; Tower Research
Capital LLC; TradeForecaster Global Markets LLC;
Traditum Group, LLC; WH Trading LLC; XR
Trading LLC (‘‘Trading Firms’’); Managed Funds
Association (‘‘MFA’’); Arbor Research & Trading
Inc. (‘‘Arbor’’); Eris Exchange (‘‘Eris’’); ICI; DRW
Trading Group (‘‘DRW’’); Spring Trading, Inc.
(‘‘Spring Trading’’); Javelin Capital Markets, LLC
(‘‘Javelin’’); The Committee on Investment of
Employee Benefit Assets (‘‘CIEBA’’); Citadel LLC
(‘‘Citadel’’); Vizier Ltd. (‘‘Vizier’’); Federal Home
Loan Banks (‘‘FHLB’’); Jefferies & Company, Inc.
(‘‘Jeffries’’); UBS Securities LLC (‘‘UBS’’); Wells
Fargo Securities (‘‘WF’’); LCH.Clearnet Group
Limited (‘‘LCH’’); D. E. Shaw group (‘‘D. E. Shaw’’);
Bank of America, Merrill Lynch, BNP Paribas, Citi,
Credit Suisse Securities (USA) LLC, Deutsche Bank
AG, Goldman Sachs, HSBC, J.P. Morgan, Morgan
Stanley (‘‘Banks’’); Deutsche Bank (‘‘DB’’); Societe
Generale (‘‘SG’’); The Association of Institutional
Investors (‘‘AII’’); and The Committee on Capital
Markets Regulation (‘‘Committee’’).
16 AII, AIMA, AllianceBernstein, Arbor, Better
Markets, Barnard, CIEBA, Citadel, CME, D. E. Shaw,
DRW, Eris, FHLB, ICE, ICI, Javelin, Jeffries, LCH,
Markit, MFA, MGEX, NYPC, SDMA, SIFMA, Spring
Trading, State Street, Trading Firms, Vanguard,
Vizier, and WF.
17 DB, ISDA, SG, UBS, Morgan Stanley, the Banks,
EEI, and the Committee.
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priority in the final rulemaking process.
Numerous commenters stated that the
proposed rules would increase open
access to clearing and execution, reduce
risk, foster competition, lower costs, and
increase transparency. FHLB expressed
the view that the proposed rules will
facilitate the transition to central
clearing. Barnard and Vanguard asserted
that the proposed rules will prevent
conflicts of interest, and achieve clear
walls between clearing and trading
activities involving FCMs and affiliates.
Six commenters went into detail why
the trilateral agreements are bad for the
markets, noting that such agreements
discourage competition and efficient
pricing, compromise anonymity, reduce
liquidity, increase the time between
execution and clearing, introduce
conflicts of interest, and prevent the
success of swap execution facilities
(‘‘SEFs’’).18 SDMA commented that
while ‘‘the SDMA is philosophically
loathe to encourage possible
government [interference] with private
contracts between two parties,’’ the
proposed rules are necessary in their
entirety in this instance, and that the
proposed rules are not overly
prescriptive. Vanguard, estimated that if
it was required to enter into trilateral
agreements, it would have to negotiate
approximately 4,800 new trilateral
agreements per year.19
Seven commenters in opposition
contended that without the trilateral
agreements, some market participants
may have reduced access to markets.20
(ISDA and the Committee did not
address this issue.) They asserted that
the trilateral agreements facilitate risk
management and certainty of execution.
DB believes that the trilateral
agreements provide a means of ensuring
compliance with mandatory clearing.
DB also commented that if an SD does
not know whether a swap will be
cleared prior to execution, it will not
know whether it should apply risk
filters that take account of the swap as
a cleared transaction or a bilateral one.
SG commented that the rules will
decrease liquidity and limit market
participation, and that without the
certainty of trilateral agreements, the
rules may foster competing and
inconsistent technology.
UBS believes that potential abuse of
credit arrangements could be more
narrowly tailored than the proposed
rule. The Banks asserted that the credit
filter infrastructure necessary to
18 AIMA, Javelin, SG, SIFMA, Spring Trading,
and Vanguard.
19 Vanguard.
20 Banks, DB, EEI, ISDA, Morgan Stanley, SG, and
UBS.
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maximize execution choice for
customers while ensuring prudent risk
management is not currently available.
The Banks suggested that instead of
prohibiting the trilateral agreements, the
Commission could require that the
allocation of credit limits across
executing counterparties be specified by
the customer, rather than the FCM, who
would confirm the customer’s allocation
to the identified executing
counterparties.
Morgan Stanley requested
clarification that the proposed rules
only apply to arrangements between
clearing firms and executing swap
dealers and customers with respect to
swaps, not futures. Morgan Stanley also
commented that the Commission should
alter the language in proposed § 1.72
and § 23.608 from ‘‘relationship to the
best terms available’’ to ‘‘execution with
an executing swap dealer of the
customer’s choice.’’
Spring Trading requested clarification
that ‘‘on terms that have a reasonable
relationship to the best terms available’’
refers to the best terms available on any
market regulated by the Commission,
which would prohibit an FCM from
establishing special hurdles for its
clearing customers in order to trade on
a particular SEF.
C. Discussion
The Commission found persuasive the
comments stating that the proposed
rules would increase open access to
clearing and execution, reduce risk,
foster competition, lower costs, and
increase transparency. The
Commmission notes that cleared futures
markets have operated for decades
without any need for the types of
provisions prohibited by the rules.
Similarly, trades executed over-thecounter (‘‘OTC’’) have been successfully
cleared by CME and ICE on behalf of
customers for approximately ten years
without such provisions.
Specifically, the Commission believes
that, as discussed by numerous
commenters, (1) disclosure of a
customer’s original executing
counterparty could have potentially
anticompetitive effects, (2) limiting the
number of counterparties would hurt
the customer’s access to the best price
as well as general market liquidity, (3)
restricting the size of trades with
particular counterparties also would
hurt the customer’s access to the best
price as well as general market liquidity,
and (4) restrictions on the number of
counterparties and on the size of trades
with them would slow down acceptance
for clearing thereby causing the very
problem the restrictions were
purportedly designed to address.
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The Commission believes that the
risks the trilateral agreements were
designed to address can be mitigated by
other means without incurring the
negative consequences described above.
Specifically, the processing rules
described in section III. below and the
risk management rules described in
section IV. below would significantly
diminish the exposure of dealers, their
counterparties, and their respective
FCMs to risk.
Moreover, the Commission notes that
there are several sections of the CEA
and Commission regulations that
support the premise underlying these
final rules. Section 4d(c) of the CEA, as
amended by the Dodd-Frank Act, directs
the Commission to require FCMs to
implement conflict of interest
procedures that address such issues the
Commission determines to be
appropriate. Similarly, section 4s(j)(5),
as added by the Dodd-Frank Act,
requires SDs and MSPs to implement
conflict of interest procedures that
address such issues the Commission
determines to be appropriate. Section
4s(j)(5) also requires SDs and MSPs to
ensure that any persons providing
clearing activities or making
determinations as to accepting clearing
customers are separated by appropriate
informational partitions from persons
whose involvement in pricing, trading,
or clearing activities might bias their
judgment or contravene the core
principle of open access.
Pursuant to these provisions, the
Commission promulgated § 1.71(d)
relating to FCMs and § 23.605(d)
relating to SDs and MSPs.21 These
regulations prohibit SDs and MSPs from
interfering or attempting to influence
the decisions of affiliated FCMs with
regard to the provision of clearing
services and activities, and prohibit
FCMs from permitting them to do so.
Section 4s(j)(6) of the CEA prohibits
an SD or MSP from adopting any
process or taking any action that results
in any unreasonable restraint on trade or
imposes any material anticompetitive
burden on trading or clearing, unless
necessary or appropriate to achieve the
purposes of the Act. To implement
Section 4s(j)(6) of the CEA, the
21 ‘‘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,’’
available at http://www.cftc.gov/LawRegulation/
DoddFrankAct/Rulemakings/
DF_4_BusConductStandardsInternal/ssLINK/
federalregister022312b.
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Commission has promulgated § 23.607
in a separate rulemaking.22
Section 2(h)(1)(B)(ii) of the CEA
requires that DCO rules provide for the
non-discriminatory clearing of swaps
executed bilaterally or through an
unaffiliated designated contract market
(‘‘DCM’’) or SEF. The Commission has
adopted § 39.12(b)(3) to implement this
provision.23
The trilateral agreements potentially
conflict with the recently-adopted
§§ 1.71(d), 23.605(d), 23.607, and 39.12.
As certain commenters have stated, the
provisions of the trilateral agreements
described above could lead to undue
influence by FCMs on a customer’s
choice of counterparties or undue
influence by SDs on a customer’s choice
of clearing member. They could
constrain a customer’s opportunity to
obtain competitive execution of the
trade by limiting the number of
potential counterparties.
The documentation rules covered by
this rulemaking are consistent with, and
complementary to, the recently adopted
rules. The rules in this Federal Register
release address specific circumstances
that have been identified to the
Commission by market participants,
while the previously adopted rules set
forth more general principles. The
Commission believes that, in this case,
market participants and the general
public would be best served by
providing both the clarity of a brightline test for certain identifiable
situations and the guidance of more
broadly-articulated principles.
Contrary to the assertion of some
commenters, the rules do not prohibit
trilateral agreements; they prohibit
certain provisions whether contained in
a trilateral or a bilateral agreement. The
rules have been tailored to address
specific issues identified by market
participants.
The Commission emphasizes that
nothing in these rules would restrain an
SD or MSP from establishing bilateral
limits with each of its counterparties.
Further, nothing in these rules would
impair an SD’s or MSP’s ability to
conduct due diligence with regard to
each of its counterparties, including
evaluation of balance sheet, credit
ratings, overall market exposure, or
similar factors.
The Commission is revising the
language in §§ 23.608 and 23.608(c) to
clarify that, for swaps that will be
submitted for clearing, an SD or MSP
may continue to manage its risk by
limiting its exposure to the counterparty
with whom it is trading. This
22 Id.
23 76
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FR 69334, Nov. 8, 2011.
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clarification is intended to emphasize
that SDs and MSPs may continue to
conduct appropriate risk management
exercises. Moreover, the Commission
believes that this modification is
responsive to the concern raised by
some commenters that until straight
through processing is achieved, SDs and
MSPs will still need to manage risk to
a counterparty before a trade is accepted
or rejected for clearing.24 Furthermore,
the Commission also believes that
§ 23.608 does not preclude an SD or
MSP from requiring that a counterparty
confirm that the counterparty has an
account with an FCM through which the
counterparty will clear.
In response to the Morgan Stanley
request for clarification, the
Commission confirms that the rules, as
drafted, only apply to swaps. As noted,
similar provisions have never been
needed and, therefore, were not
proposed for futures.
The Commission has determined not
to modify the language in §§ 1.72 and
23.608 as suggested by Morgan Stanley
from ‘‘relationship to the best terms
available’’ to ‘‘execution with an
executing swap dealer of the customer’s
choice.’’ The rule should not imply that
customers may only trade with swap
dealers. Moreover, some swap markets
operate anonymous central limit order
books. In these instances, the
counterparty is immaterial; trading
decisions are based on solely the terms
of the trade.
The Commission also has determined
not to adopt the clarification suggested
by Spring Trading. Requiring execution
on the best terms available on any
market regulated by the Commission
could impose burdensome search
costs.25 Moreover, there could be
operational costs in establishing
connectivity to every market. It is not
clear how many markets there will be or
how compatible their systems will be
with one another or with the systems of
all FCMs and SDs. Upon review of the
comments, the Commission is adopting
§§ 1.72, and 39.12(a)(1)(vi) as proposed,
and § 23.608 with the modification
described above.
24 ISDA.
25 The Commission notes that this rule does not
impose a best execution requirement. This rule
merely prohibits a contractual provision that would
impair a customer’s access to execution of a trade
on terms that have a reasonable relationship to the
best terms available.
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III. Time Frames for Acceptance Into
Clearing
A. Swap Dealer and Major Swap
Participant Submission of Trades
1. Introduction
Section 731 of the Dodd-Frank Act
amended the CEA by adding a new
section 4s, which sets forth a number of
requirements for SDs and MSPs.
Specifically, section 4s(i) of the CEA
establishes swap documentation
standards for those registrants. Section
4s(i) requires SDs and MSPs to
‘‘conform with such standards as may
be prescribed by the Commission by
rule or regulation that relate to timely
and accurate confirmation, processing,
netting, documentation, and valuation
of all swaps.’’ Section 8a(5) of the CEA
authorizes the Commission to
promulgate such regulations as, in the
judgment of the Commission, are
reasonably necessary to effectuate any of
the provisions or to accomplish any of
the purposes of the Act.26 Pursuant to
these provisions, and in order to ensure
compliance with any mandatory
clearing requirement issued pursuant to
section 2(h)(1) of the CEA and to
promote the mitigation of counterparty
credit risk through the use of central
clearing, the Commission proposed
§ 23.506.
As proposed, § 23.506(a)(1) would
require that SDs and MSPs have the
ability to route swaps that are not
executed on a SEF or DCM to a DCO in
a manner that is acceptable to the DCO
for the purposes of risk management.
Under § 23.506(a)(2), as proposed, SDs
and MSPs would also be required to
coordinate with DCOs to facilitate
prompt and efficient processing in
accordance with proposed regulations
related to the timing of clearing by
DCOs.
As proposed, § 23.506(b) would set
forth timing requirements for submitting
swaps to DCOs in those instances where
the swap is subject to a clearing
mandate and in those instances when a
swap is not subject to a mandate. Under
§ 23.506(b)(1), as proposed, an SD or
MSP would be required to submit a
swap that is not executed on a SEF or
DCM, but is subject to a clearing
mandate under section 2(h)(1) of the
CEA (and has not been electively
excepted from mandatory clearing by an
end user under section 2(h)(7) of the
CEA) as soon as technologically
practicable following execution of the
swap, but no later than the close of
business on the day of execution.27
26 7
U.S.C. 12a(5).
Commission notes that it is not expressing
an opinion at this time as to whether a mandatory
27 The
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21281
For those swaps that are not subject
to a clearing mandate, but for which
both counterparties to the swap have
elected to clear the swap, under
§ 23.506(b)(2), as proposed, the SD or
MSP would be required to submit the
swap for clearing not later than the next
business day after execution of the
swap, or the agreement to clear, if later
than execution. This time frame reflects
the possibility that in the case of a
bilateral swap, the parties may need
time to agree to terms that would
conform with a DCO’s requirements for
swaps it will accept for clearing. As
noted previously, any delay between
execution and novation to a
clearinghouse potentially presents
credit risk to the swap counterparties
and the DCO because the value of the
position may change significantly
between the time of execution and the
time of novation, thereby allowing
financial exposure to accumulate in the
absence of daily mark-to-market. The
proposed regulation was designed to
limit this delay as much as reasonably
possible.
2. Summary of Comments
MFA generally supported proposed
§§ 23.506(a) and 23.506(b).
CME commented that the regulations
should not require any particular system
or methodology that SDs or MSPs must
use for submitting swaps to DCOs.
Instead, the regulations should give
each DCO the flexibility to work with
SDs and MSPs to implement various
systems and methodologies for swap
submission, which may be subject to
change over time as cleared swap
markets continue to develop and grow.
ISDA also indicated that the rule
should permit SDs and MSPs,
coordinating with their DCOs, to be free
to select the manner by which they
route their swaps to DCOs. ISDA,
however, commented that it is not
apparent what proposed § 23.506(a)
adds to the § 39.12(a)(3) requirement
that clearing members have adequate
operational capacity to meet obligations
arising from their participation in DCOs.
ISDA also noted that market
participants have for some time been
developing industry standards for the
prompt and efficient processing of
cleared swap transactions, and it
suggested that the Commission study
these standards and defer to them
wherever possible.
MarkitSERV commented that the
requirement to submit swaps ‘‘as soon
as technologically practicable following
clearing determination must be made in
conjunction with a mandatory trading
determination.
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execution’’ may be inappropriate in
light of the Commission’s proposed rule
regarding confirmation requirements,
which requires that swap transactions
be confirmed within a certain time
period after execution. MarkitSERV
suggested that the regulation reference
the time of confirmation as opposed to
the time of execution. MarkitSERV also
noted that requiring SDs and MSPs to
submit swaps for clearing ‘‘no later than
the close of business on the day of
execution’’ fails to accommodate
transactions that occur late in the day
and suggested a 24 hour time period.
MarkitSERV also commented that
there are numerous benefits to using
third party middleware providers for
routing and processing services, and it
suggested that the Commission permit
swap counterparties to control how they
process transactions. According to
MarkitSERV, counterparties should be
permitted to use independent third
party providers for confirming, routing,
and satisfying the portfolio
reconciliation requirements proposed by
the Commission. MarkitSERV also
suggested that the Commission clarify
how proposed § 23.506 would interact
with proposed § 23.501, which requires
confirmation of all swaps, and with the
then-proposed rules requiring reporting
of swap transactions to an SDR.28
FIA commented that SDs and MSPs
are unlikely to submit a swap directly
to a DCO for clearing. Instead, they will
first affirm the swap by, for example,
submitting the relevant details to an
affirmation platform and then submit
the swap to their respective clearing
members for submission to a DCO.
FIA suggested that the Commission
should require SDs and MSPs to have a
clearing arrangement in place with
clearing members that, in turn, have the
capacity to route orders to a DCO in a
manner acceptable to it.
FIA also believes that the ‘‘no later
than close of business’’ could not be
satisfied by swaps that are entered into
later in the day and suggests the
proposed rule be revised to provide the
parties greater flexibility to submit a
swap for clearing within a reasonable
time as prescribed by the applicable
DCO. Finally, to encourage the
voluntary use of clearing where such
swaps are not required to be cleared,
FIA suggests that the proposed
§ 23.506(b)(2) be revised to permit the
parties to submit such trades for
clearing on any date to which the
parties and their respective clearing
firms agree.
28 Swap Data Repositories: Registration
Standards, Duties and Core Principles, 76 FR 54538
(Oct. 31, 2011).
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The Options Clearing Corporation
(‘‘OCC’’) commented that the phrase
‘‘for purpose of risk management’’ in
proposed §§ 23.506(a)(1) and
37.702(b)(1) creates ambiguity because a
DCO may have established routing
requirements for reasons unrelated to
risk management such as increased
efficiency or decreased administrative
costs. OCC believes that a party that
submits transactions to a DCO for
clearing should be required to ensure
that it has the ability to route the
transactions to the DCO in a manner
that meets all of the DCO’s legitimate
requirements, and not only those that
are related to risk management. OCC
suggests that the Commission delete the
phrase ‘‘for purpose of risk
management’’ and substitute the phrase
‘‘for clearing.’’
SDMA supported the amendments to
proposed § 23.506, and suggested that
the Commission promulgate rules that
ensure post-trade and pre-trade
integrity. According to SDMA, the buyer
and seller must know immediately
whether their trade has been accepted
for clearing. Trade uncertainty, SDMA
continued, caused by the time delay
between the time of trade execution and
the time of trade acceptance into
clearing, undermines market integrity in
the post-trade work process. SDMA also
stated that trade uncertainty also
directly impedes liquidity, efficiency,
and market stability.
CME commented that the technology
for SDs and MSPs to route swaps to a
DCO may be as simple as entering the
necessary data in a web page. It
suggested that a more apt standard may
be ‘‘as soon as operationally feasible.’’
CME also believes that the proposed
time frames for submission of swaps are
appropriate and operationally feasible,
and it is not aware of systemic obstacles
to the coordination between DCOs,
MSPs, and SDs required under the
proposed regulation.
FHLBanks commented that the time
frames are appropriate provided that the
Commission establishes a cut-off time
for determining the day on which a
swap is executed because it may not be
‘‘technologically practicable’’ for a swap
that is executed towards the end of a
day to be submitted for clearing that
day. FHLBanks suggests the rule specify
that swaps executed after 4 p.m. New
York time shall be deemed to be
executed on the following business day.
ISDA commented that submission by
the close of business may not be
technologically practicable. In addition,
ISDA suggested that trades will need to
go through an affirmation platform and
clearing members will need to screen
trades for compliance with their own
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standards and with DCO standards, and
this may not occur before the end of the
business day. ISDA also expressed
concern that mandatory, same day
submission may invite error because
clearing members may focus on speed
over accuracy. ISDA suggested that the
Commission impose an ‘‘as soon as
reasonably and technologically
practicable’’ standard.
ISDA also commented that
§ 23.506(b)(2) should not set forth a time
period for clearing. According to ISDA,
limiting the flexibility of parties
voluntarily seeking to clear will only
create disincentives to such
voluntarism, including confusion and
potential legal uncertainty. Thus, ISDA
suggested that where parties voluntarily
elect to submit a swap for clearing, all
aspects of that election should be left to
the parties to determine contractually.
Freddie Mac commented that swap
dealers periodically enter mismatched
data and send swap confirmations that
incorrectly reflect the principal terms of
transactions. As a result, Freddie Mac
believes that a standard for submitting
clearing submissions that starts the
clock at execution would be confusing
and impractical and it could be
detrimental to counterparties who are
subject to undue pressure to quickly
assent to terms dictated by a market
professional. Freddie Mac also
commented that establishing a close of
business deadline for submission of
swaps for clearing would impair late
day trading and potentially reduce
market integrity. Freddie Mac suggested
that the Commission modify proposed
§ 23.506(b)(1) to provide that SDs and
MSPs are required to submit swaps that
are not executed on a SEF or DCM but
that are subject to a clearing mandate as
soon as commercially and operationally
practical for both parties but no later
than 24 hours after execution.
LCH commented that swaps not
subject to mandatory clearing
obligations should not be subject to any
timeline. LCH believes that a DCO
should be able to accept such trades
whenever they are submitted, provided
that it has sufficient margin from both
sides.
3. Discussion
Proposed § 23.506(a) does not
prescribe the manner by which SDs or
MSPs route their swaps to DCOs and
provide for prompt and efficient
processing. It is possible that DCOs will
enable SDs and MSPs to submit their
swaps to clearing via third-party
platforms and other service providers.
DCOs will certainly specify the role of
their clearing members in the process.
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The flexibility of the rule makes it
consistent with the comments of MFA,
CME, ISDA, MarkitSERV, and FIA. The
Commission concurs with OCC’s
comment that a DCO may have
requirements beyond risk management.
The issue raised by SDMA is addressed
in the customer documentation
provisions.
As discussed above, any delay
between the time of execution and the
time of clearing creates financial risk for
the parties to the trade and for their
clearing FCMs. For trades that are not
subject to a clearing mandate, the
parties are not bound by any submission
deadlines unless and until they
voluntarily agree to have the trade
cleared. Once they make that decision,
however, it will reduce risk for both the
parties, as well as their respective
clearing members, to get the trade
submitted for clearing as soon as
practicable. Therefore, in most cases it
seems likely that the parties will comply
with the timing set forth within the rule
because it is in their own best interests
to do so. But, to leave ‘‘all aspects’’ to
the parties, as ISDA suggested, creates
the possibility that one party could
expose itself, its counterparty, and its
clearing member to unnecessary risk by
delaying submission.29 In light of all the
comments, the Commission believes
that the timeframes for submission set
forth in the proposed rules are
reasonable.
The Commission is not defining
‘‘business day’’ in this rule, in order to
allow the entity accepting the trade for
clearing, the DCO, to establish its own
definition. The Commission
understands that a DCO may choose to
expand its business hours in order to
offer a competitive advantage, and that
this rule should not prescribe when
swaps may be accepted for clearing. The
Commission further believes that if a
trade is submitted for clearing near the
end of a business day for a particular
DCO, but is ultimately not accepted or
rejected before that deadline, the DCO
will determine whether the trade will be
accepted or rejected for clearing for the
following day in accordance with
§ 39.12.
The Commission is adopting
§ 23.506(a)(1) with the amendment
suggested by OCC, changing ‘‘for
purposes of risk management’’ to ‘‘for
purposes of clearing.’’
The Commission is adopting
§§ 23.506(a)(2) and 23.506(b) as
proposed.
29 See
ISDA.
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B. Swap Execution Facility and
Designated Contract Market Processing
of Trades
1. Introduction
For prompt and efficient clearing to
occur, the rules, procedures, and
operational systems of the trading
platform and the clearinghouse must
align. Vertically integrated trading and
clearing systems currently process high
volumes of transactions quickly and
efficiently. The Commission believes
that trading platforms and DCOs under
separate control should be able to
coordinate with one another to achieve
similar results.
The Commission proposed §§ 37.700
through 37.703 to implement SEF Core
Principle 7 (Financial Integrity of
Transactions), pursuant to its
rulemaking authority under sections
5h(h) and 8a(5) of the CEA.30 Core
Principle 7 requires a SEF to ‘‘establish
and enforce rules and procedures for
ensuring the financial integrity of swaps
entered on or through the facilities of
the swap execution facility, including
the clearing and settlement of the swaps
pursuant to section 2(h)(1) [of the
CEA].’’ 31 As originally proposed,
§ 37.702(b) would require a SEF to
provide for the financial integrity of its
transactions cleared by a DCO by
ensuring that the SEF has the capacity
to route transactions to the DCO in a
manner acceptable to the DCO for
purposes of risk management.32 As part
of the processing rulemaking, the
Commission proposed to renumber
previous § 37.702(b) as paragraph (b)(1)
and add a new paragraph (b)(2) to
require the SEF to additionally provide
for the financial integrity of cleared
transactions by coordinating with each
DCO to which it submits transactions
for clearing, in the development of rules
and procedures to facilitate prompt and
efficient transaction processing in
accordance with the requirements of
§ 39.12(b)(7) of the Commission’s
regulations.33
Similarly, the Commission previously
proposed §§ 38.600 through 38.607 to
30 See Core Principles and Other Requirements for
Swap Execution Facilities, 76 FR 1214 (Jan. 7,
2011); 7 U.S.C. 7b–3(h); and 7 U.S.C. 12a(5).
31 See section 5h(f)(7) of the CEA, 7 U.S.C. 7b–
3(f)(7).
32 See 76 FR at 1248. Section 37.702(b), as
originally proposed, referred to ‘‘ongoing’’ risk
management. In renumbering and finalizing this
provision herein, the Commission is deleting the
term ‘‘ongoing’’ because it is superfluous and could
create confusion when read in conjunction with
other Commission regulations that refer to ‘‘risk
management.’’ See, e.g., proposed § 39.13 relating to
risk management for DCOs, 76 FR at 3720.
33 See 76 FR 13101 (Mar. 10, 2011) (setting forth
time frames for accepting or rejecting swaps for
clearing).
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implement DCM Core Principle 11
(Financial Integrity of Transactions)
pursuant to its rulemaking authority
under sections 5(d)(1) and 8a(5) of the
CEA.34 Core Principle 11 requires a
DCM to ‘‘establish and enforce-(A) rules
and procedures for ensuring the
financial integrity of transactions
entered into on or through the facilities
of the contract market (including the
clearance and settlement of the
transactions with a derivatives clearing
organization); and (B) rules to ensure—
(i) the financial integrity of any—(I)
futures commission merchant; and (II)
introducing broker; and (ii) the
protection of customer funds.’’ 35
As originally proposed, § 38.601
would require that transactions
executed on or through a DCM, other
than transactions in security futures
products, must be cleared through a
registered DCO in accordance with the
provisions of part 39 of the
Commission’s regulations.36 The
Commission later proposed to renumber
this provision as paragraph (a) of
proposed § 38.601 and add a new
paragraph (b) to specifically require the
DCM to coordinate with each DCO to
which it submits transactions for
clearing, in the development of DCO
rules and procedures to facilitate
prompt and efficient transaction
processing in accordance with the
requirements of § 39.12(b)(7) of the
Commission’s regulations.37
2. Summary of Comments
FIA supported the rules and
recommended that each SEF and DCM
be required to assure equal access to all
DCOs that wish to clear trades executed
through the facilities of the SEF or DCM.
According to FIA, failure to grant such
access would be inconsistent with
section 2(h) of the CEA as amended by
the Dodd-Frank Act, which (1) provides
for the non-discriminatory clearing of
swaps executed bilaterally or on an
unaffiliated SEF or DCM, and (2)
provides that, with respect to a swap
that is entered into by a SD or MSP, the
counterparty shall have the sole right to
select the DCO through which the swap
is cleared.
LCH also concurred with both rules.
It commented that it is of paramount
importance that: (1) A SEF or DCM
seeking access to a DCO must first be
required to meet all regulatory
requirements; (2) each SEF and DCM
34 See Core Principles and Other Requirements for
Designated Contract Markets, 75 FR 80572 (Dec. 22,
2010); 7 U.S.C. 7(d)(1); and 7 U.S.C. 12a(5).
35 See Section 5(d)(11) of the CEA, 7 U.S.C.
7(d)(11).
36 See 75 FR at 80618.
37 See 76 FR 13101.
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must code to each DCO’s application
programming interfaces; and (3) each
SEF and DCM must treat DCOs on a
nondiscriminatory basis.
ISDA commented that coordination
among the parties subject to the
Commission’s new swap jurisdiction is
critical to ensuring that the rulemaking
process is effective without disrupting
the swap markets and applauds this
proposal. ISDA suggested that an
existing standard managed by ISDA and
used between participating companies
be adopted.
As noted above, OCC commented that
the phrase ‘‘for purpose of risk
management’’ in proposed
§§ 23.506(a)(1) and 37.702(b)(1) creates
ambiguity because a DCO may have
established routing requirements for
reasons unrelated to risk management
such as increased efficiency or
decreased administrative costs. OCC
believes that a party that submits
transactions to a DCO for clearing
should be required to ensure that it has
the ability to route the transactions to
the DCO in a manner that meets all of
the DCO’s legitimate requirements, and
not only those that are related to risk
management. OCC suggests that the
Commission delete the phrase ‘‘for
purpose of risk management’’ and
substitute the phrase ‘‘for clearing.’’
3. Discussion
Rules, procedures, and operational
systems, along the lines set forth in the
rules, currently work well for many
exchange-traded futures. Similar
requirements could be applied across
multiple exchanges and clearinghouses
for swaps. The parties would need to
have clearing arrangements in place
with clearing members in advance of
execution. In cases where more than one
DCO offered clearing services, the
parties also would need to specify in
advance where the trade should be sent
for clearing.
The Commission concurs with OCC’s
comment that a DCO may have
requirements beyond risk management.
To the extent that FIA, LCH, and ISDA
recommended that the Commission
adopt additional requirements beyond
those set forth in the rule as proposed,
the Commission believes it is premature
to adopt the additional requirements at
the present time. However, the
Commission will monitor the
implementation of this rule and may
propose amendments in the future.
The Commission is adopting § 38.601
as proposed. The Commission is
adopting § 37.702 with the amendment
suggested by OCC changing ‘‘for
purposes of risk management’’ to ‘‘for
purposes of clearing.’’
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C. Clearing Member and Clearing
Organization Acceptance for Clearing
1. Introduction
As noted above, a goal of the DoddFrank Act is to reduce risk by increasing
the use of central clearing. Minimizing
the time between trade execution and
acceptance into clearing is an important
risk mitigant.
This time lag potentially presents
credit risk to the swap counterparties,
clearing members, and the DCO because
the value of a position may change
significantly between the time of
execution and the time of novation,
thereby allowing financial exposure to
accumulate in the absence of daily
mark-to-market. Among the purposes of
clearing are the reduction of risk and the
enhancement of financial certainty, and
this time lag diminishes the benefits of
clearing swaps that Congress sought to
promote in the Dodd-Frank Act. A delay
in clearing is also inconsistent with
other proposed regulations concerning
product eligibility and financial
integrity of transactions insofar as the
delay reduces liquidity and increases
risk.38
In this rulemaking, the Commission is
seeking to expand access to, and
strengthen the financial integrity of, the
swap markets subject to Commission
oversight by providing for prompt
processing, submission, and acceptance
of swaps eligible for clearing by DCOs.
This requires setting an appropriate
time frame for the processing and
submission of swaps for clearing, as
well as a time frame for the clearing of
swaps by the DCO.
As originally proposed,
§ 39.12(b)(7)(i) required DCOs to
coordinate with DCMs and SEFs to
facilitate prompt and efficient
processing of trades. In response to a
comment, the Commission later
proposed to require ‘‘prompt, efficient,
and accurate processing of trades.’’ 39
Recognizing the key role clearing
members play in trade processing and
submission of trades to central clearing,
the Commission also proposed parallel
provisions for coordination among
DCOs and clearing members. Proposed
§ 39.12(b)(7)(i)(B) would require DCOs
to coordinate with clearing members to
establish systems for prompt processing
of trades. Proposed §§ 1.74(a) and
23.610(a) would require reciprocal
coordination with DCOs by FCMs, SDs,
and MSPs that are clearing members.
As originally proposed,
§ 39.12(b)(7)(ii) required DCOs to accept
38 See
76 FR 1214, Jan. 7, 2011.
letter from Robert Pickel, Executive Vice
Chairman, International Swaps and Derivatives
Association, dated April 8, 2011.
39 See
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immediately upon execution all
transactions executed on a DCM or
SEF.40 A number of DCOs and other
commenters expressed concern that this
requirement could expose DCOs to
unwarranted risk because DCOs need to
be able to screen trades for compliance
with applicable clearinghouse rules
related to product and credit filters.41
The Commission recognized that while
immediate acceptance for clearing upon
execution currently occurs in some
futures markets, it might not be feasible
for all cleared markets at this time. For
example, where the same cleared
product is traded on multiple execution
venues, a DCO needs to be able to
aggregate the risk of trades coming in to
ensure that a clearing member or
customer has not exceeded its credit
limits. Accordingly, the Commission
modified proposed § 39.12(b)(7)(ii) to
permit DCOs to screen trades against
applicable product and credit criteria
before accepting or rejecting them.42
Consistent with principles of open
access, the proposal would require that
such criteria be non-discriminatory with
respect to trading venues and clearing
participants.
Proposed § 1.74(b) would set up a
parallel requirement for clearing FCMs;
proposed § 23.610(b) would set up a
parallel requirement for SDs and MSPs
that are clearing members. These rules,
again, would apply a performance
standard, not a prescribed method for
achieving it.
As originally proposed,
§§ 39.12(b)(7)(iii) and 39.12(b)(7)(iv)
distinguished between swaps subject to
mandatory clearing and swaps not
subject to mandatory clearing.43 Upon
review of the comments, the
Commission concluded that this
distinction was unnecessary with regard
to processing time frames. If a DCO lists
a product for clearing, it should be able
to process it regardless of whether
clearing is mandatory or voluntary.
Accordingly, the Commission modified
proposed § 39.12(b)(7)(iii) to cover all
trades not executed on a DCM or SEF.
It would require acceptance or rejection
40 See Requirements for Processing, Clearing, and
Transfer of Customer Positions, 76 FR 13101 (March
10, 2011).
41 See letter from Craig S. Donohue, Chief
Executive Officer, CME Group, dated April 11,
2011; letter from R. Trabue Bland, Vice President
and Assistant General Counsel, ICE, dated April, 11,
2011; letter from Iona J. Levine, Group General
Counsel and Managing Director, LCH.Clearnet,
dated April, 11, 2011; letter from William H. Navin,
Executive Vice President and General Counsel,
Options Clearing Corporation, dated April, 11,
2011; letter from John M. Damgard, President,
Futures Industry Association, dated April 14, 2011.
42 See 76 FR 45730, Aug. 1, 2011.
43 See 76 FR 13101, Mar. 10, 2011.
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by the DCO as quickly after submission
as would be technologically practicable
if fully automated systems were used.
Proposed § 1.74(b) would set up a
parallel requirement for clearing FCMs;
proposed § 23.610(b) would set up a
parallel requirement for SDs and MSPs
that are clearing members. These rules,
again, would apply a performance
standard, not a prescribed method for
achieving it.
The Commission also recognized that
some trades on a DCM or SEF may be
executed non-competitively. Examples
include block trades and exchanges of
futures for physicals (‘‘EFPs’’). A DCO
may not be notified immediately upon
execution of these trades. Accordingly,
the proposal treated these trades in the
same manner as trades that are not
executed on a DCM or SEF.
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2. Summary of Comments
Eighteen 44 commenters expressed
support for the timing standard as
proposed by the Commission.
CME recommended that the standard
be revised to ‘‘as quickly as would be
technologically practicable if fully
automated systems and filters were used
or as quickly as possible if automated
systems or filters are not used.’’
MGEX requested that the Commission
codify the preamble text that the new
timing standard would require action in
a matter of ‘‘milliseconds or seconds or,
at most, a few minutes, not hours or
days.’’ MGEX also commented that
proposed § 39.12(b)(7) should be a
general acceptance and timing rule, not
applicable for each specific contract
listed to be cleared. MGEX argued that
the rule only should apply to those
swaps that a DCO has identified that it
can and will clear, as opposed to
variations of contracts listed for clearing
or any contract not previously cleared
by the DCO.
Morgan Stanley believes that the
timing standard should be intended to
prohibit only those arrangements that
prevent the use of automated systems
that are available in the market to
facilitate clearing.
LCH suggested that the Commission
modify proposed §§ 39.12(7)(ii) and (iii)
by adding the language ‘‘and for which
sufficient margins have been received
by the derivatives clearing organization’’
prior to accepting and confirming a
trade for clearing.
NYPC requested clarification that in
circumstances where a DCO
automatically receives matched trade
44 AIMA, AllianceBernstein, Arbor, Barnard,
CIEBA, Citadel, DRW, Eris, FHLB, ICI, Javelin,
Jeffries, MFA, SDMA, State Street, Spring Trading,
Trading Firms, and Vizier.
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data from a DCM or SEF on a lockedin basis, no further systems
development would be required in order
to satisfy the above-referenced
requirements of proposed regulations
1.74(a) and 39.12(b)(7)(i)(B).
Better Markets stated that the timing
standard must be: (1) Provided by the
DCO or FCM; (2) capable of receiving
and processing trade data from multiple
sources in real time; (3) able to screen
against standards such as price levels
and block trade sizes as a threshold
matter; (4) able to decrease or increase
available credit real time; and (5)
automatic push notification of
acceptance or rejection by the DCO or
FCM. Better Markets also commented
that systems provided by a DCO or FCM
must be open and require no special
capabilities on the part of the trade
execution venue, and that once data is
input, the systems must function on a
first-come-first-served basis using a
reliable and common time stamping
regime, regardless of affiliation or
contractual relationship between the
trading venue and DCO or FCM. Better
Markets noted that confirmation of
acceptance or rejection must not differ
between trading venues based on
affiliation or relationship.
SG suggested that the Commission
establish one or both of the following:
(1) Credit limits of customers and FCMs
are stored at the DCO and provided to
SEFs in real time upon electronic
demand; or (2) an industry-wide utility
that stores customer and FCM limits and
provides them to DCOs and SEFs in real
time upon electronic demand.
3. Discussion
The Commission continues to believe
that acceptance or rejection for clearing
in close to real time is crucial both for
effective risk management and for the
efficient operation of trading venues.45
Rather than prescribe a specific length
of time, the Commission
is implementing a standard that action
be taken ‘‘as quickly as would be
technologically practicable if fully
automated systems were used.’’ This
standard would require action in a
matter of milliseconds or seconds or, at
most, a few minutes, not hours or days.
The Commission recognizes that
processing times may vary by product or
market.
This requirement is intended to be a
performance standard, not the
prescription of a particular method of
trade processing. The Commission
expects that fully automated systems
45 See letter from James Cawley, Swaps and
Derivatives Market Association, dated April 19,
2011.
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will be in place at some DCOs, FCMs,
SDs, and MSPs. Others might have
systems with some manual steps. The
use of manual steps would be permitted
so long as the process could operate
within the same time frame as the
automated systems.
As discussed by numerous
commenters, the proposed standard
approximates real-time acceptance
while providing flexibility to
accommodate different systems and
procedures. Avoiding a large gap
between trade execution and acceptance
for clearing is crucial to risk
management for DCOs, FCMs, and
market participants.
The Commission notes that the time
frame for acceptance by clearing
members and DCOs set forth in this
section is stricter than the time frames
for submission by SDs and MSPs set
forth in Section III.A., above. Where
execution is bilateral and clearing is
voluntary, the delay between execution
and submission to clearing is, of
necessity, within the discretion of the
parties to some degree. The Commission
believes, however, that prudent risk
management dictates that once a trade
has been submitted to a clearing
member or a DCO, the clearing member
or DCO must accept or reject it as
quickly as possible.
Assuring prompt acceptance or
rejection for clearing also undermines
much of the stated rationale for the
provisions in the trilateral agreements.
In those unusual circumstances in
which trades are rejected, the parties
will know almost immediately and be
able to take appropriate steps to mitigate
risk.
The Commission disagrees with
CME’s suggested standard of ‘‘as quickly
as possible.’’ The Commission believes
that this standard would introduce too
much potential for delay. It could
increase the very risks that this final
rulemaking is designed to reduce or
eliminate.
In support of the final standard, the
Commission notes that on December 13,
2011, $4.1 billion of trades were
executed on a trading platform and
cleared by a DCO within the time frame
contemplated by the proposed rules.
Specifically, 21 interest rate swaps were
executed and cleared with an average
time of 1.9 seconds and a quickest time
of 1.3 seconds.46
46 Katy Burne, UPDATE: Javelin, CME Claim
Record Time To Clear Rate Swaps, Dow Jones
Newswires, Nasdaq (Dec. 14, 2011; accessed Jan. 3,
2012) http://www.nasdaq.com/aspx/stock-marketnews-story.aspx?storyid=201112141726dowjones
djonline000739&title=updatejavelincme-claimrecord-time-to-clear-rate-swaps.
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The Commission also disagrees with
the MGEX suggestion that the timing
standard should be codified as
‘‘milliseconds, seconds, or minutes,’’
because this would provide a window
for trade acceptance that might be too
wide as faster systems become available.
The Commission believes that its
proposed standard will allow for
innovation to bring faster trade
acceptance or rejection to the market
most efficiently.
The Commission also disagrees with
LCH’s proposed addition of the
language ‘‘and for which sufficient
margins have been received by the
derivatives clearing organization’’ prior
to accepting and confirming a trade for
clearing. This standard may not be
practicable for DCOs that are linked to
high-volume automated trading systems.
Currently, many DCOs in such
circumstances calculate margin at the
end of the day for collection the next
day. Nothing in the final rules, however,
precludes a DCO in its discretion from
applying such a standard.
The Commission confirms NYPC’s
belief that in circumstances where a
DCO automatically receives matched
trade data from a DCM or SEF on a
locked-in basis, no further systems
development would be required.
The Commission believes that the
comments of Better Markets and SG are
consistent with the intent of the rules
but provide a level of detail that the
Commission believes is unnecessary at
the present time, and in some respects
goes beyond what the Commission
proposed. For example, Better Markets
recommended that DCOs and FCMs be
able to increase available credit in realtime and to have automatic push
notification of acceptance or rejection
from clearing. The first could conflict
with risk management procedures that
some DCOs or FCMs might wish to use.
The second is likely to be in place at
many firms, but the Commission
continues to believe that it is
appropriate to have a rule that sets a
performance standard rather than
specifying a particular means of
achieving it. Fully automated systems
would of course comply with the
performance standard. Accordingly, the
Commission has decided not to change
the rule in the manner suggested by
Better Markets and SG. The
Commission, however, will monitor the
implementation of this rule and may
propose amendments in the future.
The Commission received numerous
comments in the customer clearing
documentation rulemaking emphasizing
that it is imperative for effective risk
management to have the shortest
possible gap between execution and
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clearing. To permit additional time as
suggested by some of the commenters
on this rule would increase risk for
DCOs, clearing members, and market
participants.
However, in light of commenters’
concerns, the Commission is adopting
§§ 1.75 and 23.611, which delegate to
the Director of the Division of Clearing
and Risk the authority to establish an
alternative compliance schedule for
requirements of §§ 1.74 and 23.610 for
swaps that are found to be
technologically or economically
impracticable for an FCM, SD, or MSP
affected by §§ 1.74 or 23.610. The
purpose of §§ 1.75 and 23.611 is to
facilitate the ability of the Commission
to provide a technologically practicable
compliance schedule for affected FCMs,
SDs, or MSPs that seek to comply in
good faith with the requirements of
§§ 1.74 or 23.610.
In order to obtain an exception under
§§ 1.75 or 23.611, an affected FCM, SD,
or MSP must submit a request to the
Director of the Division of Clearing and
Risk. FCMs, SDs, and MSPs submitting
requests must specify the basis in fact
supporting their claims that compliance
with §§ 1.74 or 23.610 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 an exception and the
efforts the entity intends to make in
order to ensure compliance according to
an alternative compliance schedule. An
exception granted under §§ 1.75 or
23.611 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
Clearing and Risk 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 is adopting §§ 1.74,
23.610, and 39.12(b)(7) as proposed.
D. Post-Trade Allocation of Bunched
Orders
1. Introduction
Bunched orders are orders entered by
an account manager on behalf of
multiple customers, which are executed
as a block and later allocated among
participating customer accounts for
clearing. Believing that procedures used
in the futures markets could be adapted
for use in the swaps markets, the
Commission proposed § 1.35(a–
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1)(5)(iv).47 It provided that allocations
must be made as soon as practicable
after execution but in any event no later
than the following times: (1) For cleared
transactions, sufficiently before the end
of the day to ensure that clearing
records identify the customer accounts,
and (2) for uncleared trades, no later
than the end of the day the swap was
executed.
2. Summary of Comments
In comments filed in connection with
proposed §§ 1.74, 23.610, and
39.12(b)(7), BlackRock and State Street
stated that the Commission should
clarify the rules to specifically allow for
post-trade allocation of block trades.
BlackRock also commented that the
final rule should provide that at the
time of trade execution, confirmation of
trade economics may be done at the
block level, and a two-hour delay be
allowed before the trade must be
submitted to a DCO for clearing.
In comments also filed in connection
with proposed §§ 1.74, 23.610, and
39.12(b)(7), MFA and D. E. Shaw stated
that it is not necessary to delay trades
for post-execution allocation of trades to
multiple funds. D. E. Shaw asserted that
post-execution allocation is a ‘‘red
herring’’ and should not prevent the
Commission from mandating real-time
clearing in the proposal.
In a comment filed in connection with
the proposed amendment to § 1.35, CME
asserted that bunched orders in swaps
should not be subject to the same type
of regulatory regime as bunched orders
in futures contracts because the ‘‘futures
model’’ for treatment of bunched orders
is not a suitable model for block trades
of swaps. After a bunched trade in the
futures market is accepted for clearing,
an FCM generally holds the positions in
a suspense account while awaiting
allocation instructions from the asset
manager. In contrast, the CME believes
that an FCM holding bunched orders for
swaps in a suspense account, while
waiting for allocation instructions, may
be exposed to substantially greater risk
considering larger transaction sizes and
the different risk profile of cleared
swaps as compared to futures. CME
stated that a time frame of two hours
should allow sufficient time for asset
managers to allocate block trades in
swaps to their individual customers’
accounts.
In contrast, in comments also filed in
connection with proposed § 1.35, SDMA
stated that there should be no delay for
bunched orders that are allocated after
execution. According to SDMA, the
process for swaps trade allocation
47 See
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should be similar to that of the futures
markets.
The Commission received no
substantive comments regarding
allocation of uncleared trades.
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3. Discussion
For many years in the futures markets,
bunched orders have been executed as
a block for immediate acceptance into
clearing and allocated into individual
accounts later in the day. Essentially, a
‘‘stand-by’’ clearing member guarantees
the trades until they can be allocated.
Consequently, there is no need for a
two-hour delay.
The proposed amendments would
apply the same process to swaps. By
allowing post-trade allocation of
bunched orders, the rule is responsive
to all the comments. By not permitting
a two-hour delay the rule is also
responsive to the comments of State
Street, MFA, D. E. Shaw, and SDMA,
but is contrary to the comments of CME
and BlackRock.
The Commission does not find
persuasive the arguments that cleared
swaps should be subject to a standard
that differs in this regard from the
standard for cleared futures. The
Commission believes that a two-hour
delay would create risk rather than
mitigate it. First, the counterparty or
counterparties to the trade would incur
a delay in acceptance of their side into
clearing because of the happenstance of
being opposite a bunched order. This
result is untenable in fast-moving
markets. Second, the customers whose
orders were being bunched would also
suffer the same delay thereby incurring
the same risks.
The futures model has worked well
for many years. In most instances, the
orders are successfully allocated and the
stand-by FCM ultimately is not required
to clear any trades. In those cases where
there is a misallocation, it is corrected
the next day and the stand-by FCM is
compensated by the account manager.
All parties receive the benefits of
immediate acceptance into clearing.
CME and BlackRock have not
demonstrated why these procedures
would not work for swaps.
The Commission believes that a
similar analysis applies to uncleared
swaps. Certainty of allocation by the
end of the calendar day that a swap is
executed will reduce risk for both
counterparties. The Commission
received no comments indicating
otherwise.
The Commission is adopting § 1.35(a–
1)(5)(iv) as proposed.
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IV. Clearing Member Risk Management
A. Introduction
CEA Section 3(b) provides that one of
the purposes of the Act is to ensure the
financial integrity of all transactions
subject to the Act and to avoid systemic
risk. CEA section 8a(5) authorizes the
Commission to promulgate such
regulations that it believes are
reasonably necessary to effectuate any of
the provisions or to accomplish any of
the purposes of the Act. Risk
management systems are critical to the
avoidance of systemic risk, as evidenced
by the statutory provisions cited below.
CEA section 4s(j)(2) requires each SD
and MSP to have risk management
systems adequate for managing its
business. CEA section 4s(j)(4) requires
each SD and MSP to have internal
systems and procedures to perform any
of the functions set forth in Section 4s.
CEA section 4d requires FCMs to
register with the Commission. It further
requires FCMs to segregate customer
funds. CEA section 4f requires FCMs to
maintain certain levels of capital. CEA
section 4g establishes reporting and
recordkeeping requirements for FCMs.
These provisions of law—and
Commission regulations promulgated
pursuant to these provisions—create a
web of requirements designed to secure
the financial integrity of the markets
and the clearing system, to avoid
systemic risk, and to protect customer
funds. Effective risk management by
SDs, MSPs, and FCMs is essential to
achieving these goals. For example, a
poorly managed position in the
customer account may cause an FCM to
become undersegregated. A poorly
managed position in the proprietary
account may cause an FCM to fall out
of compliance with capital
requirements.
Even more significantly, a failure of
risk management can cause an FCM to
become insolvent and default to a DCO.
This can disrupt the markets and the
clearing system and harm customers.
Such failures have been predominately
attributable to failures in risk
management.
Proposed § 1.73 set forth risk
management requirements that would
apply to clearing members that are
FCMs; proposed § 23.609 would apply
to clearing members that are SDs or
MSPs. These provisions would require
these clearing members to have
procedures to limit the financial risks
they incur as a result of clearing trades
and liquid resources to meet the
obligations that arise. The proposal
required each clearing member to:
(1) Establish credit and market riskbased limits based on position size,
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order size, margin requirements, or
similar factors;
(2) Use automated means to screen
orders for compliance with the riskbased limits;
(3) Monitor for adherence to the riskbased limits intra-day and overnight;
(4) Conduct stress tests of all positions
in the proprietary account and all
positions in any customer account that
could pose material risk to the futures
commission merchant at least once per
week;
(5) Evaluate its ability to meet initial
margin requirements at least once per
week;
(6) Evaluate its ability to meet
variation margin requirements in cash at
least once per week;
(7) Evaluate its ability to liquidate the
positions it clears in an orderly manner,
and estimate the cost of the liquidation
at least once per month; and
(8) Test all lines of credit at least once
per quarter.
Each of these items has been observed
by Commission staff as an element of an
existing sound risk management
program at a DCO or an FCM.
B. Components of the Rule
The Commission received a total of 15
comment letters directed specifically at
the proposed risk management rules.48
A discussion of the comments received
in response to each component of the
rule follows.
1. Establish Credit and Market Limits
and Automated Screening of Orders
a. Summary of Comments
FIA stated that it does not believe that
‘‘pre-execution’’ screening of orders is
feasible in all market situations. For
instance, the FIA noted four situations
wherein ‘‘pre-execution screening’’ is
not possible given current technology.
Specifically, FIA does not believe that
‘‘pre-execution’’ screening is possible in
the case of floor execution, trading
advisors using ‘‘bunched’’ orders, giveup agreements, and traders using
multiple trading platforms.
The CME also commented that
automated screening is not feasible in a
floor trading environment. The CME
suggested that the Commission adopt
the following language: ‘‘automated or
otherwise appropriate means to screen
orders for compliance with risk-baselimits.’’
ISDA made comments consistent with
CME and recommended a more flexible
approach. ISDA noted that the
48 Barnard; Futures Industry Association (‘‘FIA’’);
SDMA; Better Markets; ICE; CME; Freddie Mac;
ISDA; MGEX; MFA; Citadel; FHLB; Jeffries; Arbor;
and Javelin.
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regulation may not take into account the
manner in which swaps are executed.
b. Discussion
As noted previously, the Dodd-Frank
Act requires the increased use of central
clearing. In particular, Section 2(h)
establishes procedures for the
mandatory clearing of certain swaps.
Central clearing will provide more
stability to the markets, and increase
transparency for market participants.49
As stated in the Committee report of the
Senate Committee on Banking, Housing,
and Urban Affairs: ‘‘Increasing the use
of central clearinghouses * * * will
provide safeguards for American
taxpayers and the financial system as a
whole.’’ 50
The Commission has finalized
extensive risk management standards at
the DCO level. Given the increased
importance of clearing and the expected
entrance of new products and new
participants into the clearing system,
the Commission believes that enhancing
the safeguards at the clearing member
level is necessary as well.
Bringing swaps into clearing will
increase the magnitude of the risks
faced by clearing members. In many
cases, it will change the nature of those
risks as well. Many types of swaps have
their own unique set of risk
characteristics. The Commission
believes that the increased
concentration of risk in the clearing
system combined with the changing
configuration of the risk warrant
additional vigilance not only by DCOs
but by clearing members as well.
FCMs generally have extensive
experience managing the risk of futures.
They generally have less experience
managing the risks of swaps. The
Commission believes that it is a
reasonable precaution to require that
certain safeguards be in place. It would
ensure that FCMs, who clear on behalf
of customers, are subject to standards at
least as stringent as those applicable to
SDs and MSPs, who clear only for
themselves. Failure to require SDs,
MSPs, and FCMs that are clearing
members to maintain such safeguards
would frustrate the regulatory regime
established in the CEA, as amended by
the Dodd-Frank Act. Accordingly, the
Commission believes that applying the
risk-management requirements in the
proposed rules to SDs, MSPs, and FCMs
that are clearing members are
49 The Dodd-Frank Wall Street Reform and
Consumer Protection Act: Title VII, Derivatives,
Mark Jickling & Kathleen Ann Ruane, 5 (Aug. 30,
2010).
50 S. Rep. No. 111–176, at 32 (2010) (report of the
Senate Committee on Banking, Housing, and Urban
Affairs).
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reasonably necessary to effectuate the
provisions, and to accomplish the
purposes, of the CEA.
The Commission does not intend to
prescribe the particular means of
fulfilling these obligations. As is the
case with DCOs, clearing members will
have flexibility in developing
procedures that meet their needs. For
example, items (1) and (2) could be
addressed through simple numerical
limits on order or position size, or
through more complex margin-based
limits. Further examples could include
price limits that would reject orders that
are too far away from the market, or
limits on the number of orders that
could be placed in a short time.
These proposals are consistent with
international standards. In August 2010,
the International Organization of
Securities Commissions issued a report
entitled ‘‘Direct Electronic Access to
Markets.’’ 51 The report set out a number
of principles to guide markets,
regulators, and intermediaries. Principle
6 states that:
A market should not permit DEA [direct
electronic access] unless there are in place
effective systems and controls reasonably
designed to enable the management of risk
with regard to fair and orderly trading
including, in particular, automated pre-trade
controls that enable intermediaries to
implement appropriate trading limits.
Principle 7 states that:
Intermediaries (including, as appropriate,
clearing firms) should use controls, including
automated pre-trade controls, which can
limit or prevent a DEA Customer from
placing an order that exceeds a relevant
intermediary’s existing position or credit
limits.
Over the years, ‘‘rogue’’ traders have
caused substantial financial damage to
both small and large firms. The size or
sophistication of the firm has not
provided comprehensive protection.
Traders have found ways to exploit gaps
in internal controls. Automated
screening procedures, such as Globex
Credit Controls, are already in place in
many markets and have proven to be
effective tools for reducing risk.
Therefore, the Commission believes that
as proposed, the rule should require
clearing members to use automated
means for screening orders executed on
automated trading systems.
In response to the comments, the
Commission has determined that, for
non-automated markets such as open
outcry exchanges or voice brokers, the
rules would permit other forms of
internal controls. For example, a
clearing member cannot use an
automated system to screen the orders
51 The
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of a floor trader. Proprietary or customer
orders executed by open outcry or voice
broker can be screened automatically if
they are routed automatically. Many
orders, however, continue to be placed
by telephone. It is not practicable at this
time to use automated means to screen
such orders. A clearing member,
however, can actively monitor a trader’s
activities and be in communication if
the trader approaches a limit. To
incorporate this approach, the
Commission is revising §§ 1.73(a)(2)(ii),
1.73(a)(2)(iii), and 23.609(a)(2)(ii) using
language suggested by ISDA.
Specifically, as amended, these rules
provide that clearing members must
‘‘establish and maintain systems of risk
controls reasonably designed to ensure
compliance.’’
The Commission believes that, as
amended, the rules will be responsive to
the comments of FIA, CME, and ISDA.
They will continue to emphasize the
key role that order screening can play in
managing risk while making
accommodation for certain
circumstances where automated
screening may not be possible or
practicable at this time.
In response to the comments, the
Commission has also determined to
make changes with regard to give-ups
and bunched orders. Give-ups are trades
where the execution function and the
clearing function are performed by
different firms. Revised paragraph
(2)(iv) requires the clearing firm, which
bears the financial risk of the trade, to
set limits and communicate them to the
executing firm, which would apply
them. This arrangement is consistent
with current practice. The uniform giveup contract contains a provision
allowing a clearing firm to establish
limits on the trades it will accept from
the executing firm.
To the extent the executing firm is an
SD or MSP, and the clearing firm is an
affiliated FCM, the firms will also have
to comply with the conflict of interest
rules for SD/MSPs and the conflict of
interest rules for FCMs.52 Those rules
address appropriate partitions between
the trading units of an SD/MSP and the
clearing units of an affiliated FCM. For
example, recently-promulgated
§ 23.605(d)(1)(iv) prohibits an SD/MSP
52 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,’’
available at http://www.cftc.gov/LawRegulation/
DoddFrankAct/Rulemakings/
DF_4_BusConductStandardsInternal/ssLINK/
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from interfering with the setting of risk
tolerance levels by an affiliated FCM.
As noted above, for bunched orders,
typically one firm acts as a ‘‘stand-by’’
clearing firm for purposes of getting the
trade executed, but before the end of the
day, the block is broken up and assigned
among multiple clearing members, each
of whom is acting on behalf of a
particular customer.
Revised paragraph (2)(v)(A) requires
the stand-by clearing firm to establish
limits for the block account and screen
the order. Revised paragraph (2)(v)(B)
requires each ultimate clearing firm to
establish limits for each of its customers
and enter an agreement with the
account manager under which the
account manager would screen orders
for compliance. Revised paragraph
(2)(v)(C) requires each ultimate clearing
firm to establish controls to enforce its
limits. The revisions adjust the rule to
take into account the more complex
procedures entailed in processing
bunched orders. They narrow the scope
of the screening required by various
clearing participants from what was
originally proposed.
To the extent the account manager or
one of the customers is an SD/MSP and
one of the clearing firms is an affiliated
FCM, the firms also will have to comply
with the conflict of interest rules for SD/
MSPs and the conflict of interest rules
for FCMs. As noted above, those rules
address appropriate partitions between
the trading units of an SD/MSP and the
clearing units of an affiliated FCM.
2. Stress Tests
a. Summary of Comments
Chris Barnard and Better Markets both
recommended that the Commission
require specific stress tests. Barnard
recommended that the Commission
adopt a minimum standard and Better
Markets recommended an ‘‘extreme but
plausible’’ standard for stress tests. In
addition, Better Markets believes that
stress test results should be reported to
the Commission and the relevant DCO.
FHLB recommended that stress test
results be publicly disclosed. FHLB
believes that public disclosure of stress
test results would allow customers to
mitigate risk.
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b. Discussion
Stress tests are an essential risk
management tool. The purpose in
conducting stress tests is to determine
the potential for significant losses in the
event of extreme market events and the
ability of traders and clearing members
to absorb the losses.
The Commission intentionally
refrained from setting specific stress
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tests levels or a minimum threshold.
The Commission believes that clearing
members are in the best position to
design stress tests based on their
knowledge of markets and the types of
customers they carry. In addition, the
Commission believes that specifying
certain stress tests might stifle
innovation or cause firms to use
minimum levels to meet regulatory
compliance rather than implementing a
vigorous risk management program.
This approach is consistent with the
approach recently adopted by the
Commission for DCO stress tests. The
Commission intends to monitor the
implementation of this rule to
determine whether clearing members
are routinely conducting stress tests
reasonably designed for the types of risk
the clearing members and their
customers face.
The Commission believes that the
concept of ‘‘extreme but plausible’’
conditions is commonly used and was
implicit in the proposal. The
Commission is adding the phrase to the
rule text for clarity.
The Commission believes that public
disclosure of stress test results could be
a disincentive to aggressive stress
testing. Moreover, disclosure of results
could have the effect of improper
disclosure of confidential position
information.
The Commission is adopting the
provisions as proposed, with
amendments to §§ 1.73(a)(4) and
23.609(a)(4) to incorporate the phrase
‘‘extreme but plausible market
conditions.’’
3. Margin Evaluation
a. Summary of Comments
ISDA and FIA believe that the
requirement to evaluate initial margin
once per week is unclear. ISDA pointed
out that a clearing member generally
knows the amount of initial margin and
collects it promptly.
The Commission received no
comments regarding §§ 1.73(a)(6) and
23.609(a)(6) regarding variation margin.
b. Discussion
The purpose of this provision is to
require clearing firms to evaluate their
ability to deal with certain
contingencies on a routine basis. For
example, a DCO might raise margin
requirements, or option positions might
be exercised, or a customer might
default on a margin call. The clearing
firm should make sure that it has
resources available to meet its
continuing obligations under such
circumstances.
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The Commission is adopting
§§ 1.73(a)(5), 1.73(a)(6), 23.609(a)(5),
and 23.609(a)(6) as proposed.
4. Estimated Cost of Liquidation
a. Summary of Comments
FIA commented that ‘‘even in normal
markets, estimating the costs of
liquidating such positions in an orderly
manner will be difficult at best. In times
of market stress, such estimates will be
impossible.’’
b. Discussion
The Commission recognizes that
estimating the cost of liquidation is at
times difficult. But the inevitable
imprecision of any estimate does not
justify abandoning efforts to quantify
potential losses.
The purpose of the calculation is to
alert the clearing firm to potential risks
that might otherwise go undetected.
This exercise could lead a clearing firm
to decide: (1) To arrange for additional
financing to cover a potential loss; or (2)
to reduce the positions prior to a period
of market stress. Commission staff
perform stress tests of FCM positions
and have alerted FCMs about potential
losses. Based on Commission staff’s
experience in this area, the Commission
believes that this is a topic that has not
been fully addressed by some clearing
members in recent years.
In response to commenters, the
Commission has decided to modify
§ 1.73(a)(7) to require estimation of
liquidation costs once per quarter,
rather than once per month.
Additionally, the Commission is renumbering § 23.609(a)(7) to
§ 23.609(a)(8), and renumbering
§ 23.609(a)(8) to § 23.609(a)(7), in order
to follow the parallel structure in § 1.73.
The Commission is adopting
§§ 1.73(a)(8) and 23.609(a)(7) with the
modifications discussed above.
5. Testing Lines of Credit
a. Summary of Comments
The CME commented that the
requirement to test lines of credit
should only be done on an annual basis
rather than a quarterly basis. The CME
believes that quarterly testing is not cost
efficient. ISDA sought clarification on
whether the test requires an actual
drawing of funds or an assessment of
conditions precedent to drawing.
b. Discussion
The Commission accepts that
quarterly testing might not be cost
efficient under all circumstances.
Nonetheless, the Commission
encourages clearing members to test
lines of credit more frequently based on
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market and credit events. For instance,
if a line of credit is in place with a bank
that has recently suffered a credit rating
downgrade, a test may be appropriate.
The Commission believes that the
actual drawing of funds is essential to
testing a line of credit. Among other
things, the test should ensure the ability
of the bank or other institution to move
the funds in a timely fashion and that
the clearing member can assess its
ability to approve the drawing and
properly make accounting entries. This
approach is consistent with the
approach the Commission recently
adopted for DCOs.
The Commission is adopting
§§ 1.73(a)(8) and 23.609(a)(7) as
proposed, but with an amendment to
provide for annual—rather than
quarterly—testing of lines of credit.
6. Vagueness, Conflict, and/or Overlap
Among Regulations
a. Summary of Comments
FIA expressed concern that
paragraphs (a)(1) and (a)(4) through (6)
of § 1.73 are too vague. FIA also
expressed concern that the limits
required by § 1.73 ‘‘may conflict with
the provisions of proposed Rule 1.72(c),
which provides that an FCM may set
only ‘an overall limit for all positions
held by the customer’ at the FCM.
Further, such limits may indirectly
‘limit’ the number of counterparties
with whom a customer may enter into
a trade, in apparent violation of
proposed Rule 1.72(b).’’ Regulation 1.72
was proposed in the customer clearing
documentation rules 53 and is discussed
in Part II, above.
ISDA commented that the thenproposed § 23.600 imposes a risk
management program for SDs and MSPs
that must include ‘‘policies and
procedures to monitor and manage,
market, credit, liquidity, foreign
currency, legal, operational, and
settlement risk, as well as controls on
business trading.’’ ISDA believes that
the broad requirements of § 23.600 that
pertain to liquidity and funding make
proposed § 23.609(a)(5)–(8) redundant.
The Commission recently promulgated
§ 23.600 as a final rule.54
53 See
76 FR 45730, Aug. 1, 2011.
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,’’
available at http://www.cftc.gov/LawRegulation/
DoddFrankAct/Rulemakings/
DF_4_BusConductStandardsInternal/ssLINK/
federalregister022312b.
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54 ‘‘Swap
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b. Discussion
The Commission does not believe that
§ 1.73 is too vague. Paragraph (a)(1)
addresses risk-based limits, paragraph
(a)(4) addresses stress tests, and
paragraphs (a)(5) and (6) address
margin. While FIA asserts that these
requirements are vague, it provides no
additional detail on the issue.
The regulation was intentionally
drafted in a non-prescriptive manner.
Risk management is a complex process
that requires firms to make judgment
calls on a daily basis. Moreover, each
firm has a different customer base,
different resources, and a different risk
appetite. The Commission envisions
that each clearing member will comply
with § 1.73 using procedures and
technology appropriate to its business
model and customer base. As drafted,
these provisions allow flexibility and
innovation in complying with the
regulation.
The Commission does not believe that
§§ 1.73 and 1.72 conflict. As proposed,
§ 1.72(b) would prohibit limits as to the
number of counterparties, whereas
§ 1.73 would require limits set
according to criteria such as position
size or margin amount. FIA asserts that
the regulations could conflict because
§ 1.73 may ‘‘indirectly’’ limit the
number of counterparties. A position
limit, of course, can have the effect of
limiting the number of counterparties in
the sense that if a trader can only
execute 100 lots, the trader cannot have
more than 100 counterparties. But such
an indirect result is distinguishable
from the conduct prohibited by
§ 1.72(b)—the deliberate setting of limits
on the number of counterparties. The
first is a legitimate risk management
tool; the second is an unnecessary
impediment to the free and open trading
that would promote liquidity.
Section 1.72(c) would prohibit only
limits on the size of positions with
specific counterparties. It does not
prohibit limits tied to executing firms.
Moreover, it specifically provides that
overall position limits are permissible.
Thus, there is no conflict between
§ 1.72(c) and § 1.73.
The Commission also does not believe
that the broad requirements of the
recently-promulgated § 23.600 make
proposed § 1.73 redundant. Section
23.600 sets out broad principles
applicable to all SDs and MSPs. As
proposed, § 23.609 would apply only to
those SDs and MSPs that are clearing
members of a DCO. The Commission
believes that if an SD or MSP takes on
the additional risks and responsibilities
of clearing, it should undertake risk
management procedures similar to those
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undertaken by clearing FCMs for their
proprietary accounts. Clearing members
pose risks to DCOs and users of DCOs
that are not posed by SDs and MSPs that
are not clearing members.
V. Effective Dates
A. Summary of Comments
Arbor, Citadel, and Eris urged the
Commission to prioritize the entire rule
in the final rulemaking process.
The Banks, DB, EEI, and ISDA
commented that the Commission should
not rush this proposal.
Wells Fargo commented that the
Commission should delay compliance
until most industry systems meet the
real-time acceptance standard. LCH
requested that the Commission delay
compliance for 9 months, if the rules are
adopted as proposed. AllianceBernstein
commented that the Commission’s
recently proposed phased
implementation provides ample time for
the market to make final preparations,
and no ‘‘interim’’ execution
documentation arrangements are
necessary. Morgan Stanley stated that
real-time clearing and risk limit
compliance verification cannot be
developed quickly enough to abandon
trilateral agreements.
B. Discussion
This rulemaking includes rules
applicable to FCMs, SDs, MSPs, DCMs,
SEFs, and DCOs. In addressing
implementation, it is important to
distinguish between FCMs, DCMs, and
DCOs, on the one hand, and SDs, MSPs,
and SEFs, on the other.
FCMs, DCMs, and DCOs are currently
involved in clearing swaps. Entity
definitions are not necessary for them.
Product definitions are not necessary for
the implementation of the rules
applicable to them. The products
currently being cleared as swaps by
DCOs are commonly characterized as
such by market participants. To delay
implementation of these rules pending
implementation of the further product
definition rules would be to deny
market participants pricing, operational,
and risk-management benefits
unnecessarily.
No firms are currently registered as
SDs, MSPs, or SEFs. Therefore, the rules
applicable to these entities will have no
practical effect until other rulemakings
are completed, such as the further entity
definition rulemaking. Nevertheless,
many entities currently expect to
operate as SDs, MSPs, or SEFs,
regardless of the precise contours of the
entity definitions. It would be more
efficient for such entities, particularly
those that are currently active in the
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markets, to develop their systems and
procedures in anticipation of being
subject to these rules as soon as they
become applicable. Indeed, failing to
take such measures would disadvantage
those that did not prepare for the
imminent regulatory framework. This
approach would also avoid temporary
gaps or discrepancies in the system of
rules addressing client clearing
documentation, trade processing, and
clearing member risk management
resulting from differing implementation
schedules for various entities.
As discussed above, the Commission
believes that implementation of these
rules is essential to effective clearing of
swaps. The Commission has determined
that for FCMs, DCMs, and DCOs, these
rules shall become effective October 1,
2012. For SDs and MSPs, these rules
shall become effective on the later of
October 1, 2012, or the date that the
registration rules become effective.55
For SEFs, these rules shall become
effective on the later of October 1, 2012,
or the date that the rules implementing
the core principles for SEFs become
effective.56 The Commission believes
that this approach strikes an appropriate
balance between those commenters who
urged implementation as quickly as
possible and those who urged delayed
implementation.
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VI. Consideration of Costs and Benefits
Introduction
CEA Section 15(a) requires the CFTC
to consider the costs and benefits of its
action before promulgating a regulation
under the CEA, specifying that the costs
and benefits shall be evaluated in light
of five broad areas of market and public
concern: (1) Protection of market
participants and the public;
(2) efficiency, competitiveness and
financial integrity of futures markets;
(3) price discovery; (4) sound risk
management practices; and (5) other
public interest considerations.57 To the
extent that these final regulations repeat
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. However, to the extent
that the 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
55 Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613 (Jan. 19, 2012).
56 Core Principles and Other Requirements for
Swap Execution Facilities, 76 FR 1214 (Jan. 7,
2011).
57 7 U.S.C. 19(a).
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other costs and benefits resulting from
the Commission’s determinations
pursuant to and in accordance with the
Dodd-Frank Act that the Commission
considers with respect to the Section
15(a) factors.
The regulations contained in this
Adopting Release were proposed in four
separate notices of proposed rulemaking
(‘‘NPRMs’’). Sections 1.72, 1.74, 23.608,
23.610, 39.12(a)(1)(iv), and 39.12(b)(7)
were proposed in Customer Clearing
Documentation and Timing of
Acceptance for Clearing,58 sections
23.506, 37.702(b), and 38.601(b) were
proposed in Requirements for
Processing, Clearing, and Transfer of
Customer Positions,59 sections 1.73 and
23.609 were proposed in Clearing
Futures Commission Merchant Risk
Management,60 and 1.35(a–1)(5)(iv) was
proposed in Adaptation of Regulations
to Incorporate Swaps.61 The
Commission is finalizing the rules
contained in this Adopting Release
together because they address three
overarching, closely-connected aims: (1)
Non-discriminatory access to
counterparties and clearing; (2) straightthrough processing; and (3) effective
risk management among clearing
members. Each of these provides
substantial benefits for the markets and
market participants.
The regulations related to nondiscriminatory access concern customer
clearing documentation. Specifically,
they prohibit FCMs, SDs, MSPs, and
DCOs from entering into agreements,
including those known in the industry
as ‘‘trilateral agreements,’’ with terms
restricting an FCM’s customer’s ability
to access all willing counterparties in
the market and obtain a swap on
reasonably competitive terms.62 Open
access, unrestrained by contractual
terms of this type, is critical to the
efficiency and financial integrity of the
swap markets.
This first set of rules is designed to
avoid the undesirable consequences
likely to result from trilateral
agreements, which include limits on the
range of eligible counterparties with
whom market participants can transact,
reduced competition for customers’
business, fragmentation of customers’
trading limits at the FCM, and distorted
price discovery.63 Reduced competition
58 See
76 FR 45730 (Aug. 1, 2011).
76 FR 13101 (Mar. 10, 2011).
60 See 76 FR 45724 (Aug. 1 2011).
61 See 76 FR 33066 (Jun. 6, 2011).
62 See §§ 1.72, 23.608, and 39.12(a).
63 Trilateral agreements were introduced in June
2011. On August 1, 2011 the Commission issued the
NPRM of this rule prohibiting certain terms that are
central to the trilateral agreements and as a
59 See
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21291
in this context may lead to wider
spreads, higher transaction fees (i.e.,
increased costs for customers), and
reduced market efficiency. Moreover,
limiting a market participant’s access to
less than all willing counterparties,
including those offering trades on terms
approximating the best available in the
market could undermine price
discovery, and market efficiency. The
first cluster of rules seeks to mitigate
these problems through provisions
fostering open access to all available
counterparties and democratized access
to clearing services. To that end, it
prevents FCMs, SDs, MSPs, and DCOs
from entering into any agreement that
would: (a) Disclose the identity of a
customer’s original executing
counterparty to the FCM, SD, or MSP;
(b) limit the number of counterparties
available to the customer; (c) set any
limits on the size of position a customer
may take (other than the general limit
established by their FCM); (d) impede a
customer’s access to trades that
approximate the best terms available; or
(e) prevent compliance with timeframes
for processing swaps that are required
by other parts of these rules.
A second group of regulations
mandates straight-through processing—
rapid processing of swap transactions,
including rapid submission to the DCO
for acceptance or rejection from
clearing—for swaps required to be
cleared or that the counterparties elect
to clear. In this regard, the regulations
impose requirements on FCMs, SDs,
MSPs, DCMs, SEFs, and DCOs that,
taken together, are designed to ensure
that counterparties know whether a
swap will be accepted for clearing at, or
soon after, the time of execution which
is a critical condition for eliminating
counterparty risk that undermines
democratized access to the swap
markets.64 When two parties enter into
a bilateral swap transaction with the
intention of clearing a swap, each party
bears counterparty risk with respect to
the other until the swap enters clearing.
Once the swap enters clearing, the
clearinghouse becomes the counterparty
to each side of the trade, which
minimizes and standardizes
counterparty risk.To the extent that
there is a period of time between
execution and clearing, counterparty
risk may develop as post-execution
market movements impact the swap’s
value and each party could face
significant costs if the swap is
consequence, adoption of the agreements thus far
has been extremely limited.
64 See §§ 1.35, 1.74, 23.506, 23.610, 37.702,
38.601, and 39.12(b) of the Commission’s
regulations.
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eventually rejected from clearing and
subsequently broken. Both
counterparties run the risk that they
may have to replace the swap under
different, less desirable terms if the
market has moved against them during
the intervening time. In addition, SDs,
whether providing liquidity to a non-SD
or SD counterparty, may have to
unwind or offset any positions they
have taken on to hedge the original
swap; this can also be costly, again,
particularly if the market has moved
against them since the execution of the
original swap. Bilateral agreements
typically address such ‘‘breakage’’ costs,
but the effectiveness of those provisions
could be compromised if either
counterparty is unwilling or unable to
make the other whole for losses. Such
costs are potentially significant,
particularly when the markets are
volatile and the latency period is long,
giving SDs an incentive to discriminate
among counterparties on the basis of
their credit quality. To mitigate those
costs and promote more democratized
access to the markets, it is critical that
executed swap transactions be accepted
or rejected from clearing quickly.
These rules contain several
requirements that are designed to ensure
that swaps are processed and accepted
or rejected promptly from clearing,
including requirements that FCMs, SDs,
MSPs, SEFs, DCMs, and DCOs
coordinate with one another to ensure
they have the capacity to accept or reject
trades ‘‘as quickly as technologically
practicable if fully automated systems
were used.’’ For trades executed on a
DCM or SEF, the Commission
anticipates that processing and
submitting a trade for clearing would be
near real-time, thus substantially
eliminating the potential for significant
counterparty risk accumulation during
the latency period. For trades that are
not executed on an exchange, but are
required to be cleared, the rules require
submission for clearing ‘‘as soon as is
technologically practicable after
execution’’ but no later than by the close
of business on the day of execution.
Similarly, swaps not executed on an
exchange and for which clearing is
elected by the counterparties (but not
required by law) must also be submitted
for clearing as soon as technologically
practicable, but not later than the day
following the latter of execution or the
decision to clear.
The Commission expects that these
rules requiring coordination to ensure
rapid processing and acceptance or
rejection of swaps for clearing will be
beneficial in several respects. First, they
will promote rapid adoption in the
market of currently existing
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technologies that will make possible
near real-time processing of exchange
traded swaps. For trades that are prescreened, or executed on an exchange,
this will virtually eliminate
counterparty credit risks associated with
clearing rejection. The rules will also
significantly reduce the amount of time
needed to process swaps that are not
traded on an exchange; although costs
associated with latency-period
counterparty credit risk cannot be
completely eliminated in this context,
the rules will substantially reduce the
need to discriminate among potential
counterparties in off-exchange trades, as
well as the potential costs associated
with rejected trades. By reducing or
eliminating the counterparty risk that
could otherwise develop during the
latency period, these rules promote a
market in which all eligible market
participants have access to
counterparties willing to trade on terms
that approximate the best available
terms in the market. This rule may
improve price discovery and promote
market integrity.
The third set of rules in this Adopting
Release requires that FCMs, SDs, and
MSPs who are clearing members of a
DCO implement sound risk management
practices that help ensure their financial
strength. A DCO’s financial strength
depends on the continued financial
strength of its clearing members. The
Commission believes that requiring
clearing members to engage in certain
risk management procedures will
provide additional assurance of their
ability to meet their financial
obligations to their respective DCOs,
particularly in times of market stress.
The third group of rules in this
Adopting Release therefore requires
clearing members to establish overall
risk-based position limits for their
proprietary trading accounts and each of
their customer accounts, and to screen
trades for compliance with those limits.
The rules also require clearing members
to monitor for adherence to such riskbased position limits, both intra-day and
overnight; to conduct rigorous stress
tests on significant accounts at least
once per week; to evaluate their ability
to meet initial and variation margin
requirements at least once per week; to
evaluate the probable cost of liquidating
various accounts at least once per
month; to test all lines of credit at least
once per year; and to establish
procedures and records that ensure and
verify their compliance with these
requirements. Many of these
requirements reflect common practices
for clearing members. These rules
promote consistent use of risk
management best practices among
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clearing members, while also allowing
flexibility to encourage innovation and
adaptation to the specific operating
requirements of diverse clearing
members. The Commission anticipates
that the requirements themselves will
help to ensure that clearing members
and their respective DCOs remain
financially sound during periods of
market stress. Moreover, the
Commission believes that the flexibility
these requirements allow will minimize
attendant costs and enable members to
adapt their risk management practices to
new market demands and develop more
effective strategies for monitoring and
managing risk.
In the sections that follow, the
Commission evaluates the costs and
benefits relevant to each of the three
groups of rules pursuant to Section 15(a)
of the CEA. Each section specifically
addresses the individual Section 15(a)
factors with respect to the rule group
and responds to comments pertaining to
that group. In its analysis, the
Commission has endeavored, where
possible, to quantify costs and benefits.
However, the costs and benefits are
either indirect, highly variable, or both
and therefore are not subject to reliable
quantification at this time. Nevertheless,
the Commission has considered all the
comments received, a broad range of
costs and benefits pertaining to
democratized swap market access,
improvements and challenges in risk
management, development and
implementation of necessary
technology, market liquidity, and
several others as detailed below.
Cost Benefit Consideration by Rule
Group
1. Customer Clearing Documentation
Sections 1.72, 23.608, and
39.12(a)(1)(vi) restrict FCMs, SDs and
MSPs, and DCOs, respectively, from
entering into any arrangements that
would (a) disclose the identity of a
customer’s original executing
counterparty to any FCM, SD, or MSP;
(b) limit the number of counterparties
with whom a customer may trade; (c)
restrict the size of a position that the
customer may take with any individual
counterparty apart from the overall limit
for all positions held by the customer at
the FCM; (d) limit a customer’s access
to trades on terms that have a reasonable
relationship to the best terms available;
or (e) prevents compliance with other
regulations requiring rapid processing
and acceptance or rejection from
clearing.
The Commission believes that these
rules proscribe certain terms in trilateral
agreements that were proposed by some
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SDs and FCMs. However, the
Commission notes that trilateral
agreements were not used in swap
markets prior to June 2011. SDs
historically have provided liquidity and
managed risk without the use of
trilateral agreements, and the
Commission understands that such
agreements have not yet been widely
adopted. Therefore, it is unlikely that
these rules, by preventing certain terms
in trilateral agreements, will cause
widespread changes in current market
practices for managing counterparty risk
or for negotiating bilateral agreements.65
Moreover, the rules adopted in this
Adopting Release will enhance risk
management in other ways, obviating
any perceived need for terms in
trilateral agreements that can harm
market competitiveness, efficiency, and
price discovery. In that context, the
Commission concludes that these
changes are justified.
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a. Protection of Market Participants 66
and the Public
The Commission is concerned that by
giving FCMs the ability to establish and
communicate sub-limits on the
positions a specific SD may clear with
a specific customer, the trilateral
agreements may allow FCMs to
influence the amount of business that a
customer conducts with specific
counterparties, or to constrain the
number or choice of counterparties with
whom a customer is able to trade. This
concern is amplified because a number
of FCMs have affiliated SDs who (along
with other SDs with whom the FCMaffiliated SD competes for swap
transaction business) are potential
counterparties to the FCM’s customers.
To the extent that FCMs could use terms
in trilateral agreements to influence a
customer’s choice from among potential
SD counterparties, the agreements could
provide a means for FCMs to direct
business toward an associated SD (or to
raise the cost of doing business with an
unassociated SD) to the diminution of
competition to provide swap liquidity
generally; in this way, the agreement
may work to the disadvantage of those
market participants that might benefit
from better competition. Moreover, by
limiting a customer’s range of potential
counterparties and the size of positions
that may be entered with specific
65 To the extent that changes will occur, the costs
attendant to them are indirect and cannot be
estimated without data that is not available at this
time.
66 The term ‘‘market participants’’ as it is used
throughout the cost benefit considerations section
includes SDs, MSPs, FCMs, and the customers of
FCMs (i.e., SD, MSP, and non-SD/MSP swap
counterparties).
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counterparties, the FCM establishes a
condition that in some circumstances
could preclude matching of the
customer’s order with the counterparty
that is willing to provide the best
available terms in the market at that
time. This sub-optimal outcome
increases costs for the customer, and
any systematic increases in costs to the
customer will indirectly impact prices
that the public ultimately pays for
related goods and services.
In addition, such limitations also
impose costs on potential counterparties
who are prevented from trading with
customers by restrictions in the trilateral
agreements. If those counterparties are
dealers, they lose the opportunity to win
that customer’s business. If those
counterparties are non-dealers, they lose
the liquidity that would have otherwise
been available to them as a consequence
of the customer’s need to execute a
swap. Last, an FCM could, intentionally
or unintentionally, signal to the market
information about the customer through
designation notices. For example,
clearing members may be more likely to
reduce a customer’s limits during a time
of market stress. Communicating
reductions on various sub-limits to
potential SD counterparties may signal
(perhaps wrongly) that the credit quality
of the customer is deteriorating. This
signal could make it more difficult for
the customer to transact at a time when
their ability to transact is particularly
critical.
These potential costs to customers
and the public will be forestalled or
altogether eliminated by these rules.
These benefits, however, are
unquantifiable for several reasons. First,
many of the potential costs and benefits
associated with trilateral agreements are
indirect and dispersed to a degree that
they would be difficult to estimate even
if there were ample data available.
Second, ample data is not available. The
Commission does not have any data that
characterizes pricing, liquidity, or other
important variables in the presence and
absence of trilateral agreements. Last,
trilateral agreements were introduced in
mid-June 2011, and the Commission
believes that adoption of trilateral
agreements thus far has been extremely
limited. Further, the Commission
believes that the NPRM of this rule,
which was released a few weeks after
trilateral agreements were introduced,
may be a primary factor deterring rapid
adoption of these agreements.67 To the
extent that this is correct, the current
rate of adoption and impact on the
market is unlikely to be a reflection of
what the impact of trilateral agreements
67 See
PO 00000
76 FR 45730, Aug. 1, 2011.
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21293
would be in the absence of this rule. In
other words, even if the Commission
had the data necessary to estimate the
current impact of trilateral agreements
(which it does not), those estimates
would not accurately reflect the
potential impact of these agreements.
However, by prohibiting contractual
terms that would limit the number of
potential counterparties, set sub-limits
on a customer’s positions, or restrict a
customer’s access to terms reasonably
related to the best terms available in the
market, these rules provide significant
protection to market participants.
With respect to the customer-identity
nondisclosure requirement, several
commenters stated that protecting
anonymity is critical as a condition for
open, efficient, and competitive swap
markets.68 Maintaining the anonymity
of a customer’s counterparty prevents
the clearing member from sharing with
any affiliated SDs competitively
sensitive information about its
customers’ counterparties—who may be
competitors and/or subsequent swap
counterparties to the affiliated SD—that
affiliated SDs can use for their own gain
(and that of the SD/FCM affiliate group).
This rule, together with the rule that
prevents FCMs from establishing sublimits, prohibits arrangements that
allow FCMs to share competitively
sensitive information that could
undermine competition to provide swap
liquidity—including information that
provides transparency into customer
swap positions and exposures. In so
doing, the rules better protect those
swap counterparty market participants
that benefit from greater competition
(e.g., as may be reflected in improved
bid/ask spreads) to provide the desired
swaps. The value of such protection
would vary depending on the specific
type and timing of information that is
communicated as well as the role and
incentives of the entity receiving that
information relative to the entity about
which the information is disclosed.
These factors are highly variable and
impracticable to quantify, and, as a
consequence, the Commission does not
have adequate information to reasonably
estimate the additional costs that might
be caused by such disclosures, or the
value of preventing such costs.
In addition, SDs, FCMs, and FCM
customers may soon expend resources
negotiating trilateral agreements. By
prohibiting certain provisions from
inclusion in trilateral agreements, these
rules reduce the likelihood that SDs,
FCMs, and customers will enter into
them. To the extent that this occurs,
68 See MFA, Arbor, SIFMA, D. E. Shaw, AIMA,
and Vizer.
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SDs, FCMs, and customers will save the
substantial costs that otherwise would
be required to negotiate such
agreements.69 Vanguard, for example,
estimates that, if it was forced by SDs to
implement trilateral agreements, it may
have to negotiate and enter into
approximately 4,800 new trilateral
agreements per year.70 In addition, those
agreements would create significant
administrative and ongoing legal costs
associated with review, periodic update,
and, for customers, compliance to
monitor their own activities. Some
commenters suggested that the
resources necessary to create and
administer trilateral agreements would
divert resources from implementing
market infrastructure that is necessary
to facilitate straight through
processing.71
The Commission recognizes that
prohibiting certain arrangements that
are currently in trilateral agreements
may increase counterparty risks (costs)
that SDs face due to the possibility that
swaps they enter could be rejected from
clearing. Trilateral agreements are
intended to increase the degree of the
SD’s certainty that trades with certain
customers and within certain limits will
be accepted for clearing. The
prohibitions contained in the first group
of rules are likely to prevent SDs from
using trilateral agreements in this way,
creating certain potential costs for the
SDs who have established trilateral
agreements with some of their
customers and the customers’ FCMs.72
However, as noted above, there are also
significant costs associated with
trilateral agreements. Moreover, in the
Commission’s judgment, provisions
contained within the second cluster of
rules (i.e., rules pertaining to straightthrough processing) will mitigate the
potential costs to SDs and other market
participants substantially. More
specifically, as discussed below, the
second group of rules mitigates costs
associated with pre-clearing-approval
69 See AllianceBernstein, Citadel, D. E. Shaw,
MFA, SIFMA, and Vanguard.
70 See Vanguard.
71 See e.g., Citadel, Alliance Bernstein, and MFA.
72 These costs, if compared against the baseline of
current market practice, depend on the extent to
which trilateral agreements containing terms
proscribed in these rules are currently being used.
Based on anecdotal feedback from market
participants, the Commission believes that trilateral
agreements have not yet been widely adopted.
Moreover, as suggested above, the Commission
believes that requiring more rapid swap processing
and clearing determinations will offset these costs,
diminishing them significantly over time. However,
the Commission does not have sufficient data
regarding the number of trilateral agreements
currently in place, or the number and terms of swap
transactions that they impact, to estimate these
costs.
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counterparty risk through straightthrough-processing requirements; the
Commission anticipates these rules will
drive rapid implementation of existing
market technology to substantially
narrow the window of counterparty risk
for SDs between execution and clearing
acceptance/rejection.
Moreover, commenters have
suggested that in certain circumstances,
the sub-limits associated with trilateral
agreements may actually exacerbate the
counterparty risk problem by delaying
processing and increasing the latency
period during which counterparty
exposure develops.73 If a customer
enters a swap with an SD without a
trilateral agreement in place, the FCM
may need to check with and adjust the
limits of various SDs who do have
trilateral agreements set up with that
customer before making a clearing
determination. The administrative
requirements of these steps could delay
clearing. By prohibiting agreements that
create such delays, the rules reduce the
latency period for some transactions,
which also reduces the amount of
counterparty risk that can develop
during that period.
Notwithstanding the inability to
quantify in dollar terms the costs of this
change in risk avoidance and mitigation
practice, in the Commission’s judgment
the change is justified by the critical
benefits that the rules provide regarding
open access to, and democratization of,
swap markets.
b. Efficiency, Competitiveness and
Financial Integrity of Markets
These rules specifically prohibit any
agreement that would limit a customer’s
potential available counterparties. This
prohibition encourages competition
among SD counterparties for the
customer’s business, which is likely to
reduce spreads and promote the
customer’s ability to obtain swap
positions on terms approaching or
equaling the best available terms in the
market at that time. Accordingly, the
Commission expects the spreads and
terms under which customers are able to
obtain swaps to improve when
compared with a situation in which
customers’ range of potential
counterparties is constrained by
counterparty-specific sub-limits
established by the FCM. It is possible
that the effect of greater competition on
spreads and terms may be mitigated by
the impact of increased risk to the
dealers, which is also likely to impact
spreads and terms. However, the
Commission believes that the latter
effects will be minimized and diminish
73 See
PO 00000
e.g., AIMA, SIFMA, Vanguard, and MFA.
Frm 00018
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over time as the processing of trades
becomes more rapid.
As suggested above, counterpartyspecific sub-limits increase expenses
related to monitoring and administrative
requirements, and commenters have
stated that in some circumstances
trilateral agreements may actually slow
swap processing. The prohibitions
contained in these rules will prevent
such arrangements, thereby leading to
greater swap processing speed in those
circumstances.
c. Price Discovery
If certain customers are prevented
from accessing swaps on terms that
approximate the best available terms in
the market at that time, and then the
terms of that trade are reported in real
time, it risks sending misleading signals
to the market about the price at which
certain swaps are available. This result
has the potential to undermine price
discovery. The prohibitions in these
rules will help ensure that customers in
the market can access trades on
approximately the best terms available
in the market, both in general by
prohibiting agreements that would
prevent such an outcome, and more
specifically by prohibiting any (1)
agreements that would limit the number
of counterparties with whom a customer
may trade, and (2) counterparty-specific
sub-limits on the customer’s positions.
d. Sound Risk Management Practices
By ensuring that customers are able to
trade with all willing counterparties in
the market, the rules promote greater
liquidity available to the customer and
to potential counterparties, which
makes it more likely they will be able
to enter swaps and offset positions as
needed. This result is important for
maintaining effective offsetting
positions as underlying positions
change. Moreover, greater liquidity may
push transaction costs downward,
which enables market participants to
execute their risk management strategies
in a more cost-effective manner.
To the extent that prohibiting certain
terms typical of trilateral agreements
will reduce an SD’s certainty about
whether the swap will be cleared, it may
increase the SD’s risk management
costs. However, as noted above,
trilateral agreements did not appear
until June 2011, which suggests that SDs
are capable of managing their risks
effectively in the absence of certain
terms contained in those agreements.
For example, SDs conduct due diligence
in order to evaluate their counterparty’s
credit-worthiness, and may choose to
negotiate terms in the bilateral
agreement that determine what
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obligations each counterparty has in the
event that a swap should be rejected
from clearing. SDs may have to adjust
their risk management strategies for the
possibility that their counterparty may
not be able to meet the terms of the
bilateral agreement if the trade is
rejected. If such bilateral agreements
provide that the swap will be
terminated when rejected from clearing,
the dealer may have to unwind or offset
certain aspects of positions that they
have taken to offset the original
position. The Commission anticipates
that SDs will account for these potential
additional costs in the terms and pricing
of the swaps they offer. In most cases,
however, the risk management strategies
described above reflect current market
practice. Therefore, much of the costs
associated with those practices are not
a function of these rules. Last, these
potential costs will be mitigated by
faster processing, and, in cases where
prescreening or near real-time postexecution screening are possible,
eliminated.74
Some SDs have posited that market
liquidity for some customers may
decrease because SDs will not provide
swaps to counterparties whose credit
quality is lower unless a trilateral
agreement is executed. The Commission
recognizes that any factor that
undermines SDs’ confidence that swaps
will be cleared may cause them to avoid
certain trades or to increase the price at
which they are willing to offer swaps to
certain counterparties. However,
because SDs have been providing
liquidity to market participants for years
in the absence of trilateral agreements,
and adoption of such agreements is not
yet widespread, the Commission does
not believe that preventing certain
provisions of these agreements will
significantly reduce liquidity in swap
markets. Moreover, certain aspects of
these rules, such as requirements for
rapid swap processing and clearing
determinations, are likely to promote
additional liquidity by reducing the
counterparty risk that could develop for
SDs between the time of execution and
clearing.75
74 Several commenters pointed out that in an
environment where real-time clearing
determinations are made, bilateral execution
agreements are not necessary. As evidence,
commenters pointed to Clearport, Globex, and
WebICE. Each of these platforms facilitate real-time
clearing determinations, and each does so without
bilateral execution agreements. See e.g., SDMA and
Javelin.
75 See section 2, Timing of Acceptance of Trades
for Clearing, below.
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and precluding anonymity that is a
necessary condition for trading on
central limit order books, justify these
rules.84 In this vein commenters
maintained that the largest SDs have
f. Response to Comments
sufficient power deriving from their role
as swap liquidity providers to coerce at
Several commenters noted that the
least some market participants into
benefits of the proposed rules include:
signing ‘‘optional’’ trilateral agreements,
reduced systemic risk; 76 reduced
barriers to entry and greater competition and expressed concern that the
agreement could rapidly become an
among liquidity providers, clearing
industry standard despite the resistance
members, and execution venues; 77
enhanced market depth and liquidity; 78 of buy-side firms.85 The Commission
agrees that it is necessary, in this case,
substantially reduced transaction
to establish rules that prevent trilateral
costs; 79 narrower bid-ask spreads; 80
agreements from being used to limit
and increased access to best execution
open and competitive swap markets.
via the freedom to execute with any
In supporting the use of trilateral
counterparty in the market.81 D. E. Shaw
agreements
some commenters have
and MFA commented that the proposed
rules would preserve anonymity among suggested that they are analogous to the
FIA/FOA sponsored International
trading participants, and facilitate the
Uniform Brokerage Execution Services
development of electronic trading and
(‘‘Give-Up’’) Agreement (‘‘Futures Givecentral limit order books.
Up Agreement’’), which is used in the
Additionally, several commenters
futures markets. The Futures Give-Up
remarked that without the final rules,
Agreement is between an executing
the framework for trilateral agreements
broker, clearing broker, and customer,
would substantially increase costs for
market participants.82 AllianceBernstein and allows the clearing broker to ‘‘place
limits or conditions on the positions it
suggested that without the proposed
rules, resources would be diverted from will accept for the give-up for
forward-looking technological solutions customer’s account.’’ 86 Commenters
expressed the opinion that the risks
for clearing certainty, and instead used
faced by executing brokers and clearing
to prop-up legacy systems for credit
firms in futures markets are
intermediation.83 Vanguard stated that
substantially similar to the risks faced
the trilateral agreement will introduce
by SDs and clearing members in the
significant costs and delays to the
swap markets, and therefore the use of
timeline for swaps clearing
trilateral agreements should be
implementation because parties will be
forced to execute a myriad of documents acceptable.87
However, the Commission is not
as a pre-condition to clearing and
persuaded that the points of similarity
trading.
between Futures Give-Up Agreements
Moreover, multiple commenters
and trilateral agreements provide
stated that while they are generally
sufficient evidence to demonstrate that
loathe to encourage regulations that
interfere with private contracts between the latter may be used in swap markets
without adverse effects on market
two parties, they believe that the
participants as discussed above. The
undesirable consequences of trilateral
two types of agreements are
agreements, such as limiting a
customer’s choice of counterparties and distinguishable in important respects.
trading venues, impairing their access to The parties to a Futures Give-Up
Agreement include a customer and two
the best terms available, the potential
brokers acting on behalf of the customer.
for anticompetitive effects, creating
The parties do not include the
barriers to entry for new liquidity
customer’s trading counterparty in the
providers, delaying adoption of
relevant transaction. Moreover, Futures
technology that will enable real time
processing and clearing determinations, Give-Up Agreements do not: (a) Disclose
the identity of a customer’s original
76 See AllianceBernstein, Arbor, CBA, CIEBA,
executing counterparty to any FCM, SD,
Citadel, D. E. Shaw, and MFA.
or MSP; (b) limit the number of
77 See AllianceBernstein, Arbor, Citadel, D. E.
counterparties with whom a customer
Shaw, and MFA.
may trade; (c) restrict the size of a
78 Id.
position that the customer may take
79 See AllianceBernstein, Arbor, and CIEBA.
with any individual counterparty apart
80 See AllianceBernstein, Citadel, D. E. Shaw, and
e. Other Public Interest Considerations
The Commission has not identified
additional public interest considerations
beyond those discussed above.
MFA.
81 See AllianceBernstein, Citadel, D. E. Shaw, and
MFA.
82 See AllianceBernstein, Citadel, D. E. Shaw,
MFA, SIFMA, and Vanguard.
83 See also MFA, Citadel.
PO 00000
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84 See SDMA, AIMA, Trading Firms, MFA, Arbor,
DRW, and Jeffries.
85 See AIMA, Trading Firms, CIEBA, Citadel.
86 See Morgan Stanley, FIA/ISDA, Banks.
87 See Morgan Stanley.
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from the overall limit for all positions
held by the customer at the FCM; (d)
limit a customer’s access to execution of
trades on terms that have a reasonable
relationship to the best terms available;
or (e) prevent compliance with other
regulations requiring rapid processing
and acceptance or rejection from
clearing.
Some commenters suggested that by
specifying the types, size, and volume of
trades that they are willing to engage in
with certain customers, trilateral
agreements help increase the range of
counterparties with whom SDs are
willing to trade.88 There is not sufficient
data available to the Commission to
evaluate these assertions, and
commenters did not provide any data to
support them. The Commission
acknowledges that factors reducing an
SD’s certainty about whether a swap
will be cleared could prompt it to limit
its business with certain counterparties
or to change the terms under which it
offers swaps to certain counterparties,
but the trilateral agreements could also
constrain either the range of
counterparties with whom an SD is
willing to trade, the size of positions it
is willing to offer to certain
counterparties, or both.89 In other
words, while some commenters are
concerned that prohibiting certain terms
in trilateral agreements may constrain
liquidity, the Commission recognizes
that trilateral agreements also constrain
liquidity. It is not knowable at this time
which force is likely to have the greater
constrictive effect on the liquidity that
an SD is willing to provide to certain
counterparties. Moreover, as stated
above, some aspects of these rules,
including the straight-throughprocessing and risk management
provisions, are likely to substantially
reduce, if not eliminate, SD latency
exposure and encourage SDs to provide
greater liquidity. Accordingly, in the
Commission’s judgment, proscribing
certain terms of trilateral agreements
(with their negative implications for
competition, efficiency and price
discovery) is the preferable approach
from a systemic standpoint to promote
liquidity.
Commenters opposed to the rules
stated that prohibiting trilateral
agreements would require buy-side and
88 See
Morgan Stanley, UBS, and EEI.
first page of the FIA–ISDA Cleared
Derivatives Execution Agreement states that
‘‘EXECUTION PARTIES MAY REQUEST THAT A
FORM OF THIS AGREEMENT (OR THE ANNEXES
HERETO) BE EXECUTED AS A CONDITION TO
ENTERING INTO TRANSACTIONS INTENDED TO
BE CLEARED.’’ See http://www.futuresindustry.org/
downloads/ClearedDerivativesExecution
Agreement_June142001.pdf.
89 The
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sell-side firms to subject themselves to
risks that they do not face today and
would make it necessary for dealers to
expend resources negotiating bilateral
agreements with customers and
evaluating the customer’s credit prior to
executing a transaction.90 However, this
would only be true to the extent that
trilateral agreements are (1) being used
today to mitigate certain risks, and (2)
make it unnecessary to negotiate
bilateral agreements and evaluate a
customer’s counterparty risk. As stated
above, the Commission believes that
trilateral agreements are not widely
used at this time and, thus, are
providing dealers risk protection only to
a limited extent. Moreover, it does not
appear that trilateral agreements obviate
the need to negotiate what might
happen in the event of breakage; the
Commission, therefore, does not believe
that prohibiting certain provisions of
trilateral agreements is likely to
significantly impact the expenses
associated with bilateral agreements.91
Furthermore, commenters opposed to
the rules stressed that the trilateral
agreements are optional.92 They also
noted that the trilateral agreements ‘‘do
not affirmatively limit’’ a customer’s
ability to trade with willing
counterparties or prohibit dealers and
customers from entering positions
greater than the sub-limit established by
the FCM.93 However, even in the
absence of ‘‘affirmative’’ limitations, the
agreement may have much the same
effect. Some commenters stated that
certain dealers have expressed
unwillingness to continue providing
swaps to certain customers if they did
not sign a trilateral agreement; the
agreement itself contemplates this
possibility.94 The Commission’s
concern with conduct of this type is
heightened by information suggesting
that a relatively small number of dealers
provide a significant amount of swap
liquidity available.95 Under these
90 See
Banks, Morgan Stanley.
http://www.futuresindustry.org/downloads/
ClearedDerivativesExecutionAgreement_June
142001.pdf. The trilateral agreement template
includes terms dictating what happens in the event
that a swap is rejected from clearing. The CFTC
believes, therefore, that these terms are likely
negotiated and addressed even where trilateral
agreements are used.
92 See FIA/ISDA.
93 See Morgan Stanley. See also FIA/ISDA, Banks.
94 See n.71, above.
95 See the OCC’s Quarterly Report on Bank
Trading and Derivatives Activities Third Quarter
2011, available at http://www.occ.gov/topics/
capital-markets/financial-markets/trading/
derivatives/dq311.pdf, which states, ‘‘Derivatives
activity in the U.S. banking system continues to be
dominated by a small group of large financial
institutions. Five large commercial banks represent
96% of the total banking industry notional amounts
91 See
PO 00000
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circumstances, each dealer that refuses
to offer swaps in the absence of a
trilateral agreement may significantly
reduce liquidity available to a customer.
Absent sufficient competition to provide
liquidity, dealers may be able to impose
restrictive, undesirable trilateral
agreement terms on customers.
Commenters in favor of trilateral
agreements suggested that concern
about anti-competitive behavior could
be addressed by allowing the customer
to determine how their overall limit at
the clearinghouse is allocated across
potential counterparties. The
Commission agrees that such an
approach would mitigate the concern
that FCMs could use trilateral
agreements to influence a customer’s
choice of counterparties in an anticompetitive manner. However, it would
not allow customers to take positions in
excess of previously established sublimits with certain counterparties
without walking through the process of
reallocating sub-limits, a process that
could be time consuming. This result
risks delay of swap processing and
clearing determinations, or inducement
of market participants to select
suboptimal offers that comply with preestablished limits to avoid the delay.
Such a delay could be particularly
problematic in volatile market
situations, where the ability to enter
into positions quickly may be necessary
in order to manage risk effectively.
2. Timing of Acceptance of Trades for
Clearing
Taken as a whole, the regulations in
this cluster require SEFs, DCMs, SDs,
MSPs, and DCOs to coordinate in order
to facilitate real-time acceptance or
rejection of trades for clearing,
including through development of the
technology necessary to do so. In the
case of cleared trades, the swaps must
be processed and submitted to the DCO
as soon as technologically practicable
using fully automated systems. In the
case of non-cleared trades, the swaps
will be processed and submitted to the
DCO as soon as is technologically
practicable, but allows for processing to
take slightly longer. More specifically:
Regarding Clearing Members
Sections 1.74 and 23.610 require that
FCMs, and SDs and MSPs, respectively,
coordinate with the DCO to accept or
reject trades for clearing ‘‘as quickly as
and 85% of industry net current credit exposure.’’
While the report only includes data related to
positions held by U.S. banks, and incorporates
derivatives that are not swaps, anecdotal evidence
also supports the likelihood that a relatively small
dealer population accounts for significant portions
of swap liquidity.
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would be technologically practicable if
fully automated systems were used’’ and
do so by one of the following methods:
(1) Pre-screening orders; (2) enabling the
DCO to screen orders using criteria
established by the FCM, SD or MSP; or
(3) setting up systems that enable the
DCO to communicate with and receive
a reply from the FCM, SD, or MSP as
soon as would be practicable if fully
automated systems were used.
Section 23.506 requires SDs and
MSPs to: (1) Have the capacity to submit
swaps that are not executed on a DCM
or SEF (‘‘OTC swaps’’) to the DCO for
clearing in a way that is acceptable to
the DCO; (2) work with the DCO to
process swaps in a manner that is
‘‘prompt and efficient’’ and that
complies with 39.12(b)(7); (3) submit
bilateral swaps to the DCO as soon as is
technologically practicable but no later,
if it is a swap subject to mandatory
clearing, than the close of business on
the day of execution, or, if it is a swap
not subject to mandatory clearing, no
later than the end of the following
business day from the later of execution
or the date when the parties decide to
clear.
Section 1.35 requires that for bunched
trades that are cleared, post-trade
allocations must occur on the day of
execution, so that clearing records
properly reflect the ultimate customers.
(Bunched trades that are cleared are not
given a delay for post-trade allocation
before being submitted for clearing.) For
bunched trades that are not cleared,
post-trade allocations must happen by
the end of the day they are executed.
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Regarding Execution Platforms
Section 38.601 requires that
transactions executed on or through a
DCM, other than transactions in security
futures products, must be cleared on a
DCO, and the DCM must work with
DCOs to ensure ‘‘prompt and efficient’’
transaction processing such that the
DCO can comply with § 39.12(b)(7).
Section 37.702(b) requires that SEFs
coordinate with DCOs in order to route
transactions to the DCO in a manner
acceptable to the DCO, and to develop
rules and procedures that facilitate
prompt transaction processing in
accordance with § 39.12(b)(7).
Regarding DCOs
Section 39.12(b)(7) requires DCOs: (1)
To coordinate with SEFs and DCMs to
develop rules and procedures that
facilitate ‘‘prompt, efficient, and
accurate’’ processing of transactions
received by the DCO; (2) to coordinate
with FCMs, SDs, and MSPs to set up
systems that enable the clearing member
or the DCO acting on its behalf to accept
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or reject trades for clearing as swiftly as
if fully automated systems were used;
(3) for trades executed on SEFs or
DCMs, to establish rules to accept or
reject trades for clearing as fast as if
fully automated systems were used, and
to accept all trades for which both
executing parties have a clearing
member, and that satisfy the criteria of
the DCO; and (4) for trades that are not
executed on SEFs or DCMs, but that are
for contracts listed by the DCO, to
satisfy requirements similar to those
applicable to trades that are executed on
SEFs or DCMs.
a. Protection of Market Participants and
the Public
The Commission anticipates that this
group of rules will provide significant
benefits to market participants. First, by
requiring that SEFs, DCMs, SDs, and
MSPs coordinate in ways that will lead
to faster processing and acceptance or
rejection of swaps for clearing, the rules
reduce the latency period during which
counterparty risk can accumulate for
parties who have executed a swap that
they intend to clear. If, following a long
latency period, the swap is rejected from
clearing and is cancelled as a
consequence, the SD will be forced to
recoup breakage costs from their
counterparty to the extent that their
bilateral agreement provides and their
counterparty is able to meet the terms of
that agreement; the SD also may need to
unwind or offset any position it has
established, potentially at a loss. SDs
have pointed out that the size of many
swap transactions, as well as the
illiquidity and volatility of these
markets, create the potential for these
risks to be substantial,96 so by reducing
the time between execution and
clearing, these rules provide
considerable benefits to SDs. Moreover,
for swaps where real-time acceptance or
rejection from clearing occurs, the
latency period, and the potential for
post-execution termination costs, is
eliminated.
Likewise, non-SD market participants
will be able to better judge their
counterparty risk and hedging strategies.
The possibility exists that a non-SD
market participant could have to
unwind or offset other positions at a
loss if a swap position is cancelled
unexpectedly, or need to create the
same position but on less favorable
terms if the market has moved against
them. It is also possible that the non-SD
market participant may not be able to
negotiate terms with the SD that would
allow it to recoup much or all of the
96 SDs, however, did not provide estimates of or
seek to quantify such risks.
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21297
costs associated with the cancelled
swap. Reducing or eliminating the
latency period through more rapid
processing and acceptance or rejection
of swaps from clearing will reduce those
costs to the benefit of both SD and nonSD market participants. If there is less
time between execution and clearing,
there will be less time for counterparty
exposure to develop, which mitigates
the need for extensive due diligence or
for elaborate procedures to address
breakage costs.
With respect to costs, some capital
investment will be necessary to develop
the processes and implement the
technology necessary to meet the
requirements specified in these rules.
However, in the case of DCMs, SDs,
MSPs, and DCOs, the Commission
believes that many entities are already
using procedures and technology that
comply with the standards in some
measure. The necessary investments,
therefore, will be incremental and will
depend significantly on the current
processes and technology in place at
each of these institutions. Moreover,
many of these entities may have to
modify or upgrade their systems in
order to comply with other aspects of
the Dodd-Frank Act. The costs
necessary to adjust technology platforms
to meet these other requirements are
being considered in each of those rules,
and so the costs attributable to these
rules are only those that create
improvements that would not otherwise
be made pursuant to those other rules.
The incremental costs attributable to
these rules cannot be quantified, due to
the flexibility the rules provide
regulated entities to meet the applicable
standards and to the differing
technology already in use by those
entities, but the Commission anticipates
that the necessary capital expenditures
by some entities may be significant.
However, as discussed above, the
benefits of such technology and
procedures are substantial as well, and,
based on comments, the Commission
believes potentially of a magnitude to
offset the costs of implementing such
systems. Citadel believes the rules will
save enough resources to benefit the
economy as a whole, and SDMA
estimates that the total benefits for
corporate America will have a value of
approximately $15 billion annually.97
97 See Citadel and SDMA. Neither commenter
provided calculations to substantiate their
estimates, so the Commission is not able to verify
their accuracy. However, as stated above, the
Commission does believe that the benefits of such
systems and procedures will be substantial.
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b. Efficiency, Competitiveness, and
Financial Integrity of the Markets
The general requirement that
processing and acceptance or rejection
from clearing must occur ‘‘as quickly as
is technologically practicable’’ or ‘‘as
quickly as is technologically practicable
if fully automated systems are used’’
creates an enforceable standard that
provides SEFs, DCMs, SDs, MSPs, and
DCOs the freedom to establish systems
that meet their unique operational needs
and that is, in their judgment, most cost
effective. By accommodating
innovation, and further system
improvements, this approach will
promote continued improvements in the
reliability and efficiency of these
systems that, indirectly, may benefit
financial market efficiency generally.
Rapid processing and acceptance or
rejection from clearing will help to
ensure that eligible counterparties are
not exposed in transactions that are
ultimately rejected from clearing and
broken. With respect to dealers, this
helps to ensure that they will be
available to other eligible customers by
reducing the amount of their balance
sheet that is ‘‘tied up’’ supporting
transactions that are eventually rejected
from clearing and broken. By limiting
the duration of transactional exposure,
the rules’ rapid processing requirements
serve to help protect market liquidity
that dealers in significant part
provide.98
Required coordination among SEFs,
DCMs, SDs, MSPs, and DCOs, together
with the requirements for rapid
processing and acceptance or rejection
from clearing, is likely to promote broad
adoption of standardized technologies
and processes. The rules, in this respect,
will provide an incentive to further
improvements in the speed of
processing, and may reduce switching
costs for customers by ensuring that
their technology platforms are able to
interface with a wide array of FCMs and
counterparties without significant
modifications. Lower switching costs, in
turn, are conducive to greater
competition among SD counterparties
and lower bid-ask spreads may result.
Limit order books 99 cannot exist in an
environment where there is uncertainty
about clearing because each participant
will want to identify its potential
98 See
n. 77, above.
Central Limit Order Book (CLOB) is a system
used by many exchanges to consolidate and match
orders. An open CLOB exposes available pricing
and market depth for listed products. Market
participants are allowed to see limit orders that
have been placed but have not yet been executed
or cancelled. Usually, exchanges use open CLOBs
to match customer trade orders with a ‘‘price time
priority.’’
99 A
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counterparty and evaluate its
creditworthiness in order to manage
risks that could develop if the trade is
rejected from clearing. Enabling clearing
members and exchanges to pre-screen
orders in real time for compliance with
clearing member limits for each
customer facilitates the development of
a central limit order book and the pure
price competition it affords by ensuring
that each trade executed on the
exchange will proceed to clearing. This
certainty, and the central limit order
book that it makes possible, enables
anonymous, exchange-based execution.
This execution method is an effective
mechanism for providing all-to-all
market access, placing all eligible
market participants on equal footing
when bidding on or offering positions;
the only distinguishing characteristic
among them is the price they bid or
offer. Participants do not need to know
the identity of entities on the other side
of the trade or to concern themselves
with the creditworthiness of those
entities because each participant knows
they will be facing the clearinghouse as
their counterparty.
Efficiency, certainty of clearing, and
liquidity in the U.S. based swap markets
are attractive characteristics that may
prompt additional customers and
dealers to send business to U.S.-based
exchanges. To the extent that this
occurs, it will promote greater liquidity
and competition.
c. Price Discovery
Pre-trade price transparency is
enhanced by central limit order books,
where market participants can view the
prices at which market participants are
willing to ‘‘buy’’ or ‘‘sell’’ certain
positions. Pre-screening capabilities
help to ensure that only bids and offers
from parties whose transactions will be
accepted for clearing are represented in
the central limit order book. This
promotes the integrity of the order book,
and the informational value of the bids
and offers contained within it, which
promotes effective price discovery.
To the extent that a swap moves from
execution to acceptance or rejection
from clearing and receives an answer in
real time that speed eliminates the need
for SDs to price idiosyncratic
counterparty risk (i.e. risk that is
different than that posed by the
clearinghouse as a counterparty) into
the swap. This result means that the
price at which a swap is transacted
more accurately reflects the price that
other market participants would receive
for the same product at that time.
Therefore, the prices reported in real
time have greater informational value
for all market participants.
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d. Sound Risk Management Practices
If an SD is uncertain whether a trade
will clear, it will not know whether it
should account for idiosyncratic
counterparty risk because it will not
know whether the clearinghouse or their
counterparty will face them for the life
of the swap.100 Or, if the agreement
between the SD and the customer
counterparty calls for the trade to be
cancelled in the event of clearing
rejection, the SD’s hedging strategies
will be complicated by uncertainty until
the clearing outcome is known. Faster
processing and acceptance or rejection
of trades from clearing facilitates sound
risk management by eliminating these
uncertainties, or at least by reducing the
period of time during which they are
relevant. This result makes it easier and
potentially less costly for dealers to
develop and execute sound risk
management strategies.
Similarly, faster processing and
acceptance or rejection from clearing
makes it easier and potentially less
costly for other non-SD market
participants to manage their risk
effectively. The more certainty SDs have
that a trade will clear, the less they need
to charge for clearing-acceptance risk.
This result makes it less expensive for
non-SD market participants to acquire
the positions they need to execute their
risk management strategies. It also
obviates the need that an SD would
otherwise have to evaluate counterparty
credit-worthiness, which may decrease
the amount of time required for a market
participant to execute a needed trade. In
volatile markets, this increased speed
can be valuable, if not essential, when
managing complex risks.
On the other hand, some processes
will still be manual even after these
rules are adopted. This result may be
true particularly for swap transactions
that are executed bilaterally and then
communicated to clearing members.
Speed requirements may increase the
possibility of errors in manual
processes. The potential range of
mistakes and range of costs associated
with those mistakes is broad, and
impossible to estimate. However, market
participants have an incentive to avoid
such mistakes, and the Commission
anticipates that the requirements related
to the timing of acceptance or rejection
from clearing will encourage automated,
straight-through processing, which over
time is likely to reduce the number of
manual processes and therefore the
number of opportunities for errors.
Also, while these rules require
clearing members, SEFs, DCMs, and
100 See
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DCOs to develop the ability to process
swaps and make clearing
determinations in a timeframe that is
likely to be a matter of milliseconds,
seconds, or at most, a few minutes,
bilateral transactions will still take some
amount of time to submit to the
appropriate clearing member. The rules
require SDs and MSPs to submit OTC
swaps for clearing as soon as is
technologically practicable and in no
case later than the close of business on
the date of execution for swaps that are
required to be cleared, and in no case
later than the end of the business day
following execution or the decision to
clear (whichever is later) for swaps that
are not required to be cleared. Moreover,
until the mandatory clearing regime
becomes effective, all OTC swaps will
be subject to the requirement that they
be submitted for clearing as soon as is
technologically practicable but in no
case later than the day following
execution or the decision to clear
(whichever is later). Therefore, some
time lapse between execution and
clearing as well as some breakage risk
will remain for OTC swaps and that risk
may be greater prior to the mandatory
clearing regime becoming effective.
However, the Commission notes that
these rules establish timelines for
submission to clearing that are
considerably shorter than what some
market participants practice today.
Moreover, the close of business on the
date of execution and the end of the
business day following execution or the
decision to clear (whichever is later) are
outer bounds on the timeline for
submitting swaps to clearing. The rules
still require these swaps to be submitted
‘‘as soon as is technologically
practicable,’’ which in many cases will
likely be sooner than these outer limits.
Last, to the extent that market
participants bear breakage cost risk, they
have an incentive to submit OTC swaps
for clearing promptly and to implement
and promote technological
improvements that will allow them to
do so. Each of these considerations are
likely to significantly reduce the amount
of time between execution and
submission for clearing for OTC swaps,
and therefore, are likely to mitigate the
breakage risks that counterparties face
when engaging in OTC transactions.
e. Other Public Interest Considerations
As described above, rapid and
predictable clearing provides substantial
benefits for both SDs and other market
participants. As market entities come
into compliance with these rules, the
Commission anticipates that rapid
processing and clearing determinations
will make the U.S. markets more
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attractive to foreign entities, which
could further increase liquidity and
reduce spreads.
Also, the Commission observes that
much of the technology that will be
necessary to meet these requirements
has been implemented in certain venues
with marked success.101 This
circumstance, together with the fact that
many market participants already may
have systems capable of at least partial
compliance, will serve to limit the
overall outlay necessary to bring
regulated entities into compliance.
f. Response to Comments
Many commenters agreed that the
technology for real time acceptance or
rejection already exists in other cleared
derivatives markets and is currently
being rolled out for cleared OTC
swaps.102 Commenters also noted that
the benefits of the rules far exceed any
incremental costs in upgrading
infrastructure, and that any required
infrastructure upgrades would be
minimal due to existing industry
capabilities.103 Furthermore, Citadel
stated that any costs to upgrade existing
infrastructure have already been
factored into industry investment plans,
because many SDs, FCMs, DCOs, and
SEFs are already launching real-time
acceptance.
Eris noted that it is currently able to
execute and clear interest rate swaps.
Arbor stated that it supports both the
Globex and Clearport solutions for
swaps because they are proven, work
well, and would be inexpensive
alternatives for market participants to
implement. Arbor continued to state
that because such workflow and
technology are currently used by
clearinghouses and clearing members
today, these technologies could be
ported quickly into the cleared swaps
context. Finally, Arbor remarked that by
compelling market adoption of
workflow and systems currently
deployed in other cleared markets,
implementation will be less costly and
more rapid.
Javelin calculated that Clearport’s
daily trade volume increased from
139,177 contracts in 2005 to over
450,000 contracts today. Javelin also
noted that Clearport covers multiple
asset classes including credit and
interest rates, and is interfacing with
over 16,000 registered users, and Globex
had average daily volume of 6,368,000
contracts in interest rates during August
101 See
e.g., Arbor, Eris, CME, SDMA, Vanguard,
and Javelin.
102 See AllianceBernstein, Arbor, Citadel, D.E.
Shaw, Eris, Javelin, MFA, SDMA, and State Street.
103 See AllianceBernstein, Arbor, D.E. Shaw,
MFA, and SDMA.
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21299
2011 and total exchange average daily
volume of 14,420,000 contracts during
the same period.
Commenters opposed to the rules
doubted that ‘‘market-wide real-time’’
clearing and risk limit compliance
verification can be developed quickly
enough or provided with sufficient
reliability to eliminate the ‘‘functional
benefits’’ of trilateral agreements.104
One commenter posited that to provide
real-time clearing on a broad basis
would require systems that have the
capacity to share information, calculate
risk metrics on a portfolio basis, adjust
limits accordingly, and disseminate
information in ways that are not
currently possible and that are unlikely
to be possible in the near future.105
However, the Commission is not
persuaded by these opposing
commenters’ arguments, which pivot on
an assumption that the Commission’s
determination to prohibit certain
provisions commonly contained in
trilateral agreements is premised on a
faulty belief that the functional benefits
of trilateral agreements will be entirely
eliminated in the near term. Such a
belief, however, is not the premise for
the Commission’s determination.
Rather, after careful consideration of
costs and benefits associated with
trilateral agreements, the Commission
believes that certain provisions common
to these agreements generate
unacceptable costs and, thus, should be
prohibited. In reaching this
determination, the Commission has not
concluded, and need not conclude, that
the trilateral agreements, judged in
isolation, are devoid of value.
Moreover, the Commission believes
that significant improvements in
straight through processing and in the
speed of processing and clearing
determinations can be achieved even
when the ideal is not yet attainable. In
that regard, the Commission notes that
the system requirements delineated by
commenters opposed to the rules
describe ‘‘requirements’’ that the
Commission does not believe are
necessary to straight through processing
or real time clearing determinations.106
Several commenters noted that some
technologies existing today provide near
real-time clearing determinations with
respect to certain swaps.107 Those
104 See
105 See
Morgan Stanley, and Banks.
Morgan Stanley.
106 Id.
107 See SDMA, Vanguard, State Street, Arbor, Eris,
CME, and Javelin. Multiple commenters cited
Clearport as an example of immediate post-trade (or
’’low latency’’) solution that is already providing
clearing acceptance/rejection decisions within
milliseconds of execution in some markets.
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systems function effectively despite the
fact that they do not achieve the ideal
system requirements described by other
commenters. The Commission,
therefore, believes that while many of
the ‘‘requirements’’ described by some
commenters are desirable, they are not
essential to swap processing and
clearing determinations that comply
with these rules. Furthermore, the
Commission believes that improvements
that significantly mitigate the risks
associated with counterparty exposure
that trilateral agreements seek to address
are possible with existing technology.
One commenter suggested that sublimits with individual dealers need not
delay clearing of swaps because the
same technology that is used to satisfy
the Commission’s requirements for
clearing in real time could be used to
automate the sub-limits.108 However,
commenters generally agreed that realtime clearing determinations would
mitigate or eliminate any legitimate
need for sub-limits or the agreements
necessary to establish them, a
perspective that the Commission finds
persuasive.109 Once the technology
necessary for straight through
processing and real time clearing
determinations is in place, the economic
rationale that commenters have
advanced in favor of sub-limits will no
longer be relevant, and therefore the
elements of trilateral agreements that are
prohibited in the first part of these rules
will not assist SDs with risk
management.
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3. Clearing Member Risk Management
This cluster of rules establishes risk
management requirements for FCMs,
SDs, and MSPs who are clearing
members. Section 1.73 of the
Commission’s regulations requires
FCMs who are clearing members to: (1)
Establish limits for proprietary accounts
and customer accounts based on
position size, order size, margin
requirements, etc.; (2) ensure that trades
Similarly, commenters cited Globex and WebICE as
examples of platforms that provide pre-trade
screens against customer limits set by FCMs, which
enables ‘‘perfect settlement’’ (i.e. every trade that is
executed is accepted immediately for clearing) for
the markets in which they operate. Commenters
generally cited these examples as evidence that the
requisite technology for real time clearing
determinations already exists, and could be applied
more broadly in order to facilitate compliance with
the rules adopted in this release.
108 See Morgan Stanley.
109 See e.g., SDMA, AIMA, Vanguard,
AllianceBernstein, Trading Firms, and MFA. In
addition, Morgan Stanley, ISDA/FIA, Banks, and
EEI implicitly acknowledge that real-time clearing
determinations mitigate the need for trilateral
agreements by arguing that trilateral agreements are
a useful risk management tool because real-time
clearing determinations are not yet possible in all
parts of the market.
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received by the FCM for automated or
non-automated execution, that are
executed bilaterally then delivered to
the FCM, or that are executed by a
broker and then delivered to the FCM,
are screened by either the FCM or the
broker (whichever encounters the
transaction first) for compliance with
overall position limits at the FCM for
each customer; (3) monitor for
compliance with overall position limits
at the FCM for each customer both
intraday and overnight; (4) conduct
stringent stress tests for all positions
that could impact its financial strength
at least once per week; (5) evaluate its
ability to meet initial margin
requirements at least once per week; (6)
evaluate its ability to, and the cost of,
liquidating positions in its proprietary
and customer accounts at least once per
month; (7) test all lines of credit at least
once per year; and (8) establish
procedures and maintain records to
ensure and document compliance with
these requirements.
Section 23.609 requires SDs and
MSPs who are clearing members to do
all the same things to manage risk, with
the exception that bilateral execution,
‘‘give up’’ agreements, and bunched
orders are not addressed in this section,
because SDs and MSPs may only clear
customer trades if they are also
registered as FCMs.
a. Protection of Market Participants
Several reported incidents over the
last 15 years involving so called ‘‘rogue
traders’’110 highlight the protective
import of these rules. The rules in the
second group require FCMs to establish
overall position limits for each of their
customers and promote the
establishment of systems capable of
more effectively pre-screening orders for
compliance with these overall position
limits. Automated screening
mechanisms that are external to those of
an FCM’s customer provide a second
layer of defense against evasion by
rogue traders within the customer’s
organization. The Commission believes
that these measures will help protect
against rogue trading, thereby protecting
market participants, who past events
have shown to be vulnerable to harm
from such conduct.111
110 See e.g., Report of the Board of Banking
Supervision Inquiry Into the Circumstances of the
Collapse of Barings, (Jul. 18, 1995), available at:
http://www.prmia.org/pdf/Case_Studies/
Barings_Case_Study.pdf; Factbox: Rise and Fall of
the SocGen Rogue Trader, Reuters (Jan. 27, 2008),
available at http://www.reuters.com/article/2008/
01/27/us-socgen-factbox-idUSL2733740320080127.
111 A key purpose of risk management procedures
is to minimize the chance of a firm incurring losses
that exceed its risk appetite. For example, in 1999,
a CFTC-regulated futures commission merchant
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With respect to the risk management
requirement that each clearing member
establish overall position limits for each
customer, the rules promote restrictions
that help prevent individual customers
from establishing positions sufficiently
large to jeopardize the financial health
of their clearing member if they were to
default. This is a critical safeguard that,
due to its importance and relative
simplicity, the Commission anticipates
many clearing members may already
have in place. But, by implementing
these rules, the Commission is ensuring
that every clearing member uses such
safeguards to help ensure that they, and
the DCOs on which they clear trades,
remain financially sound even during
times of financial market turbulence.
The risk management requirements do
prescribe certain timelines for regular
testing and evaluation; however, they do
not dictate (1) specific levels for
position limits set by clearing members,
or (2) specific methodologies of testing
with respect to the clearing member’s
ability to meet margin requirements, the
cost of liquidating positions, or stress
testing positions that could have a
material impact on the entity’s financial
strength. This flexibility gives market
participants the opportunity to
implement the requirements in ways
that are suited to their operational
patterns and minimize costs associated
with changes and upgrades to existing
technology systems. Moreover, it allows
market participants ample room to
innovate and adapt the most effective
procedures as the market continues to
evolve. This flexibility for innovation
and adaptation is critical to the long
term success of risk management
practices. Over time the markets will
continue to evolve with changes in
products, connections among
institutions, regulatory requirements,
and broader economic realities. Each of
these dynamic realities has the potential
to impact the effectiveness of specific
risk management strategies, making it
essential for firms to continue adapting
their approaches. The rules benefit
FCMs, their counterparties, and the
public by giving FCMs the flexibility
they need to continue developing
effective risk management strategies that
address current market realities.
Clearing members that do not
currently practice one or more of the
requirements established by this cluster
of rules will incur some incremental
costs to comply with them. Some initial
investment will be required to develop
filed bankruptcy after a trader exceeded his trading
limits. This event highlights the potential damage
that occurs from a poorly designed risk
management program or from a lack internal
controls.
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and implement processes necessary for
compliance, and ongoing costs will be
incurred as such entities engage in
repeated testing. The incremental cost
for each entity will depend on the
degree to which its current practices are
or are not in compliance, as well as the
procedures they select and implement
in order to comply. The Commission
does not have, and has not been
provided by commenters with, the
information required to estimate those
costs either on a per-entity or aggregate
basis. However, the Commission expects
that while the costs may be material for
a small number of entities, most clearing
members are currently using risk
management strategies that are largely
compliant with these requirements and,
therefore, the incremental cost for most
entities and for the market as a whole
is likely to be relatively low.
b. Efficiency, Competitiveness, and
Financial Integrity of the Markets
With clearing mandates in place, the
financial integrity of swap markets will
depend significantly on the financial
strength of DCOs. Moreover, the
financial health of a DCO is dependent
upon the strength of its clearing
members and those members’ ability to
meet any obligations pursuant to the
terms of their agreement with the DCO.
By requiring clearing members to
implement sound risk management
practices, the rules mitigate the risk that
those members could experience
financial strain that could undermine
the financial strength of the DCO.
In addition, by requiring that DCOs
coordinate with clearing members and
that clearing members coordinate with
account managers who execute trades
before submitting them to the clearing
member, the rules promote market
integrity by making it more difficult for
market participants to circumvent the
overall position limit established by
their clearing member.
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c. Price Discovery
The Commission does not expect
these rules to materially affect price
discovery.
d. Sound Risk Management Practices
As mentioned above, prescreening of
trades for compliance with overall
position limits set by the clearing
member will help guard against the
activities of rogue traders, particularly
those that may be operating within one
of the clearing members’ customers.
Intraday and overnight monitoring of
compliance with overall position limits
is an additional line of defense against
the same risk, but also serves to help
protect the clearing member against any
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such activities within its own ranks. In
this way, the rules mandate processes
that provide a deterrent against and a
screen for rogue trading, and help to
protect market participants from these
relatively infrequent, but potentially
catastrophic, risks.
Moreover, in situations where
automated screening may not be
possible, such as with bunched trades
and give-up trades, the rules still specify
requirements that should effect prescreening of trades against overall
position limits with the clearing
member. Non-automated systems may
be slightly slower, but the manual
screens still provide some measure of
protection against the activities of rogue
traders. Even in situations where nonautomated screening occurs postexecution, as is the case with screens on
floor traders, manual systems—if
carefully and rigorously practiced—can
provide effective protection against
excessive exposure. In the case of floor
traders, the clearing member may
monitor the trader’s positions
throughout the day and intervene in
person when the trader exceeds
allowable limits, forcing him to close
out positions immediately in order to
come under such limits, even if he must
close out those positions at a loss. Such
monitoring reduces the opportunity that
the trader has to exceed appropriate
limits, and the amount of time that such
excesses can last, thus limiting the
associated potential risk for his firm and
the clearing member.
Also, as stated above, the flexibility
that is implicit in these requirements is
particularly critical as a precondition to
innovation regarding testing
methodologies. Clearing members might
develop many different approaches to
stress tests, one or more of which may
be particularly well suited to a
particular firm and set of market
conditions, but which may not be well
suited to other firms and market
conditions. Flexibility is critical to
enabling continued development and
testing of new methodologies. It is likely
to benefit the individual entities that
engage in such innovation and testing,
as well as a broader array of market
participants introduced to
developments at industry gatherings
and through informal transfer of
intellectual capital as personnel move
between firms.
The requirement for each clearing
member to evaluate its ability to meet
margin requirements at least once per
week is a valuable tool to help clearing
firms avoid liquidity crises, which
could jeopardize the solvency of
otherwise healthy clearing members.
Margin calls can come as a result of
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significant movements in the price of
the underlying commodity, or as a
consequence of changes in price
volatility. Counterparties may choose to
exercise options at unanticipated times,
which may have significant
repercussions for a clearing member’s
margin requirements. Additionally, a
clearing member’s cash position may be
negatively impacted if one of its
customers becomes unable to meet
margin calls on large positions. Clearing
members must have sufficient liquidity
to meet margin calls from the DCO, even
at a time when the clearing member may
have a depleted cash position due to the
failure of its customers to meet margin
requirements. Such stress tests may help
to ensure that the clearing member has
a clear sense for how much liquidity
may be necessary in such
circumstances, and may encourage them
to preserve ample liquidity.
Testing lines of credit also helps
clearing members to ensure that (1) the
credit provider is able to honor its
commitment, and (2) the clearing
member can access the line in a timely
fashion. Liquidity crises seldom play
out in slow motion, and time is likely
to be of the essence when a clearing
member needs to access its credit line.
Therefore, it is important for the
clearing member’s staff to know how to
access the line quickly and reliably
when it is needed. By requiring annual
testing, the rules guard against the
danger that an episode of financial
strain for the member could be
exacerbated by an inability to access its
credit line in a timely manner. Such
preventable problems could be fatal for
the firm in the midst of a liquidity
crisis.
e. Other Public Interest Considerations
The Commission understands that the
past several years’ events in the
financial markets have tested and
strained the public’s confidence in
financial institutions’ management of
risks. To the extent that these
regulations promote broader
implementation of sound riskmanagement practices, they may serve
to strengthen such public confidence in
the integrity of the affected markets.
Such public confidence, if justified by
improved risk-management practices, is
critical to the overall health and
functioning of the swaps and
commodity markets.
To the extent that sound risk
management practices are broadened,
these regulations will help to promote
such confidence, and as such will
benefit the financial markets and the
American public who ultimately
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benefits from the health of these
markets.
f. Response to comments
Chris Barnard and Better Markets both
recommend that the Commission
require specific stress tests, and FHLB
recommends that stress test results be
publicly disclosed.112 FHLB believes
that public disclosure of stress test
results would allow customers to
mitigate risk.
The purpose of stress tests is for
clearing members to monitor the
potential losses they would face in the
event of extreme market events as well
as their ability to absorb such losses.
The Commission has chosen not to set
specific thresholds or specifying
methodologies for stress tests for three
reasons. First, appropriate thresholds
and methodologies depend, at least in
part, on the types of customers and
positions that characterize each clearing
member’s business. The clearing
member is best positioned to account for
these factors when developing an
appropriate test. Second, the
Commission believes that specifying
certain stress test thresholds could
prompt firms to focus tests on those
minimum levels in order to meet
regulatory requirements rather than
establishing thresholds that further
achieve the goal of maintaining a
vigorous risk management program.
Third, the Commission believes that
specifying particular methodologies for
stress testing would stifle innovation,
which would undermine the
effectiveness of stress tests as the swap
markets and their clearing members
continue to evolve.113
The Commission considered FHLB’s
recommendation but believes that
public disclosure of stress test results
could be a disincentive to aggressive
stress testing, which would undermine
the intent of this rule and the strength
of the FCM’s risk management program,
and in so doing, increase risk to the
DCO. Moreover, disclosure of results
could have the effect of improper
disclosure of confidential position
information. Last, additional rules have
been enacted limiting the range of assets
in which FCMs can invest customer
funds,114 and requiring careful
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112 See
section IV.B(2)(a), above.
Commission also notes that the approach
taken in this rule is consistent with the approach
recently adopted by the Commission for DCO stress
tests. The Commission intends to monitor to
determine whether the tests conducted by clearing
members are reasonably designed for the types of
risk the clearing members and their customers face.
114 See Investment of Customer Funds and Funds
Held in an Account for Foreign Futures and Foreign
Options Transactions, 76 FR 78776 (Dec. 19, 2011).
113 The
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segregation of customer funds,115 both
of which are designed to protect
customers in the event that an FCM
should become insolvent. With these
considerations in view, the Commission
has chosen not to require FCMs to make
the results of their stress tests public.
The CME commented that clearing
members should only be required to test
lines of credit on an annual basis rather
than a quarterly basis because they
believe that more frequent testing is not
cost efficient. ISDA inquired as to
whether an institution must actually
draw funds in order to properly test a
line of credit.
The Commission agrees that quarterly
testing might not be cost efficient in
every situation, and therefore has
established an annual testing
requirement in the Adopting Release.
However, the Commission encourages
clearing members to test lines of credit
more frequently based on any
developments that might impact the
ability of the lender to provide the line
of credit, or the clearing member’s
ability to access it in a timely manner.
Various market events, credit events,
and operational changes could lead to a
situation where testing lines of credit
would be appropriate. For example, if,
the clearing member changes personnel
or reorganizes in a manner that changes
the individuals who would be
responsible for accessing the credit line,
the Commission believes that it would
be beneficial to test lines of credit.
The Commission believes that the
actual drawing of funds is essential to
testing a line of credit. Among other
things, the test should ensure the ability
of the bank or other institution to move
the funds in a timely fashion, which is
likely to be particularly important at
times when the firm most needs the
additional liquidity provided by the line
of credit.
VII. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires that agencies consider
whether the regulations they propose
will have a significant economic impact
on a substantial number of small
entities.116 The final rules set forth in
this release would affect FCMs, SDs,
MSPs, DCOs, DCMs, and SEFs. The
Commission has already established
certain definitions of ‘‘small entities’’ to
be used in evaluating the impact of its
115 See Protection of Cleared Swaps Customer
Contracts and Collateral; Conforming Amendments
to the Commodity Broker Bankruptcy Provisions, 77
FR 6336 (Feb. 7, 2012).
116 5 U.S.C. 601 et seq.
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rules on such 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,’’ 117 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.’’ 118 Thus, with respect
to registered FCMs, the Commission
believes that the final rules will not
have a significant economic impact on
a substantial number of small entities.
Like FCMs, SDs will be subject to
minimum capital and margin
requirements, and are expected to
comprise the largest global firms.
Moreover, the Commission is required
to exempt from designation as an SD
any entity that engages in a de minimis
level of swaps dealing in connection
with transactions with or on behalf of
customers. Based, in part, on that
rationale, the Commission previously
has determined that SDs should not be
considered to be ‘‘small entities’’ for
purposes of the RFA.119 Thus, with
respect to SDs, the Commission believes
that the final rules will not have a
significant economic impact on a
substantial number of small entities.
Further, the Commission previously
has 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
similarly has noted that MSPs, by
definition, will 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. Based, in
part, on those facts, the Commission
previously has determined that MSPs
should not be considered to be ‘‘small
entities’’ for purposes of the RFA.120
117 47
FR 18618 (Apr. 30, 1982).
at 18619.
119 See ‘‘Registration of Swap Dealers and Major
Swap Participants,’’ 77 FR 2613, 2620 (Jan. 19,
2012); ‘‘Business Conduct Standards for Swap
Dealers and Major Swap Participants with
Counterparties,’’ 77 FR 9734, 9803–04 (Feb. 17,
2012).
120 Id.
118 Id.
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Thus, with respect to MSPs, the
Commission believes that the final rules
will not have a significant economic
impact on a substantial number of small
entities.121
Certain of the final rules set forth in
this release will affect DCMs, SEFs, and
DCOs, some of which will be designated
as systemically important DCOs. The
Commission previously has determined
that DCMs, SEFs, and DCOs are not
‘‘small entities’’ for purposes of the
RFA.122 In determining that these
registered entities are not ‘‘small
entities,’’ the Commission reasoned that
it designates a contract market, or
registers a DCO or SEF, only if the entity
meets a number of specific criteria,
including the expenditure of sufficient
resources to establish and maintain an
adequate self-regulatory program.123
Because DCMs, SEFs, and DCOs are
required to demonstrate compliance
with Core Principles, including
principles concerning the maintenance
or expenditure of financial resources,
the Commission determined that such
registered entities are not ‘‘small
entities’’ for the purposes of the RFA.
Thus, with respect to DCMs, SEFs, and
DCOs, the Commission believes that the
final rules will not have a significant
economic impact on a substantial
number of small entities.
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.
121 In a recent rulemaking, the Commission
discussed the applicability of the RFA with respect
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.’’
‘‘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,’’
available at http://www.cftc.gov/LawRegulation/
DoddFrankAct/Rulemakings/
DF_4_BusConductStandardsInternal/ssLINK/
federalregister022312b.
122 76 FR 44776, 44789 (July 27, 2011)
(‘‘Provisions Common to Registered Entities’’); see
66 FR 45604, 45609 (Aug. 29, 2001); 47 FR 18618,
18619 (Apr. 30, 1982).
123 See, e.g., Core Principle 2 applicable to SEFs
under Section 733 of the Dodd-Frank Act.
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B. Paperwork Reduction Act
1. Customer Clearing Documentation
Pursuant to the Paperwork Reduction
Act (‘‘PRA’’),124 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 final rules set forth
in this Adopting Release relating to
Customer Clearing Documentation will
result in new collection of information
requirements within the meaning of the
PRA.
Accordingly, the Commission
requested control numbers for the
required collection 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
this collection of information is
‘‘Customer Clearing Documentation and
Timing of Acceptance for Clearing.’’ The
OMB has assigned this collection
control number 3038–0092.
The collection of information under
these regulations is necessary to
implement certain provisions of the
CEA, as amended by the Dodd-Frank
Act. Specifically, it is essential to
reducing risk and fostering open access
to clearing and execution of customer
transactions on a DCM or SEF on terms
that have a reasonable relationship to
the best terms available by prohibiting
restrictions in customer clearing
documentation of SDs, MSPs, FCMs, or
DCOs that could delay or block access
to clearing, increase costs, and reduce
market efficiency by limiting the
number of counterparties available for
trading. These regulations are also
crucial both for effective risk
management and for the efficient
operation of trading venues among SDs,
MSPs, FCMs, and DCOs.
Many responses to this collection of
information will be 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 CEA, from making
public ‘‘data and information that
would separately disclose the business
transactions or market positions of any
person and trade secrets or names of
customers.’’ The Commission is also
required to protect certain information
contained in a government system of
124 44
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21303
records according to the Privacy Act of
1974, 5 U.S.C. 552a.
a. Information Provided by Reporting
Entities/Persons
SDs, MSPs, FCMs, and DCOs will be
required to develop and maintain
written customer clearing
documentation in compliance with
§§ 1.72, 23.608, and 39.12. Section
39.12(b)(7)(i)(B) requires DCOs to
coordinate with clearing members to
establish systems for prompt processing
of trades. Sections 1.74(a) and 23.610(a)
require reciprocal coordination with
DCOs by FCMs, SDs, and MSPs that are
clearing members.
The annual burden associated with
these regulations is estimated to be 16
hours, at an annual cost of $1,600 for
each FCM, SD, and MSP. Burden means
the total time, effort, or financial
resources expended by persons to
generate, maintain, retain, disclose, or
provide information to or for a federal
agency. The Commission has
characterized the annual costs as initial
costs because the Commission
anticipates that the cost burdens will be
reduced dramatically over time as the
documentation and procedures required
by these regulations become
increasingly standardized within the
industry.
Sections 1.72 and 23.608 require each
FCM, SD, and MSP to ensure
compliance with these regulations.
Maintenance of contracts is prudent
business practice and the Commission
anticipates that SDs and MSPs already
maintain some form of this
documentation. Additionally, the
Commission believes that much of the
existing customer clearing
documentation already complies with
these rules, and therefore that
compliance will require a minimal
burden.
In addition to the above, the
Commission anticipates that FCMs, SDs,
and MSPs will spend an average of
another 16 hours per year drafting and,
as needed, updating customer clearing
documentation to ensure compliance
required by §§ 1.72 and 23.608.
For each DCO, the annual burden
associated with these regulations is
estimated to be 40 hours, at an annual
cost of $4,000. Burden means the total
time, effort, or financial resources
expended by persons to generate,
maintain, retain, disclose, or provide
information to or for a federal agency.
The Commission has characterized the
annual costs as initial costs because the
Commission anticipates that the cost
burdens will be reduced dramatically
over time as the documentation and
procedures required by the regulations
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are implemented. Any additional
expenditure related to § 39.12 likely
would be limited to the time required to
review—and, as needed, amend—
existing documentation and procedures.
Section 39.12(b)(7) requires each DCO
to coordinate with clearing members to
establish systems for prompt processing
of trades. The Commission believes that
this is currently a practice of DCOs.
Accordingly, any additional
expenditure related to § 39.12(b)(7)
likely would be limited to the time
initially required to review—and, as
needed, amend—existing trade
processing procedures to ensure that
they conform to all of the required
elements and to coordinate with FCMs,
SDs, and MSPs to establish reciprocal
procedures.
The Commission anticipates that
DCOs will spend an average of 20 hours
per year drafting—and, as needed,
updating—the written policies and
procedures to ensure compliance
required by § 39.12, and 20 hours per
year coordinating with FCMs, SDs, and
MSPs on reciprocal procedures.
The hour burden calculations below
are based upon a number of variables
such as the number of FCMs, SDs,
MSPs, and DCOs in the marketplace and
the average hourly wage of the
employees of these registrants that
would be responsible for satisfying the
obligations established by the proposed
regulation.
There are currently 134 FCMs and 14
DCOs based on industry data. SDs and
MSPs are new categories of registrants.
Accordingly, 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. The
Commission believes there will be
approximately 125 SDs and MSPs who
will be required to comply with the
recordkeeping requirements of the
proposed rules. The Commission
estimated the number of affected
entities based on industry data.
According to recent Bureau of Labor
Statistics, the mean hourly wage of an
employee under occupation code 11–
3031, ‘‘Financial Managers,’’ (which
includes operations managers) that is
employed by the ‘‘Securities and
Commodity Contracts Intermediation
and Brokerage’’ industry is $74.41.125
Because SDs, MSPs, FCMs, and DCOs
include large financial institutions
whose operations management
employees’ salaries may exceed the
mean wage, the Commission has
125 http://www.bls.gov/oes/current/
oes113031.htm.
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estimated the cost burden of these
proposed regulations based upon an
average salary of $100 per hour.
Accordingly, the estimated hour
burden was calculated as follows:
Developing Written Procedures for
Compliance, and Maintaining Records
Documenting Compliance for SDs and
MSPs. This hourly burden arises from
the requirement that SDs and MSPs
make and maintain records
documenting compliance related to
client clearing documentation.
Number of registrants: 125.
Frequency of collection: As needed.
Estimated number of annual
responses per registrant: 1.
Estimated aggregate number of
annual responses: 125.
Estimated annual hour burden per
registrant: 16 hours.
Estimated aggregate annual hour
burden: 2,000 burden hours [125
registrants × 16 hours per registrant].
Developing Written Procedures for
Compliance, and Maintaining Records
Documenting Compliance for FCMs.
This hourly burden arises from the
requirement that FCMs make and
maintain records documenting
compliance related to client clearing
documentation.
Number of registrants: 134.
Frequency of collection: As needed.
Estimated number of annual
responses per registrant: 1.
Estimated aggregate number of
annual responses: 134.
Estimated annual hour burden per
registrant: 16 hours.
Estimated aggregate annual hour
burden: 2,144 burden hours [134
registrants × 16 hours per registrant].
Drafting and Updating Trade
Processing Procedures for DCOs. This
hour burden arises from the time
necessary to develop and periodically
update the trade processing procedures
required by the regulations.
Number of registrants: 14.
Frequency of collection: Initial
drafting, updating as needed.
Estimated number of annual
responses per registrant: 1.
Estimated aggregate number of
annual responses: 14.
Estimated annual hour burden per
registrant: 40 hours.
Estimated aggregate annual hour
burden: 560 burden hours [14
registrants × 40 hours per registrant].
Based upon the above, the aggregate
hour burden cost for all registrants is
4,704 burden hours and $470,400 [4,704
× $100 per hour].
2. Time Frames for Acceptance into
Clearing
The Commission believes that the
final rules set forth in this Adopting
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Release relating to the Time Frames for
Acceptance into Clearing will not
impose any new information collection
requirements that require approval of
OMB under the PRA.
3. Clearing Member Risk Management
The final rules contained in this
Adopting Release relating to Clearing
Member Risk Management will result in
new collection of information
requirements within the meaning of the
PRA. Accordingly, the Commission
requested control numbers for the
required collection 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
this collection of information is
‘‘Clearing Member Risk Management.’’
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless it
displays a currently valid control
number. The OMB has assigned this
collection control number 3038–0094.
The collection of information under
these regulations is necessary to
implement certain provisions of the
CEA, as amended by the Dodd-Frank
Act. Specifically, it is essential both for
effective risk management and for the
efficient operation of trading venues on
which SDs, MSPs, and FCMs
participate. The position risk
management requirement established by
the rules diminishes the chance for a
default, thus ensuring the financial
integrity of markets as well as customer
protection.
Responses to this collection of
information will be 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 CEA, from making
public ‘‘data and information that
would separately disclose the business
transactions or market positions of any
person and trade secrets or names of
customers.’’ The Commission is also
required to protect certain information
contained in a government system of
records according to the Privacy Act of
1974, 5 U.S.C. 552a.
a. Information Provided by Reporting
Entities/Persons
SDs, MSPs, and FCMs will be
required to develop and monitor
procedures for position risk
management in accordance with §§ 1.73
and 23.609.
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The annual burden associated with
these regulations is estimated to be 524
hours, at an annual cost of $52,400 for
each FCM, SD, and MSP. Burden means
the total time, effort, or financial
resources expended by persons to
generate, maintain, retain, disclose, or
provide information to or for a federal
agency. The Commission has
characterized the annual costs as initial
costs because the Commission
anticipates that the cost burdens will be
reduced dramatically over time as the
documentation and procedures required
by the regulations become increasingly
standardized within the industry.
This hourly burden primarily results
from the position risk management
obligations that will be imposed by
§§ 1.73 and 23.609. Sections 1.73 and
23.609 will require each FCM, SD, and
MSP to establish and enforce
procedures to establish risk-based
limits, conduct stress testing, evaluate
the ability to meet initial and variation
margin, test lines of credit, and evaluate
the ability to liquidate, in an orderly
manner, the positions in the proprietary
and customer accounts and estimate the
cost of the liquidation. The Commission
believes that each of these items is
currently an element of existing risk
management programs at a DCO or an
FCM. Accordingly, any additional
expenditure related to §§ 1.73 and
23.609 likely will be limited to the time
initially required to review and, as
needed, amend, existing risk
management procedures to ensure that
they encompass all of the required
elements and to develop a system for
performing these functions as often as
required.
In addition, §§ 1.73 and 23.609 will
require each FCM, SD, and MSP to
establish written procedures to comply,
and maintain records documenting
compliance. Maintenance of compliance
procedures and records of compliance is
prudent business practice and the
Commission anticipates that FCMs, SDs,
and MSPs already maintain some form
of this documentation.
With respect to the required position
risk management, the Commission
estimates that FCMs, SDs, and MSPs
will spend an average of 2 hours per
trading day, or 504 hours per year,
performing the required tests. The
Commission notes that the specific
information required for these tests is of
the type that would be performed in a
prudent market participant’s ordinary
course of business.
In addition to the above, the
Commission anticipates that FCMs, SDs,
and MSPs will spend an average of 16
hours per year drafting and, as needed,
updating the written policies and
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procedures to ensure compliance
required by §§ 1.73 and 23.609, and 4
hours per year maintaining records of
the compliance.
The hour burden calculations below
are based upon a number of variables
such as the number of FCMs, SDs, and
MSPs in the marketplace and the
average hourly wage of the employees of
these registrants that will be responsible
for satisfying the obligations established
by the regulations.
There are currently 134 FCMs based
on industry data. SDs and MSPs are new
categories of registrants. Accordingly, 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. The Commission believes
there will be approximately 125 SDs
and MSPs who will be required to
comply with the recordkeeping
requirements of the proposed rules. The
Commission estimated the number of
affected entities based on industry data.
According to recent Bureau of Labor
Statistics, the mean hourly wage of an
employee under occupation code 11–
3031, ‘‘Financial Managers,’’ (which
includes operations managers) that is
employed by the ‘‘Securities and
Commodity Contracts Intermediation
and Brokerage’’ industry is $74.41.126
Because SDs, MSPs, and FCMs include
large financial institutions whose
operations management employees’
salaries may exceed the mean wage, the
Commission has estimated the cost
burden of these regulations based upon
an average salary of $100 per hour.
Accordingly, the estimated hour
burden was calculated as follows:
Developing and Conducting Position
Risk Management Procedures for SDs
and MSPs. This hourly burden arises
from the requirement that SDs and
MSPs establish and perform testing of
clearing member risk management
procedures.
Number of registrants: 125.
Frequency of collection: Daily.
Estimated number of responses per
registrant: 252 [252 trading days].
Estimated aggregate number of
responses: 31,500 [125 registrants × 252
trading days].
Estimated annual burden per
registrant: 504 hours [252 trading days
× 2 hours per record].
Estimated aggregate annual hour
burden: 63,000 hours [125 registrants ×
252 trading days × 2 hours per record].
Developing Written Procedures for
Compliance, and Maintaining Records
126 http://www.bls.gov/oes/current/
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Documenting Compliance for SDs and
MSPs. This hourly burden arises from
the requirement that SDs and MSPs
make and maintain records
documenting compliance related to
clearing member risk management.
Number of registrants: 125.
Frequency of collection: As needed.
Estimated number of annual
responses per registrant: 1.
Estimated aggregate number of
annual responses: 125.
Estimated annual hour burden per
registrant: 20 hours.
Estimated aggregate annual hour
burden: 2,500 burden hours [125
registrants × 20 hours per registrant].
Developing and Conducting Position
Risk Management Procedures for FCMs.
This hourly burden arises from the
requirement that FCMs establish and
perform testing of clearing member risk
management procedures.
Number of registrants: 134.
Frequency of collection: Daily.
Estimated number of responses per
registrant: 252 [252 trading days].
Estimated aggregate number of
responses: 33,768 [134 registrants × 252
trading days].
Estimated annual burden per
registrant: 504 hours [252 trading days
× 2 hours per record].
Estimated aggregate annual hour
burden: 67,536 hours [134 registrants ×
252 trading days × 2 hours per record].
Developing Written Procedures for
Compliance, and Maintaining Records
Documenting Compliance for FCMs.
This hourly burden arises from the
requirement that FCMs make and
maintain records documenting
compliance related to clearing member
risk management.
Number of registrants: 134.
Frequency of collection: As needed.
Estimated number of annual
responses per registrant: 1.
Estimated aggregate number of
annual responses: 134.
Estimated annual hour burden per
registrant: 20 hours.
Estimated aggregate annual hour
burden: 2,680 burden hours [134
registrants × 20 hours per registrant].
Based upon the above, the aggregate
hour burden cost for all registrants is
135,716 burden hours and $13,571,600
[227,416 × $100 per hour].
In addition to the per hour burden
discussed above, the Commission
anticipates that SDs, MSPs, and FCMs
may incur certain start-up costs in
connection with the recordkeeping
obligations. Such costs may include the
expenditures related to re-programming
or updating existing recordkeeping
technology and systems to enable the
SD, MSP, or FCM to collect, capture,
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process, maintain, and re-produce any
newly required records. The
Commission believes that SDs, MSPs,
and FCMs generally could adapt their
current infrastructure to accommodate
the new or amended technology and
thus no significant infrastructure
expenditures would be needed. The
Commission estimates the programming
burden hours associated with
technology improvements to be 60
hours.
According to recent Bureau of Labor
Statistics, the mean hourly wages of
computer programmers under
occupation code 15–1021 and computer
software engineers under program codes
15–1031 and 1032 are between $34.10
and $44.94.127 Because SDs, MSPs, and
FCMs generally will be large entities
that may engage employees with wages
above the mean, the Commission has
conservatively chosen to use a mean
hourly programming wage of $60 per
hour. Accordingly, the start-up burden
associated with the required
technological improvements is $3,600
[$60 × 60 hours] per affected registrant
or $932,400 [$3,600 × 259 registrants] in
the aggregate.
List of Subjects
17 CFR Part 1
Conflicts of interest, Futures
commission merchants, Major swap
participants, Swap dealers.
17 CFR Part 23
Conflicts of interests, Futures
commission merchants, Major swap
participants, Swap dealers.
17 CFR Part 37
Swaps, Swap execution facilities.
17 CFR Part 38
Block transaction, Commodity
futures, Designated contract markets,
Transactions off the centralized market.
17 CFR Part 39
Derivatives clearing organizations,
Risk management, Swaps.
For the reasons stated in the
preamble, amend 17 CFR parts 1, 23, 37,
38, and 39 as follows:
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PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. Revise the authority citation for part
1 to read as follows:
■
Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b,
6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o,
6p, 6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a,
127 http://www.bls.gov/oes/current/
oes113031.htm.
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12, 12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23,
and 24, as amended by Title VII of the DoddFrank Wall Street Reform and Consumer
Protection Act, Pub. L. 111–203, 124 Stat.
1376 (2010).
2. Amend § 1.35 by revising paragraph
(a–1)(5)(iv) to read as follows:
(e) Prevents compliance with the
timeframes set forth in § 1.74(b),
§ 23.610(b), or § 39.12(b)(7) of this
chapter.
■ 4. Add § 1.73 to read as follows:
■
§ 1.35 Records of commodity interest and
cash commodity transactions.
*
*
*
*
*
(a–1) * * *
(5) * * *
(iv) Allocation. Orders eligible for
post-execution allocation must be
allocated by an eligible account manager
in accordance with the following:
(A) Allocations must be made as soon
as practicable after the entire transaction
is executed, but in any event no later
than the following times: For cleared
trades, account managers must provide
allocation information to futures
commission merchants no later than a
time sufficiently before the end of the
day the order is executed to ensure that
clearing records identify the ultimate
customer for each trade. For uncleared
trades, account managers must provide
allocation information to the
counterparty no later than the end of the
calendar day that the swap was
executed.
(B) Allocations must be fair and
equitable. No account or group of
accounts may receive consistently
favorable or unfavorable treatment.
(C) The allocation methodology must
be sufficiently objective and specific to
permit independent verification of the
fairness of the allocations using that
methodology by appropriate regulatory
and self-regulatory authorities and by
outside auditors.
*
*
*
*
*
■ 3. Add § 1.72 to read as follows:
§ 1.72 Restrictions on customer clearing
arrangements.
No futures commission merchant
providing clearing services to customers
shall enter into an arrangement that:
(a) Discloses to the futures
commission merchant or any swap
dealer or major swap participant the
identity of a customer’s original
executing counterparty;
(b) Limits the number of
counterparties with whom a customer
may enter into a trade;
(c) Restricts the size of the position a
customer may take with any individual
counterparty, apart from an overall limit
for all positions held by the customer at
the futures commission merchant;
(d) Impairs a customer’s access to
execution of a trade on terms that have
a reasonable relationship to the best
terms available; or
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§ 1.73 Clearing futures commission
merchant risk management.
(a) Each futures commission merchant
that is a clearing member of a
derivatives clearing organization shall:
(1) Establish risk-based limits in the
proprietary account and in each
customer account based on position
size, order size, margin requirements, or
similar factors;
(2) Screen orders for compliance with
the risk-based limits in accordance with
the following:
(i) When a clearing futures
commission merchant provides
electronic market access or accepts
orders for automated execution, it shall
use automated means to screen orders
for compliance with the limits;
(ii) When a clearing futures
commission merchant accepts orders for
non-automated execution, it shall
establish and maintain systems of risk
controls reasonably designed to ensure
compliance with the limits;
(iii) When a clearing futures
commission merchant accepts
transactions that were executed
bilaterally and then submitted for
clearing, it shall establish and maintain
systems of risk management controls
reasonably designed to ensure
compliance with the limits;
(iv) When a firm executes an order on
behalf of a customer but gives it up to
another firm for clearing,
(A) The clearing futures commission
merchant shall establish risk-based
limits for the customer, and enter into
an agreement in advance with the
executing firm that requires the
executing firm to screen orders for
compliance with those limits in
accordance with paragraph (a)(2)(i) or
(ii) as applicable; and
(B) The clearing futures commission
merchant shall establish and maintain
systems of risk management controls
reasonably designed to ensure
compliance with the limits.
(v) When an account manager
bunches orders on behalf of multiple
customers for execution as a block and
post-trade allocation to individual
accounts for clearing:
(A) The futures commission merchant
that initially clears the block shall
establish risk-based limits for the block
account and screen the order in
accordance with paragraph (a)(2)(i) or
(ii) as applicable;
(B) The futures commission
merchants that clear the allocated trades
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on behalf of customers shall establish
risk-based limits for each customer and
enter into an agreement in advance with
the account manager that requires the
account manager to screen orders for
compliance with those limits; and
(C) The futures commission
merchants that clear the allocated trades
on behalf of customers shall establish
and maintain systems of risk
management controls reasonably
designed to ensure compliance with the
limits.
(3) Monitor for adherence to the riskbased limits intra-day and overnight;
(4) Conduct stress tests under extreme
but plausible conditions of all positions
in the proprietary account and in each
customer account that could pose
material risk to the futures commission
merchant at least once per week;
(5) Evaluate its ability to meet initial
margin requirements at least once per
week;
(6) Evaluate its ability to meet
variation margin requirements in cash at
least once per week;
(7) Evaluate its ability to liquidate, in
an orderly manner, the positions in the
proprietary and customer accounts and
estimate the cost of the liquidation at
least once per quarter; and
(8) Test all lines of credit at least once
per year.
(b) Each futures commission merchant
that is a clearing member of a
derivatives clearing organization shall:
(1) Establish written procedures to
comply with this regulation; and
(2) Keep full, complete, and
systematic records documenting its
compliance with this regulation.
(3) All records required to be
maintained pursuant to these
regulations shall be maintained in
accordance with Commission
Regulation 1.31 (17 CFR 1.31) and shall
be made available promptly upon
request to representatives of the
Commission and to representatives of
applicable prudential regulators.
■ 5. Add § 1.74 to read as follows:
pmangrum on DSK3VPTVN1PROD with RULES3
§ 1.74 Futures commission merchant
acceptance for clearing.
(a) Each futures commission merchant
that is a clearing member of a
derivatives clearing organization shall
coordinate with each derivatives
clearing organization on which it clears
to establish systems that enable the
futures commission merchant, or the
derivatives clearing organization acting
on its behalf, to accept or reject each
trade submitted to the derivatives
clearing organization for clearing by or
for the futures commission merchant or
a customer of the futures commission
merchant as quickly as would be
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technologically practicable if fully
automated systems were used; and
(b) Each futures commission merchant
that is a clearing member of a
derivatives clearing organization shall
accept or reject each trade submitted by
or for it or its customers as quickly as
would be technologically practicable if
fully automated systems were used; a
clearing futures commission merchant
may meet this requirement by:
(1) Establishing systems to pre-screen
orders for compliance with criteria
specified by the clearing futures
commission merchant;
(2) Establishing systems that authorize
a derivatives clearing organization to
accept or reject on its behalf trades that
meet, or fail to meet, criteria specified
by the clearing futures commission
merchant; or
(3) Establishing systems that enable
the clearing futures commission
merchant to communicate to the
derivatives clearing organization
acceptance or rejection of each trade as
quickly as would be technologically
practicable if fully automated systems
were used.
■ 6. Add § 1.75 to read as follows:
§ 1.75 Delegation of authority to the
Director of the Division of Clearing and Risk
to establish an alternative compliance
schedule to comply with futures
commission merchant acceptance for
clearing.
(a) The Commission hereby delegates
to the Director of the Division of
Clearing and Risk 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 § 1.74 for swaps that are found to be
technologically or economically
impracticable for an affected futures
commission merchant that seeks, in
good faith, to comply with the
requirements of § 1.74 within a
reasonable time period beyond the date
on which compliance by such futures
commission merchant 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 Clearing and Risk within
30 days from the time such a request is
received, or it shall be deemed
approved.
(c) An exception 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
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21307
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.
PART 23—SWAP DEALERS AND
MAJOR SWAP PARTICIPANTS
7. Revise the authority citation for part
23 to read as follows:
■
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b–
1, 6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c,
16a, 18, 19, 21.
■
8. Add subpart I to read as follows:
Subpart I—Swap Documentation
Sec.
23.500–23.505 [Reserved]
23.506 Swap processing and clearing.
Subpart I—Swap Documentation
§§ 23.500–23.505
§ 23.506
[Reserved]
Swap processing and clearing.
(a) Swap processing. (1) Each swap
dealer and major swap participant shall
ensure that it has the capacity to route
swap transactions not executed on a
swap execution facility or designated
contract market to a derivatives clearing
organization in a manner acceptable to
the derivatives clearing organization for
the purposes of clearing; and
(2) Each swap dealer and major swap
participant shall coordinate with each
derivatives clearing organization to
which the swap dealer, major swap
participant, or its clearing member
submits transactions for clearing, to
facilitate prompt and efficient swap
transaction processing in accordance
with the requirements of § 39.12(b)(7) of
this chapter.
(b) Swap clearing. With respect to
each swap that is not executed on a
swap execution facility or a designated
contract market, each swap dealer and
major swap participant shall:
(1) If such swap is subject to a
mandatory clearing requirement
pursuant to section 2(h)(1) of the Act
and an exception pursuant to 2(h)(7) is
not applicable, submit such swap for
clearing to a derivatives clearing
organization as soon as technologically
practicable after execution of the swap,
but no later than the close of business
on the day of execution; or
(2) If such swap is not subject to a
mandatory clearing requirement
pursuant to section 2(h)(1) of the Act
but is accepted for clearing by any
derivatives clearing organization and
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the swap dealer or major swap
participant and its counterparty agree
that such swap will be submitted for
clearing, submit such swap for clearing
not later than the next business day after
execution of the swap, or the agreement
to clear, if later than execution.
■ 9. Add § 23.608 to subpart J, as added
at 77 FR 20128, April 3, 2012, effective
June 4, 2012, to read as follows:
§ 23.608 Restrictions on counterparty
clearing relationships.
No swap dealer or major swap
participant entering into a swap to be
submitted for clearing with a
counterparty that is a customer of a
futures commission merchant shall
enter into an arrangement that:
(a) Discloses to the futures
commission merchant or any swap
dealer or major swap participant the
identity of a customer’s original
executing counterparty;
(b) Limits the number of
counterparties with whom a customer
may enter into a trade;
(c) Restricts the size of the position a
customer may take with any individual
counterparty, apart from an overall limit
for all positions held by the customer
with the swap dealer or major swap
participant;
(d) Impairs a customer’s access to
execution of a trade on terms that have
a reasonable relationship to the best
terms available; or
(e) Prevents compliance with the
timeframes set forth in § 1.74(b),
§ 23.610(b), or § 39.12(b)(7) of this
chapter.
■ 10. Add § 23.609 to subpart J, as
added at 77 FR 20128, April 3, 2012,
effective June 4, 2012, to read as
follows:
pmangrum on DSK3VPTVN1PROD with RULES3
§ 23.609 Clearing member risk
management.
(a) With respect to clearing activities
in futures, security futures products,
swaps, agreements, contracts, or
transactions described in section
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the
Act, commodity options authorized
under section 4c of the Act, or leveraged
transactions authorized under section
19 of the Act, each swap dealer or major
swap participant that is a clearing
member of a derivatives clearing
organization shall:
(1) Establish risk-based limits based
on position size, order size, margin
requirements, or similar factors;
(2) Screen orders for compliance with
the risk-based limits in accordance with
the following:
(i) For transactions subject to
automated execution, the clearing
member shall use automated means to
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screen orders for compliance with the
risk-based limits; and
(ii) For transactions subject to nonautomated execution, the clearing
member shall establish and maintain
systems of risk controls reasonably
designed to ensure compliance with the
limits.
(3) Monitor for adherence to the riskbased limits intra-day and overnight;
(4) Conduct stress tests under extreme
but plausible conditions of all positions
at least once per week;
(5) Evaluate its ability to meet initial
margin requirements at least once per
week;
(6) Evaluate its ability to meet
variation margin requirements in cash at
least once per week;
(7) Evaluate its ability to liquidate the
positions it clears in an orderly manner,
and estimate the cost of the liquidation;
and
(8) Test all lines of credit at least once
per year.
(b) Each swap dealer or major swap
participant that is a clearing member of
a derivatives clearing organization shall:
(1) Establish written procedures to
comply with this regulation; and
(2) Keep full, complete, and
systematic records documenting its
compliance with this regulation.
(3) 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.
■ 11. Add § 23.610 to subpart J, as
added at 77 FR 20128, April 3, 2012,
effective June 4, 2012, to read as
follows:
§ 23.610 Clearing member acceptance for
clearing.
(a) Each swap dealer or major swap
participant that is a clearing member of
a derivatives clearing organization shall
coordinate with each derivatives
clearing organization on which it clears
to establish systems that enable the
clearing member, or the derivatives
clearing organization acting on its
behalf, to accept or reject each trade
submitted to the derivatives clearing
organization for clearing by or for the
clearing member as quickly as would be
technologically practicable if fully
automated systems were used; and
(b) Each swap dealer or major swap
participant that is a clearing member of
a derivatives clearing organization shall
accept or reject each trade submitted by
or for it as quickly as would be
technologically practicable if fully
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automated systems were used; a clearing
member may meet this requirement by:
(1) Establishing systems to pre-screen
orders for compliance with criteria
specified by the clearing member;
(2) Establishing systems that authorize
a derivatives clearing organization to
accept or reject on its behalf trades that
meet, or fail to meet, criteria specified
by the clearing member; or
(3) Establishing systems that enable
the clearing member to communicate to
the derivatives clearing organization
acceptance or rejection of each trade as
quickly as would be technologically
practicable if fully automated systems
were used.
■ 12. Add § 23.611 to subpart J, as
added at 77 FR 20128, April 3, 2012,
effective June 4, 2012, to read as
follows:
§ 23.611 Delegation of authority to the
Director of the Division of Clearing and Risk
to establish an alternative compliance
schedule to comply with clearing member
acceptance for clearing.
(a) The Commission hereby delegates
to the Director of the Division of
Clearing and Risk 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 § 23.610 for swaps 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 § 23.610 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 Clearing and Risk within
30 days from the time such a request is
received, or it shall be deemed
approved.
(c) An exception 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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■
13–14. Revise part 37 to read as
follows:
Subpart A—General Provisions
PART 37—SWAP EXECUTION
FACILITIES
■
*
Subpart L—Financial Integrity of
Transactions
Sec.
38.600 [Reserved]
38.601 Mandatory clearing.
38.602–38.606 [Reserved]
Sec.
Subparts A–G
[Reserved]
Subpart H—Financial Integrity of
Transactions
37.700 [Reserved]
37.701 [Reserved]
37.702 General financial integrity.
37.703 [Reserved]
Subparts I–K
Subpart L—Financial Integrity of
Transactions
[Reserved]
Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a–
2, 7b–3 and 12a, as amended by the DoddFrank Wall Street Reform and Consumer
Protection Act, Pub. L. 111–203, 124 Stat.
1376.
Subparts A–G
[Reserved]
Subpart H—Financial Integrity of
Transactions
§ 37.700
[Reserved]
§ 37.701
[Reserved]
§ 37.702
General financial integrity.
(a) [Reserved]
(b) For transactions cleared by a
derivatives clearing organization:
(1) By ensuring that the swap
execution facility has the capacity to
route transactions to the derivatives
clearing organization in a manner
acceptable to the derivatives clearing
organization for purposes of clearing;
and
(2) By coordinating with each
derivatives clearing organization to
which it submits transactions for
clearing, in the development of rules
and procedures to facilitate prompt and
efficient transaction processing in
accordance with the requirements of
§ 39.12(b)(7) of this chapter.
§ 37.703
[Reserved]
PART 38—DESIGNATED CONTRACT
MARKETS
15. Revise the authority citation for
part 38 to read as follows:
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■
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e,
6f, 6g, 6i, 6j, 6k, 6l, 6m, 6n, 7, 7a–2, 7b, 7b–
1, 7b–3, 8, 9, 15, and 21, as amended by the
Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111–203,
124 Stat. 1376.
16. Designate existing §§ 38.1 through
38.6 as the contents of added subpart A
under the following heading:
■
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15:18 Apr 06, 2012
§ 38.601
[Reserved]
§ 38.601
Mandatory clearing.
(a) Transactions executed on or
through the designated contract market,
other than transactions in security
futures products, must be cleared
through a registered derivatives clearing
organization, in accordance with the
provisions of part 39 of this chapter.
(b) A designated contract market must
coordinate with each derivatives
clearing organization to which it
submits transactions for clearing, in the
development of rules and procedures to
facilitate prompt and efficient
transaction processing in accordance
with the requirements of § 39.12(b)(7) of
this chapter.
§§ 38.602–38.606
Jkt 226001
[Reserved]
PART 39—DERIVATIVES CLEARING
ORGANIZATIONS
18. Revise the authority citation for
part 39 to read as follows:
■
Authority: 7 U.S.C. 2, and 7a–1 as
amended by the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Pub. L.
111–203, 124 Stat. 1376.
Subpart B—Compliance With Core
Principles
19. In § 39.12, add paragraphs
(a)(1)(vi) and (b)(7) to read as follows:
■
§ 39.12
[Reserved]
Subparts I–K
*
*
*
*
17. Add subpart L to read as follows:
Participant and product eligibility.
(a) * * *
(1) * * *
(vi) No derivatives clearing
organization shall require as a condition
of accepting a swap for clearing that a
futures commission merchant enter into
an arrangement with a customer that:
(A) Discloses to the futures
commission merchant or any swap
dealer or major swap participant the
identity of a customer’s original
executing counterparty;
(B) Limits the number of
counterparties with whom a customer
may enter into trades;
(C) Restricts the size of the position a
customer may take with any individual
counterparty, apart from an overall limit
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21309
for all positions held by the customer at
the futures commission merchant;
(D) Impairs a customer’s access to
execution of a trade on terms that have
a reasonable relationship to the best
terms available; or
(E) Prevents compliance with the time
frames set forth in § 1.74(b), § 23.610(b),
or § 39.12(b)(7) of this chapter.
*
*
*
*
*
(b) * * *
(7) Time frame for clearing. (i)
Coordination with markets and clearing
members.
(A) Each derivatives clearing
organization shall coordinate with each
designated contract market and swap
execution facility that lists for trading a
product that is cleared by the
derivatives clearing organization in
developing rules and procedures to
facilitate prompt, efficient, and accurate
processing of all transactions submitted
to the derivatives clearing organization
for clearing.
(B) Each derivatives clearing
organization shall coordinate with each
clearing member that is a futures
commission merchant, swap dealer, or
major swap participant to establish
systems that enable the clearing
member, or the derivatives clearing
organization acting on its behalf, to
accept or reject each trade submitted to
the derivatives clearing organization for
clearing by or for the clearing member
or a customer of the clearing member as
quickly as would be technologically
practicable if fully automated systems
were used.
(ii) Transactions executed
competitively on or subject to the rules
of a designated contract market or swap
execution facility. A derivatives clearing
organization shall have rules that
provide that the derivatives clearing
organization will accept or reject for
clearing as quickly after execution as
would be technologically practicable if
fully automated systems were used, all
contracts that are listed for clearing by
the derivatives clearing organization
and are executed competitively on or
subject to the rules of a designated
contract market or a swap execution
facility. The derivatives clearing
organization shall accept all trades:
(A) For which the executing parties
have clearing arrangements in place
with clearing members of the
derivatives clearing organization;
(B) For which the executing parties
identify the derivatives clearing
organization as the intended
clearinghouse; and
(C) That satisfy the criteria of the
derivatives clearing organization,
including but not limited to applicable
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risk filters; provided that such criteria
are non-discriminatory across trading
venues and are applied as quickly as
would be technologically practicable if
fully automated systems were used.
(iii) Swaps not executed on or subject
to the rules of a designated contract
market or a swap execution facility or
executed non-competitively on or
subject to the rules of a designated
contract market or a swap execution
facility. A derivatives clearing
organization shall have rules that
provide that the derivatives clearing
organization will accept or reject for
clearing as quickly after submission to
the derivatives clearing organization as
would be technologically practicable if
fully automated systems were used, all
swaps that are listed for clearing by the
derivatives clearing organization and are
not executed on or subject to the rules
of a designated contract market or a
swap execution facility or executed noncompetitively on or subject to the rules
of a designated contract market or a
swap execution facility. The derivatives
clearing organization shall accept all
trades:
(A) That are submitted by the parties
to the derivatives clearing organization,
in accordance with § 23.506 of this
chapter;
(B) For which the executing parties
have clearing arrangements in place
with clearing members of the
derivatives clearing organization;
(C) For which the executing parties
identify the derivatives clearing
organization as the intended
clearinghouse; and
(D) That satisfy the criteria of the
derivatives clearing organization,
including but not limited to applicable
risk filters; provided that such criteria
are non-discriminatory across trading
venues and are applied as quickly as
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would be technologically practicable if
fully automated systems were used.
*
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*
Issued in Washington, DC, on March 20,
2012, by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendices to Customer Clearing
Documentation, Timing of Acceptance
for Clearing, and Clearing Member Risk
Management—Commission Voting
Summary and Statements of
Commissioners
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendix 1—Commission Voting
Summary
On this matter, Chairman Gensler and
Commissioners Sommers, Chilton, and
Wetjen voted in the affirmative;
Commissioner O’Malia voted in the negative.
Appendix 2—Statement of Chairman
Gensler
I support today’s final rulemaking on
clearing which will promote market
participants’ access to central clearing,
increase market transparency, foster
competition, support market efficiency, and
bolster risk management. These rules include
provisions on client clearing documentation,
so-called ‘straight-through’ processing,
bunched orders, and clearing member risk
management.
These final rules have all benefited from
broad public comment.
One of the primary goals of the Dodd-Frank
Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act) is to lower risks to the
public by increasing the use of central
clearing and to promote the financial
integrity of the markets and the clearing
system. These rules are an important step in
furtherance of these goals.
First, the final rule does so by establishing
requirements for the documentation between
a Futures Commission Merchant (FCM) and
its customers and between a Swap Dealer and
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its counterparties. This rule will foster
bilateral clearing arrangements between
customers and their FCM. The rule will
promote competition in the provision of
clearing services and swap liquidity to the
broad public by limiting one FCM or Swap
Dealer from restricting a customer or
counterparty access to other market
participants.
Second, the final rule does so by setting
standards for the timely processing of trades
through so-called ‘straight-through’
processing or sending transactions promptly
to the clearinghouse upon execution. This
lowers risk to the markets by minimizing the
time between submission and acceptance or
rejection of trades for clearing. These
regulations would require and establish
uniform standards for prompt processing,
submission and acceptance for clearing of
swaps eligible for clearing. Such uniform
standards, similar to the practices in the
futures markets, lower risk because they
allow market participants to get the prompt
benefit of clearing rather than having to first
enter into a bilateral transaction that would
subsequently be moved into a clearinghouse.
Third, the final rule does so by allowing
asset managers to allocate bunched orders for
swaps consistent with long established rules
for allocating bunched orders for futures.
This will help promote access to clearing of
swaps for pension funds, mutual funds and
other clients of asset managers.
Lastly, the final rule does so by
strengthening the risk management
procedures of clearing members. One of the
primary goals of the Dodd-Frank Act was to
reduce the risk that swaps pose to the
economy. The final rule would require
clearing members that are FCMs, Swap
Dealers, and major swap participants to
establish risk-based limits on their customer
and house accounts. The rule also would
require clearing members to establish
procedures to, amongst other provisions,
evaluate their ability to meet margin
requirements, as well as liquidate positions
as needed. These risk filters and procedures
would help secure the financial integrity of
the markets and the clearing system.
[FR Doc. 2012–7477 Filed 4–6–12; 8:45 am]
BILLING CODE 6351–01–P
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| File Type | application/pdf |
| File Modified | 2012-04-07 |
| File Created | 2012-04-07 |