Final Rule -FRN

Vol. 77

Tuesday,

No. 176

September 11, 2012

Part II

Commodity Futures Trading Commission

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17 CFR Part 23
Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap
Trading Relationship Documentation Requirements for Swap Dealers and
Major Swap Participants; Final Rule

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Federal Register / Vol. 77, No. 176 / Tuesday, September 11, 2012 / Rules and Regulations

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

Confirmation, Portfolio Reconciliation,
Portfolio Compression, and Swap
Trading Relationship Documentation
Requirements for Swap Dealers and
Major Swap Participants
Commodity Futures Trading
Commission.
ACTION: Final rule.
AGENCY:

I. Background

The Commodity Futures
Trading Commission (Commission or
CFTC) is adopting regulations to
implement certain provisions of Title
VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(Dodd-Frank Act). Section 731 of the
Dodd-Frank Act added a new section
4s(i) to the Commodity Exchange Act
(CEA), which requires the Commission
to prescribe standards for swap dealers
(SDs) and major swap participants
(MSPs) related to the timely and
accurate confirmation, processing,
netting, documentation, and valuation
of swaps. These regulations set forth
requirements for swap confirmation,
portfolio reconciliation, portfolio
compression, and swap trading
relationship documentation for SDs and
MSPs.
DATES: The rules will become effective
November 13, 2012. Specific
compliance dates are discussed in the
SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT:
Frank N. Fisanich, Chief Counsel, 202–
418–5949, [email protected], Ward P.
Griffin, Associate Chief Counsel, 202–
418–5425, [email protected] Division of
Swap Dealer and Intermediary
Oversight, and Hannah Ropp,
Economist, 202–418–5228,
[email protected], Office of the Chief
Economist, Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street NW., Washington, DC
20581.
SUMMARY:

SUPPLEMENTARY INFORMATION

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Table of Contents
I. Background
II. Comments on the Notices of Proposed
Rulemaking
A. Regulatory Structure
B. Swap Trading Relationship
Documentation
C. End User Exception Documentation
D. Swap Confirmation
E. Portfolio Reconciliation
F. Portfolio Compression
III. Effective Dates and Compliance Dates
A. Comments Regarding Compliance Dates

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B. Compliance Dates
IV. Cost Benefit Considerations
A. Statutory Mandate to Consider the Costs
and Benefits of the Commission’s Action
B. Background
C. Swap Confirmation
D. Portfolio Reconciliation
E. Portfolio Compression
F. Swap Trading Relationship
Documentation
G. Swap Valuation Methodologies
V. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act

The Commission is hereby adopting
§ 23.500 through § 23.505 1 setting forth
standards for the timely and accurate
confirmation of swaps, requiring the
reconciliation and compression of swap
portfolios, and setting forth
requirements for documenting the swap
trading relationship between SDs,
MSPs, and their counterparties. These
regulations are being adopted by the
Commission pursuant to the authority
granted under sections 4s(h)(1)(D),
4s(h)(3)(D), 4s(i), and 8a(5) of the CEA.
Section 4s(i)(1) of the CEA, 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.’’ Documentation of swaps is a
critical component of the bilaterallytraded, over-the-counter (OTC)
derivatives market, while confirmation,
portfolio reconciliation, and portfolio
compression have been recognized as
important post-trade processing
mechanisms for reducing risk and
improving operational efficiency. Each
of these processes has been the focus of
significant domestic and international
attention in recent years by both market
participants and their regulators.
II. Comments on the Notices of
Proposed Rulemaking
The final rules adopted herein were
proposed in three separate notices of
proposed rulemaking.2 Each proposed
rulemaking was subject to an initial 60day public comment period and a re1 Commission

regulations referred to herein are
found at 17 CFR Ch. 1.
2 See 75 FR 81519 (Dec. 28, 2010) (Confirmation,
Portfolio Reconciliation, and Portfolio Compression
Requirements for Swap Dealers and Major Swap
Participants (Confirmation NPRM)); 76 FR 6715
(Feb. 8, 2011) (Swap Trading Relationship
Documentation Requirements for Swap Dealers and
Major Swap Participants (Documentation NPRM));
and 76 FR 6708 (Feb. 8, 2011) (Orderly Liquidation
Termination Provision in Swap Trading
Relationship Documentation for Swap Dealers and
Major Swap Participants (Orderly Liquidation
NPRM)).

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opened comment period of 30 days.3
The Commission received a total of
approximately 62 comment letters
directed specifically at the proposed
rules.4 The Commission considered
each of these comments in formulating
the final regulations.5
The Chairman and Commissioners, as
well as Commission staff, participated
in numerous meetings with
representatives of potential SDs and
MSPs, trade associations, public interest
groups, traders, and other interested
parties. In addition, the Commission has
consulted with other U.S. financial
regulators including: (i) The Securities
and Exchange Commission (SEC); (ii)
the Board of Governors of the Federal
Reserve System; (iii) the Office of the
Comptroller of the Currency; and (iv)
the Federal Deposit Insurance
Corporation. Staff from each of these
agencies has had the opportunity to
provide oral and/or written comments
to this adopting release, and the final
regulations incorporate elements of the
comments provided.
The Commission is mindful of the
benefits of harmonizing its regulatory
framework with that of its counterparts
in foreign countries. The Commission
has therefore monitored global advisory,
legislative, and regulatory proposals,
and has consulted with foreign
regulators in developing the final
regulations. Specifically, Commission
staff has consulted with the European
Securities and Markets Authority
(ESMA), which has recently released a
consultation paper for the regulation of
OTC derivatives containing draft
technical standards that are
substantially similar to some of the rules
adopted by the Commission in this
release, as further noted below.6
A. Regulatory Structure
Several commenters raised general
concerns with the legal authority for or
structure of the proposed rules, or their
possible effect on existing transactions.
1. Statutory Authority for the Proposed
Rules
The Working Group of Commercial
Energy Firms (The Working Group)
3 See 76 FR 25274 (May 4, 2011) (extending or reopening comment periods for multiple Dodd-Frank
proposed rulemakings).
4 Comment files for each proposed rulemaking
can be found on the Commission Web site,
www.cftc.gov.
5 The Commission also reviewed the proposed
rule of the Securities and Exchange Commission
concerning trade acknowledgement and verification
of security-based swap transactions. See 76 FR 3859
(Jan. 21, 2011).
6 See ESMA Consultation Paper 2012/379, Draft
Technical Standards for the Regulation of OTC
Derivatives, CCPs and Trade Repositories (June 25,
2012) (ESMA Draft Technical Standards).

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commented that many of the specific
provisions in the proposed rules are not
required by section 731 of the DoddFrank Act and that such provisions are
not ‘‘reasonably necessary’’ to achieve
the goals of the CEA. The Working
Group believes that the Commission
could meet its statutory mandate by
publishing principle-based rules, rather
than the detailed approach of the
proposed rules. Dominion Resources,
Inc. (Dominion) also asserted that the
proposed rules would achieve a
regulatory scope beyond what is
required by section 4s(i) and may
require end users to change their
business practices. Dominion requested
that the proposed rules be further
tailored to ensure the effect of the rules
is limited to SDs and MSPs.
The Commission notes that section
731 of the Dodd-Frank Act added a new
section 4s(i) to the CEA that states that
each registered SD and MSP shall
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 4s(i) also states
that the Commission shall adopt rules
governing documentation standards for
SDs and MSPs.
Swaps and swap trading relationship
documentation are contractual
arrangements that necessarily involve
more than a single party. The
Commission believes that the statutory
requirement that the Commission adopt
rules governing documentation
standards relating to confirmation,
processing, netting, documentation, and
valuation of all swaps reflects the intent
of Congress to have the Commission
adopt rules that necessarily effect SDs,
MSPs, and their swap counterparties.
The Commission also believes the rules
establish a set of documentation
standards for prudent risk management
for registered SDs and MSPs while
minimizing the burdens on non-SDs and
non-MSPs.
2. Application to Existing Swaps and
Documentation
In response to a request for comment
in the Documentation NPRM asking
how long SDs and MSPs should have to
bring existing swap documentation into
compliance with the proposed rules and
whether a safe harbor should be
provided for dormant trade
documentation, the International Swaps
and Derivatives Association (ISDA) and
the Securities Industry and Financial
Markets Association (SIFMA), in a joint
comment letter (ISDA & SIFMA),
strongly urged the Commission to
specify that only new transactions

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entered into after the effective date of
the rules are subject to the rules’
requirements, and that it is not
mandatory to amend terms or
agreements that apply to transactions
entered into prior to such date. ISDA &
SIFMA further argued that Commission
rules relating to business conduct, the
confirmation process, confidentiality
and privacy, collateral segregation
requirements, and margin and capital
may all directly or indirectly require
registrants to make amendments to
existing relationship documentation,
and that it would be extremely
inefficient, time consuming and costly
for registrants to engage in separate
rounds of amendments with their
trading counterparties for each set of
Dodd-Frank Act rulemakings. ISDA &
SIFMA recommended that registrants be
permitted to develop plans to update
their agreements in an integrated
manner for the full range of Dodd-Frank
Act requirements, and implementation
timelines should reflect the
requirements of such an approach,
keeping in mind that those requirements
will not be known until the scope and
terms of all of the relevant Commission
regulations (and those of the SEC) are
more clearly delineated.
The Working Group and the Financial
Services Roundtable (FSR) also urged
the Commission to apply the rules to
new swaps only, arguing that
renegotiation of existing documentation
would take significantly longer than six
months; may be impossible in some
cases; and is not a good use of limited
resources of market participants that
will already be taxed with the necessary
changes mandated by the Dodd-Frank
Act and the Commission’s other rules.
Likewise, the Coalition for Derivatives
End-Users urged the Commission to
exempt trades entered into before the
enactment of the Dodd-Frank Act from
the requirements of the rules and the
Managed Funds Association (MFA)
strongly objected to the Commission
applying any of these requirements to
existing contracts. MFA argued that
section 739(5) of the Dodd-Frank Act
specifically provides that the DoddFrank Act shall not constitute a
‘‘regulatory change, or similar event
* * * that would permit a party to
terminate, renegotiate, modify, amend,
or supplement one or more transactions
under the swap.’’ MFA believes that
imposing these requirements on existing
agreements would clearly require that
existing agreements be ‘‘renegotiated.’’
The Federal Home Loan Banks
(FHLBs) noted on the other hand that
netting of pre-existing transactions with
new transactions is critical to efficient
hedging, and thus documentation for

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pre-existing swaps will need to be
modified to maintain the benefits of
netting.
Having considered these comments,
the Commission agrees with
commenters that the rules should not
apply retrospectively and will require
compliance with the rules only with
respect to swaps entered after the date
on which compliance with the rules is
required, as discussed below. With
respect to the comment of the FHLBs,
the Commission notes that the rules
would not prohibit parties from
arranging their documentation to
maintain the benefits of netting between
pre-existing swaps and swaps entered
after the date compliance with the rules
is required if they so choose. In
addition, with regard to ISDA &
SIFMA’s argument that swap trading
documentation would need to be
amended when rules relating to
segregation and margin are finalized, the
Commission observes that those rules
are likely to provide for additional time
for documentation to be brought into
compliance.
3. Legal Certainty
With respect to the validity of
transactions where the parties fail to
comply with the rules, The Working
Group argued that for the sake of legal
certainty, a failure to comply with the
proposed rules should not result in
invalidation of swaps entered into
under deficient swap trading
relationship documentation. The
Coalition of Physical Energy Companies
(COPE) recommended that the
Commission make clear that section 739
of the Dodd-Frank Act, regarding legal
certainty, applies to the proposed
regulations so that SD or MSP
noncompliance with the rules will not
otherwise affect the enforceability of a
swap. MFA and the International Energy
Credit Association (IECA) also believe
that it is imperative that the
Commission affirmatively clarify that
defects in required regulatory
documentation do not render a contract
void or voidable by one of the parties or
constitute a breach of the swap
documentation. IECA added that a party
should not have a private right of action
with respect to documentation that does
not comply with the rules. IECA further
requested that the Commission add
specific language to proposed § 23.504.
The FHLBs made the same argument as
IECA, adding that the Commission can
enforce the provisions through penalties
for SDs and MSPs.
Upon consideration of these
comments, the Commission is clarifying
that it is not the intent of the rules to
provide swap counterparties with a

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basis for voiding or rescinding a swap
transaction based solely on the failure of
the parties to document the swap
transaction in compliance with the
rules. However, the Commission
believes it does not have the authority
to immunize SDs or MSPs from private
rights of action for conduct within the
scope of section 22 of the CEA, i.e., for
violations of the CEA. In the interest of
legal certainty, to avoid disruptions in
the swaps market, and to reduce
compliance costs, the Commission has
determined that it will, in the absence
of fraud, consider an SD or MSP to be
in compliance with the rules if it has
complied in good faith with its policies
and procedures reasonably designed to
comply with the requirements of each
rule.
4. Standing of the ISDA Agreements
Several commenters requested that
the Commission clarify the standing
under the rules of the ISDA Master
Agreement and Credit Support Annex
(the ISDA Agreements), which are
prevalent in the swaps market.
Specifically, ISDA & SIFMA commented
that the proposed rules could create
uncertainty as to the level of
documentation required because the
proposed rules require that ‘‘all terms’’
governing the swap trading relationship
be documented. ISDA & SIFMA thus
requested that the Commission
acknowledge the general adequacy of
the ISDA Agreements for purposes of
the rule to enhance legal certainty and
market stability. Similarly, COPE argued
that many end users have already
negotiated existing documentation
under the ISDA architecture and thus
requested that the Commission make
clear that: (1) ISDA Agreements or any
substantially similar master agreements
satisfy the documentation requirements
of the final rules; (2) in accordance with
the ISDA Agreements and applicable
state law, swaps are binding when made
orally; and (3) long-form confirmations
that contain all requisite legal terms to
establish a binding agreement also
satisfy the requirements of the rules.
IECA also recommended that the
Commission expressly state that the
ISDA Agreements satisfy the
documentation requirements of the final
rules or state how the ISDA Agreements
are deficient to eliminate any confusion.
Finally, the Coalition for Derivatives
End-Users argued that, given that the
ISDA Agreements are used by nearly all
end users and that such documentation
substantially complies with the
proposed rules, the Commission should
expressly state that the ISDA
Agreements satisfy the documentation
requirements of the rules.

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On the other hand, the Committee on
the Investment of Employee Benefit
Assets (CIEBA) anticipates that ISDA
may initiate a uniform protocol to
conform existing ISDA Agreements to
the requirements of the rules. In this
regard, CIEBA stated that ISDA
protocols, which in the past have
typically been developed by dealerdominated ISDA committees, are not
form documents that can be revised by
the parties. Rather, CIEBA argues, end
users may only adopt these protocols on
a ‘‘take it or leave it’’ basis, which may
not be in their best interests.
Accordingly, CIEBA recommended that
the Commission not, either explicitly or
implicitly, require market participants
to consent to ISDA protocols in order to
comply with the Dodd-Frank Act or the
Commission’s regulations.
The Commission notes that many
comments received with respect to this
and other rulemakings stated that swaps
are privately negotiated bilateral
contracts. Although the Commission
recognizes that the ISDA Agreements in
their pre-printed form as published by
ISDA are capable of compliance with
the rules, such agreements are subject to
customization by counterparties. In
addition, the Commission notes that
while the pre-printed form of the ISDA
Master Agreement is capable of
addressing the requirements of
proposed § 23.504(b)(1), it is not
possible to determine if the pre-printed
form of the ISDA Credit Support Annex
will comply with proposed
§ 23.504(b)(3), because that section
requires that the documentation include
credit support arrangements that
comply with the Commission’s rules
regarding initial and variation margin
and custodial arrangements, which have
been proposed but not yet finalized.
Further, the Commission does not
believe that the standard ISDA
Agreements address the swap valuation
requirements of § 23.504(b)(4), the
orderly liquidation termination
provisions of § 23.504(b)(5), or the
clearing records required by
§ 23.504(b)(6). Given the foregoing, the
Commission declines to endorse the
ISDA Agreements as meeting the
requirements of the rules in all
instances.
5. Identical Rules Applicable to SDs and
MSPs
The proposed regulations did not
differentiate between SDs and MSPs,
but, rather, applied identical rules to
both types of entities. In this regard,
BlackRock commented that MSPs are
buy-side entities, yet many of the
proposed documentation standards are
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BlackRock believes these requirements
should not apply to MSPs because they
are unnecessary and will cause both
MSPs and the Commission to use
resources inefficiently.
The Commission is not modifying the
regulations to differentiate between SDs
and MSPs. The Commission observes
that section 4s(i) of the CEA, as added
by the Dodd-Frank Act, does not
differentiate between SDs and MSPs.
The Commission thus has determined
that the intent of section 4s(i) is to apply
the same requirements to MSPs and
SDs, and the Commission is taking the
same approach in the final regulations.
B. Swap Trading Relationship
Documentation—§ 23.504
Section 4s(i)(1) requires swap dealers
and major swap participants to
‘‘conform with such standards as may
be prescribed by the Commission by
rule or regulation that relate to timely
and accurate confirmation, processing,
netting, documentation, and valuation
of all swaps.’’ Under section 4s(i)(2), the
Commission is required to adopt rules
‘‘governing documentation standards for
swap dealers and major swap
participants.’’
OTC derivatives market participants
typically have relied on the use of
industry standard legal documentation,
including master netting agreements,
definitions, schedules, and
confirmations, to document their swap
trading relationships. This industry
standard documentation, such as the
widely used ISDA Master Agreement
and related definitions, schedules, and
confirmations specific to particular asset
classes, offers a framework for
documenting the transactions between
counterparties for OTC derivatives
products.7 The standard documentation
is designed to set forth the legal, trading,
and credit relationship between the
parties and to facilitate netting of
transactions in the event that parties
have to close-out their position with one
another or determine credit exposure for
margin and collateral management.
Notwithstanding the standardization of
such documentation, some or all of the
terms of the master agreement and other
documents are subject to negotiation
and modification.
To promote the ‘‘timely and accurate
* * * documentation * * * of all
swaps’’ under section 4s(i)(1) of the
CEA, in the Documentation NPRM, the
Commission proposed § 23.504(a),
which required that swap dealers and
major swap participants establish,
7 The International Swaps and Derivatives
Association (ISDA) is a trade association for the
OTC derivatives industry (http://www.isda.org).

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maintain, and enforce written policies
and procedures reasonably designed to
ensure that each swap dealer or major
swap participant and its counterparties
have agreed in writing to all of the terms
governing their swap trading
relationship and have executed all
agreements required by proposed
§ 23.504. The Commission received
approximately 31 comment letters in
response to the Documentation NPRM
and considered each comment in
formulating the final rules, as discussed
below.
1. Application to Swaps Executed on a
SEF or DCM, or Cleared by a DCO
In response to a request for comment
in the Documentation NPRM regarding
whether proposed § 23.504 should
include a safe harbor for swaps entered
into on, or subject to the rules of, a
board of trade designated as a contract
market, ISDA & SIFMA, as well as the
American Benefits Counsel and the
Committee on Investment of Employee
Benefit Assets (jointly, ABC & CIEBA),
recommended that the Commission
provide such a safe harbor for swaps
executed on a swap execution facility
(SEF) or designated contract market
(DCM). ISDA & SIFMA commented that
the safe harbor is especially needed for
those transactions where the SD or MSP
will not know the identity of its
counterparty until just before or after
execution. ISDA & SIFMA also urged
the Commission to clarify that the term
‘‘swap trading relationship
documentation’’ is used to describe only
bilateral documentation between parties
to uncleared swaps. MFA also
recommended that the Commission
clarify that exchange traded or cleared
swaps, which will be subject to standard
contract terms, are not subject to the
documentation rules. The Working
Group commented that the swap trading
relationship requirement in § 23.504(a)
includes a carve-out for swaps cleared
with a DCO, but § 23.504(b)(6) includes
express requirements for the swap
trading relationship documentation
with respect to cleared swaps. Given the
apparent contradiction, The Working
Group requested that the Commission
clarify whether the other requirements
of § 23.504 apply to swaps that are
intended to be cleared
contemporaneously with execution or
that are executed on a SEF or DCM.
In response to The Working Group’s
comment expressing confusion about
whether § 23.504 applies to swaps that
are cleared by a DCO and to ISDA &
SIFMA’s comment regarding
applicability to cleared swaps, as well
as the applicability to pre-existing
swaps per the discussion above, the

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Commission is modifying § 23.504 to
clarify the overall applicability of the
rule by adding a new paragraph (a)(1) as
set forth in the regulatory text of this
rule.
This revision clarifies the
circumstances under which the rule
applies. The proviso in § 23.504(a)(1)(ii)
would achieve the rule’s goal of
avoiding differences between the terms
of a swap as carried at the DCO level
and at the clearing member level, which
could compromise the benefits of
clearing. Any such differences raise
both customer protection and systemic
risk concerns. From a customer
protection standpoint, if the terms of the
swap at the customer level differ from
those at the clearing level, then the
customer will not receive the full
transparency and liquidity benefits of
clearing, and legal and basis risk will be
introduced into the customer position.
Similarly, from a systemic perspective,
any differences could diminish overall
price discovery and liquidity and
increase uncertainties and unnecessary
costs into the insolvency resolution
process. The cross reference to
§ 39.12(b)(6) imports the specific
requirements that had been included in
proposed § 23.504(b)(6)(v). See below
for a more complete discussion of
§ 23.504(b)(6).
In response to the comment from
ISDA & SIFMA, the Commission
clarifies that swaps executed
anonymously on a SEF or traded on a
DCM prior to clearing by a DCO are not
subject to the requirements of § 23.504.
For those swaps that are not executed
anonymously, the swap trading
relationship documentation
requirements of § 23.504 would apply.
2. Viability of Long-Form Confirmations
as Swap Trading Relationship
Documentation—§ 23.504(a) & (b)
Proposed § 23.504(b) required that all
terms governing the trading relationship
between an SD or MSP and its
counterparty be documented in writing.
Proposed § 23.504(a) required that SDs
and MSPs establish policies and
procedures reasonably designed to
ensure that the required swap trading
relationship documentation be executed
prior to or contemporaneously with
entering into a swap transaction with
any counterparty. The Commission
notes the industry practice whereby
counterparties enter into a ‘‘long-form
confirmation’’ after execution of
transaction, where the long-form
confirmation contains both the terms of
the transaction and many, if not all,
terms usually documented in a master
agreement until such time as a complete

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master agreement is negotiated and
executed.
The Office of the Comptroller of the
Currency (OCC) commented that the
proposed rule may require master
agreements between all counterparties
even if a ‘‘long-form’’ confirmation
would sufficiently address legal risks,
creating a significant expense and
burden for end users. Similarly, IECA
commented that long form
confirmations that incorporate the terms
of a standard master agreement are
useful for certain new transaction
relationships. In this respect, IECA
recommends that § 23.504(b)(1) be
modified to make clear that terms can be
incorporated by reference.
In response to these comments, the
Commission has determined that so
long as a ‘‘long-form’’ confirmation
includes all terms of the trading
relationship documented in writing
prior to or contemporaneously with the
assumption of risk arising from swap
transactions, the ‘‘long-form’’
confirmation would comply with the
rules. However, the Commission is not
modifying the rule to permit execution
of a long-form confirmation subsequent
to the execution of a swap transaction,
which the Commission believes results
in some period, however short, in which
the terms of the trading relationship
between the parties are not in written
form. In response to the comment of
IECA, the rule does not prohibit
incorporation of terms by reference.
Thus, so long as the terms incorporated
by reference are in written form, the
documentation would be in compliance
with the rule.
3. Confirmation Execution Timing and
Swap Trading Relationship
Documentation—§ 23.504(a) & (b)(2)
Proposed § 23.504(b)(2) states that
swap trading relationship
documentation includes transaction
confirmations. Proposed § 23.504(a)
requires swap trading relationship
documentation to be executed prior to
or contemporaneously with entering
into any swap with a counterparty.
However, proposed § 23.501 provides
for specific post-execution time periods
for confirming swaps. This apparent
contradiction was identified by a
number of commenters.
In order to reconcile the apparent
contradiction, ISDA & SIFMA
recommended that confirmations be
excluded from swap trading
relationship documentation and be
treated solely in § 23.501. MFA also
recommended that confirmations be
treated solely in § 23.501, noting that if
forced to choose between quick
execution and the negotiation of all

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terms, the proposed rule’s timing
requirements might substantially limit
end users’ ability to engage in proper
risk management using tailored swaps.
MFA also commented that unless
modified, the rule might decrease the
number of transactions in the markets,
thereby decreasing liquidity and
increasing volatility.
IECA noted that many short term
transactions are executed orally and
often documented by recording, ending
before a written confirmation can be
completed. IECA also stated that if all
confirmations must be in writing, the
additional employee time cost for each
market participant would be substantial
and is not included in the annual cost
analysis. The Working Group also
commented that in some instances, it
may take longer to negotiate a written
confirmation for a swap or complete the
necessary mid- and back-office
processes than the planned duration of
the swap at issue. IECA recommended
that proposed § 23.504(b)(2) be modified
by adding at the end, ‘‘which
confirmations need not be in writing.’’
MetLife commented that the
requirement to document ‘‘all’’ terms of
a trading relationship is overly
burdensome. MetLife believes the
documentation subject to regulation
should be clarified to mean two sets of
documents: A master agreement, credit
support arrangement and master
confirmation agreement and second,
transaction specific confirmations. The
confirmations can include any trade
specific terms including specific
valuation methodologies or inputs not
already contained in the master
documentation. Differentiation would
assist with clarity for policies and
procedures and with the audit
requirements.
The Coalition for Derivatives EndUsers and The Working Group
commented that the rule may require
pre-trade negotiation and disadvantage
the party that is most sensitive to the
timing of the swap in such negotiations.
The Working Group believes such party
may have to accept less than favorable
terms in order to execute within its
desired time frame, and that the rule
would make it very difficult for parties
to enter into short-term swaps. The
Coalition for Derivatives End-Users
point out that end-users often trade by
auction and given the low probability of
winning, SDs will not want to incur the
expense of negotiating documents in
advance. The Coalition for Derivatives
End-Users also point out that even
where established relationships exist,
newly formed affiliates may trade based
on existing expectations, but without
the documents fully executed.

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On the other hand, CIEBA
commended the Commission for
including all terms in swap trading
relationship documentation. CIEBA
believes this approach will minimize
the potential for disputes over swap
terms during the confirmation process
caused by the introduction of new
‘‘standard’’ terms after the swap is
executed, which CIEBA stated is a
frequent occurrence. CIEBA
recommended that the Commission
confirm in its final rules that the
requirement that documentation ‘‘shall
include all terms governing the trading
relationship between the swap dealer or
major swap participant and its
counterparty’’ would require all terms to
be in writing prior to or at the time of
entering into the swap transaction,
except for terms such as price, quantity
and tenor, that are customarily agreed to
contemporaneously with entering into a
swap transaction. CIEBA recommended
that the rule require these remaining
terms to be documented in writing
contemporaneously with entering into
the swap transaction.
Having considered these comments,
the Commission has determined that
proposed § 23.504(a) should be clarified
with respect to the inclusion of swap
confirmations in swap trading
relationship documentation. The
Commission is therefore modifying the
proposed rule to make clear that the
timing of confirmations of swap
transactions is subject to § 23.501, and
that swap trading relationship
documentation other than confirmations
of swap transactions is required to be
executed prior to or contemporaneously
with entering into any swap transaction.
The Commission does not, however,
agree with commenters suggesting that
terms governing a swap or a trading
relationship need not be in writing. The
Commission recognizes that binding
swap contracts may be created orally
under applicable law and the rule does
not affect parties’ ability to enforce such
contracts. However, an orderly swap
market and the goal of reducing
operational risk require that such oral
contracts be appropriately documented
as soon as possible. In response to the
comments of CIEBA, the Commission
believes the modifications to the
confirmation time periods in § 23.501
discussed below adequately address
CIEBA’s concerns. Given the foregoing,
the Commission is modifying proposed
§ 23.504(a) to read as set forth in the
regulatory text of this rule
4. Swap Trading Relationship
Documentation Among Affiliates
The proposed regulations did not
include an exemption or different rules

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for documenting swap trading
relationships between affiliates. Shell
Energy North America (Shell)
commented that an end user trading
with an affiliated SD/MSP does not have
valuation, trade, and documentation
risks that nonaffiliated entities may
have, that such transactions only
allocate risk within the legal entity, and,
accordingly, affiliate transactions
should be exempted from the
documentation rules.
The Commission is not persuaded
that the risk of undocumented (and
therefore objectively indiscernible)
terms governing swaps is obviated
because the trading relationship is with
an affiliate. The Commission has
regulatory interests in knowing or being
able to discover the full extent of a
registered SD’s or MSP’s risk exposure,
whether to external or affiliated
counterparties, and is not modifying the
rule in response to this comment. The
Commission observes that to the extent
certain risks are not present in affiliate
trading relationships, the
documentation of the terms related to
such risks should be non-controversial
and easily accomplished. For example,
because affiliates are generally under
common control, the documentation of
an agreement on valuation
methodologies should not require
extensive negotiation as it may between
non-affiliated counterparties.
5. Use of ‘‘Enforce’’ in Proposed
§ 23.504(a)
Proposed § 23.504(a) required that
each SD and MSP establish, maintain,
and enforce policies and procedures
designed to ensure that prior to or
contemporaneously with entering into a
swap transaction, it executes swap
trading relationship documentation that
complies with the rules.
CEIBA questions what is intended by
the requirement for SDs and MSPs to
‘‘enforce policies and procedures’’ in
§ 23.504(a). CEIBA believes the use of
the term ‘‘enforce’’ with respect to SDs’
and MSPs’ procedures is contrary to the
Dodd-Frank Act, because it implies that
such procedures have the force of law
and can be imposed on counterparties
absent mutual agreement. CIEBA
recommended that the word ‘‘enforce’’
should be deleted.
Having considered this comment, the
Commission is modifying the proposed
rule by replacing the term ‘‘enforce’’
with the term ‘‘follow.’’ The intent of
the term ‘‘enforce’’ in the proposed rule
was to require SDs and MSPs to in fact
follow the policies and procedures
established to meet the requirements of
the proposed rule, rather than to enforce

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its internal policies and procedures
against third parties.
6. Payment Obligation Terms—
§ 23.504(b)
In the Documentation NPRM, the
Commission asked whether the
proposed rules should specifically
delineate the types of payment
obligation terms that must be included
in the trading relationship
documentation.
CIEBA commented that the
Commission need not dictate every term
that must appear in swap trading
relationship documentation, and that it
is important to defined benefit plans to
be able to negotiate payment obligation
terms in their documentation.
The Commission agrees with CIEBA
on this issue and has not modified the
rule to further define the types of
payment obligation terms required to be
specified in swap trading relationship
documentation.

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7. Additional Requirements for Events
of Default and Termination Events
In the Documentation NPRM, the
Commission asked whether the
requirement for agreement on events of
default or termination events should be
further defined, such as adding
provisions related to cross default.
The Coalition for Derivatives EndUsers commented that the ISDA
documentation sufficiently addresses
these issues and that parties should be
allowed to negotiate these terms
bilaterally so the Commission need not
further define such terms. CIEBA agreed
that parties should be allowed to
negotiate these terms bilaterally so the
Commission need not further define
such terms.
The Commission agrees with the
commenters on this point and has not
modified the rule to further define the
types of events of defaults and
termination events required to be
specified in swap trading relationship
documentation.
8. Senior Management Approval of
Documentation Policies and
Procedures—§ 23.504(a)
Proposed § 23.504(a) required SDs’
and MSPs’ documentation policies and
procedures to be approved in writing by
senior management of the SD or MSP.
The Working Group raised a concern
that this requirement will be used to the
negotiating advantage by SDs and MSPs
who will claim that the form of
documentation had been approved for
regulatory purposes and cannot be
changed without a prohibitively lengthy
internal approval process. In addition,
The Working Group argued that rigid

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documentation standards that must be
approved by senior management could
severely limit the flexibility of SDs,
ending the ability of end users to obtain
customized swaps in a timely manner.
The Working Group recommended that
the Commission allow current practice
to continue where trading managers can
authorize deviations from standard
trade documentation so long as such
amendment does not violate the
overarching policies and procedures set
by internal management authorized by
the governing body.
MFA similarly commented that the
senior management approval
requirement, together with the
cumulative effect of the proscriptive
documentation rules, may lead to the
institutionalization of the terms favored
by SDs and MSPs. As a result, MFA is
concerned that SDs and MSPs will
compel their customers to accept
unfavorable terms or forego timesensitive market opportunities.
Accordingly, MFA recommended that
each party should be free to assess
requisite approval levels for various
kinds of swap activity based on its
unique organizational structure.
IECA commented that review by
senior management is an unnecessary
use of management time. Most SDs and
MSPs have risk management policies
that provide a framework for elevating
issues through levels of management as
applicable. By requiring senior
management to review too many
modifications, many that can be
reviewed by lower levels with
appropriate expertise, it is likely that
senior management may actually miss
the major issues that should get
attention. Also, IECA argued that the
chilling effect of the rule could stifle
risk management efforts, innovation,
and increase counterparty risk as review
processes become too rigid in order to
comply with regulatory requirements.
The Commission is not modifying the
rule based on these comments. The
commenters’ concerns are overly broad
because the rule requires senior
management of SDs and MSPs to
approve the ‘‘policies and procedures’’
governing swap trading documentation
practices, not to approve each
agreement, transaction, or modifications
thereto. The rule does not prohibit SDs
and MSPs from establishing policies
and procedures instituting a framework
for elevating issues through a hierarchy
of management as each sees fit, so long
as such framework has been approved
in writing by senior management.

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9. Dispute Resolution Procedures—
§ 23.504(b)(1)
Proposed § 23.504(b)(1) required SDs’
and MSP’s swap trading relationship
documentation to include dispute
resolution procedures. In the
Documentation NPRM preamble, the
Commission asked whether the
proposed rules should include specific
requirements for dispute resolution
(such as time limits), and if so, what
requirements are appropriate for all
swaps.
ISDA & SIFMA objected that the
requirement that the parties agree to
dispute resolution procedures is not
authorized by the Dodd-Frank Act and
that denying parties to a swap access to
the judicial system is not a measure that
should be taken lightly or without
Congressional consideration. Similarly,
IECA believes the proposed regulations
for dispute resolution are too specific
and could violate separation of powers
under the Constitution.
On the other hand, CIEBA responded
that the rules should not include
specific requirements, with the
exception of requiring the availability of
independent valuation agents that are
agreed upon by the parties. CIEBA
recommended that the Commission
propose only a set of fair and evenhanded principles for resolving
disputes.
In response to these comments, the
Commission is modifying the proposed
rule to delete the term ‘‘procedures’’
from the requirement that swap trading
relationship documentation include
‘‘terms addressing * * * dispute
resolution procedures.’’ The
Commission notes that the rule as
proposed was not intended to require
SDs and MSPs to agree with their
counterparties on specific procedures to
be followed in the event of a dispute,
but rather to require that dispute
resolution be addressed in a manner
agreeable to both parties, whether it be
in the form of specific procedures or a
general statement that disputes will be
resolved in accordance with applicable
law. The Commission believes that
some form of agreement on the handling
of disputes between SDs, MSPs, and
their counterparties will be essential to
ensuring the orderly operation of the
swaps market.
10. Documentation of Credit Support
Arrangements—§ 23.504(b)(3)
Proposed § 23.504(b)(3) required that
the swap trading relationship
documentation include certain specified
details of the credit support
arrangements of the parties.
Better Markets recommended that the
Commission revise the proposed rule to

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require documentation of the terms
under which credit may be extended to
a counterparty by a registrant in the
form of forbearance from funding of
margin and the cost of such credit
extension, arguing that such credit
extension and the cost thereof, which is
embedded in the price of a swap,
seriously impairs the transparency of
the market by concealing the true price
of a swap divorced from the cost of
credit.
Michael Greenberger commented that
leaving terms and rules regarding credit
extension and transactional fees to
subjective desires of market participants
will be counterproductive. Mr.
Greenberger supports the comment
letter by Better Markets, Inc., which
urges the Commission to propose
definitive rules requiring
documentation of credit extension and
transactional fees.
COPE asked the Commission to clarify
that the rule requires trading
documentation to include any
applicable margin provisions and
related haircuts, but does not require
margining and haircuts unless agreed by
the parties. IECA echoed the COPE
comment, stating that the proposed rule
is unclear whether parties can enter into
a swap that requires no margin, as is
contemplated in the Dodd Frank Act.
CIEBA commented that proposed
§ 23.504(b)(3) should be clarified by
adding the words ‘‘if any’’ to the end of
each of subsections (i) through (iv) to
make clear that end users are not
required to post initial margin or allow
rehypothecation.
Having considered these comments,
the Commission is of the view that the
proposed rule was not intended to
require margin or related terms where
such are not required pursuant to other
Commission regulations or the
applicable regulations adopted by
prudential regulators. The proposed rule
was intended to require written
documentation of any credit support
arrangement, whether that be a
guarantee, security agreement, a
margining agreement, or other collateral
arrangement, but only to require written
documentation of margin terms if
margin requirements are imposed by
Commission regulations, the regulations
of prudential regulators, or are
otherwise agreed between SDs, MSPs,
and their counterparties. Thus, in
response to commenters’ requests for
clarification, the Commission is
modifying the proposed rule as
recommended by CIEBA by adding ‘‘if
any’’ at the end of each of subsections
(i) through (iv) of § 23.504(b)(3). The
Commission expects that other forms of
credit support arrangements will be

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documented in accordance with the rule
as well.
However, the Commission is not
revising the rule to enumerate the terms
of any extension of credit that are
required to be included in the
documentation, as recommended by
Better Markets. The Commission
believes that the rule, as proposed and
as adopted by this release, already
requires documentation of initial and
variation margin requirements, which
necessarily will entail documentation of
any extension of credit, i.e., the
documentation will reflect whether
margining is subject to any credit
extension threshold. Thus, to the extent
applicable, credit support arrangements
must include, at a minimum, the
maximum amount of credit to be
extended, the method for determining
how much credit has been extended,
and any term of the facility and early
call rights. During negotiations
regarding credit support arrangements,
counterparties would be well served to
address issues related to the embedded
cost of credit. The Commission also
observes that transactional fees are
required to be disclosed under § 23.431
of the Business Conduct Standards for
SDs and MSPs Dealing with
Counterparties.8
11. Legal Enforceability of Netting and
Collateral Arrangements—§ 23.504
The proposed regulations did not
require SDs and MSPs to document the
legal enforceability of netting and
collateral arrangements in the swap
trading relationship documentation.
In this regard, Volvo Financial
Services Europe (Volvo) recommended
that the Commission adopt a rule that
states clearly that credit support
arrangements should include legal
opinions (updated annually) verifying
the perfection of security interests in
collateral supporting net exposures.
Volvo argued that lack of legal certainty
contributed to losses in the 2008
financial crisis where counterparties
discovered that un-perfected security
interests resulted in the unenforceability
of pledged collateral. Specifically, Volvo
recommended that the Commission
revise the proposed rules to require: (i)
Mandatory collateralization, (ii) robust
8 See Subpart H of Part 23 of the Commission’s
Regulations, Business Conduct Standards for Swap
Dealers and Major Swap Participants with
Counterparties, 77 FR 9734, 9824 (Feb. 17, 2012).
In addition, to the extent that any cost of credit may
be embedded in the price of a swap, the
Commission believes that the disclosure of the midmarket mark, which must be disclosed when an SD
or MSP discloses the price of a swap, will facilitate
greater transparency concerning the embedded cost
of credit. Id. at 9765–66 (discussing new
§ 23.431(a)(3)(i)).

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legal opinions (updated annually) on
enforceability of collateral
arrangements, (iii) zero risk weighting if
robust legal opinions are obtained, and
(iv) regular collateral audits by the
Commission to ensure that market
participants perform the perfection
formalities of security interests.
Although the Commission agrees with
the commenter that SDs and MSPs
should support their collateral
arrangements with all necessary legal
analysis, the Commission has not made
any changes to the proposed rule based
on this comment because the
Commission believes (1) Volvo’s
concerns regarding margining of
uncleared swaps are addressed in the
Commission’s proposed margin rules, or
the prudential regulators’ proposed
margin rules, as applicable, and (2)
Volvo’s concerns regarding the legal
enforceability of collateral arrangements
is addressed in risk management rules
adopted by the Commission in
February, 2012.9
12. Valuation Methodology
Requirement—§ 23.504(b)(4)
Proposed § 23.504(b)(4) required that
the swap trading relationship
documentation of each SD and MSP
with their counterparties include an
agreement in writing on the methods,
procedures, rules, and inputs for
determining the value of each swap at
any time from execution to the
termination, maturity, or expiration of
such swap.
a. Comments Received
Twenty of the comment letters
received by the Commission addressed
the proposed valuation requirement in
§ 23.504(b)(4). Many of those comments
raised similar concerns about the
proposal, as summarized thematically,
below:
The Working Group, ISDA & SIFMA,
FSR, White & Case, Morgan Stanley,
COPE, MFA, IECA, FHLBs, Hess Energy
Trading Company, LLC (Hess),
Riverside Risk Advisors LLC, and
Edison Electric Institute (EEI)
commented that valuation disputes
provide valuable information to both
market participants and regulators about
pricing dislocations and associated
credit risks and a static, rigid valuation
methodology necessarily produces
values that become increasingly
outdated over time and could impede
9 See 17 CFR 23.600(c)(4)(v)(A) requiring SDs and
MSPs to establish policies and procedures to
monitor and manage legal risk, including policies
and procedures that take into account
determinations that transactions and netting
arrangements entered into have a sound legal basis.
77 FR 20128, 20206 (Apr. 3, 2012).

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the transmission of this important risk
information.
The Working Group, ISDA & SIFMA,
FSR, Markit, Freddie Mac, COPE, MFA,
FHLBs, CIEBA, EEI, and the Coalition of
Derivatives End Users commented that
requiring agreement on valuation
methodologies and set alternative
methods will materially increase the
pre-execution negotiating burden
without an offsetting benefit and
agreement on models for complex swaps
would require negotiations that could
take sophisticated professionals months
to complete, if such could be completed
at all.
The Working Group, FSR, OCC, and
Markit commented that it is impossible
to state valuation methodologies with
the required specificity without
disclosing proprietary information about
the parties’ internal models.
OCC and Hess commented that
requiring agreement on valuation
methodologies may discourage
development of more refined, dynamic
swap valuation models, which would
lead to use of less sophisticated or
vanilla models that are less accurate
than their proprietary counterparts.
ISDA & SIFMA and IECA commented
that agreeing on a methodology that
could survive the loss of any input to
the valuation is wholly unworkable,
will diminish standardization as parties
negotiate bespoke approaches to
valuation, and will undermine legal
certainty if the valuation methodology is
determined not to be adaptable to all
circumstances.
COPE, FHLBs, MFA, EEI, and Markit
commented that there is no business
need for swap-by-swap valuation
formulas because valuation of exposures
with counterparties is usually
conducted on a portfolio basis and
documented in a master agreement, and
that agreement on swap-by-swap
valuation formulas also is likely to
disrupt trading.
Several commenters also
recommended alternative approaches to
the valuation requirement. The Working
Group, Morgan Stanley, MFA, IECA,
FHLBs, CIEBA, and MetLife suggested
that the focus of the rule should be on
the valuation dispute resolution process
rather than valuation methodologies
that include fallback alternatives and
other static terms. MetLife specifically
recommended that the Commission
establish ‘‘mandatory dispute resolution
guidelines’’ that include a requirement
for a third party arbiter after a set period
of time.
With respect to valuation
methodologies, CIEBA and Chris
Barnard recommended that the rule
require SDs to value swaps on the basis

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of transparent models that can be
replicated by their counterparty. The
Working Group requested that the
Commission clarify that parties are
permitted to use different valuation
methodologies under different
circumstances (i.e., mid-market
valuation for collateral purposes and
replacement cost valuation for
terminations). Markit and MFA
requested that the Commission clarify
that parties may rely on a more general
set of inputs, models, and fallbacks for
valuation purposes, rather than the
exhaustive fallbacks required by the
rule. White & Case and IECA
recommended that the Commission
permit parties to change the valuation
method and inputs as the market
changes over time. Freddie Mac
suggested that the rule should provide
that the valuation methodology
requirement can be satisfied by
executing industry standard
documentation that provides for a
commercially reasonable valuation
methodology. The Coalition of
Derivatives End Users, IECA, and Chris
Barnard recommended that proprietary
inputs be allowed under the rule.
More generally, FSR recommended
that the Commission withdraw the
proposed valuation requirement until
the Commission has the time to conduct
a thorough study, including a
comprehensive cost-benefit analysis,
whereas Markit recommended that the
rule be modified to explicitly allow
parties to comply with the rule by
agreeing that an independent third party
may provide any or all of the elements
required to agree upon the valuation of
swaps. The Coalition of Derivatives End
Users recommended that the
Commission change the rule to require
SDs and MSPs to provide commercially
reasonable information to substantiate
its valuations upon an end user’s
request, instead of requiring extensive
pre-trade documentation of valuation
methodology.
The Working Group recommended
that the Commission modify the rule to
provide that the valuation requirements
for cleared swaps or swaps executed on
a trading facility should be satisfied by
referencing the price provided by the
relevant DCO or facility, while Markit
recommended that the Commission
clarify that neither prices of recently
executed transactions or any other
single pricing input should be regarded
as preferable inputs for the valuation of
swaps and explicitly permit parties to
use pricing sources other than DCOs,
even for cleared swaps.
A number of commenters supported
the rule. Chris Barnard strongly
supported the requirement that the

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55911

agreed methods, procedures, rules and
inputs constitute a ‘‘complete and
independently verifiable methodology
for valuing each swap entered into
between the parties,’’ and that the
methodology must include alternatives
‘‘in the event that one or more inputs to
the methodology become unavailable or
fail.’’ Mr. Barnard also supported the
requirement for SDs and MSPs to
‘‘resolve a dispute over the valuation of
a swap within one business day.’’
Michael Greenberger generally
supported the valuation methodology
rule to promote transparency and
financial integrity. MetLife agreed with
the proposal that parties should
determine upfront what the valuation
methodologies will be to help mitigate
disputes, but believes that disputes will
not be eliminated by the rule.
CIEBA commended the Commission
for requiring objective and specific
valuation mechanisms in swaps
documentation and believes that this
requirement will limit the potential for
valuation disputes. However, CIEBA
believes requiring objective and specific
valuation mechanisms is not enough. In
addition to requiring SDs to value swaps
using transparent models that can be
replicated by their counterparties,
CIEBA recommended that the
Commission require the mechanisms or
procedures by which disputes are
resolved to be fair and even-handed and
should not override existing contractual
protections negotiated by the parties.
b. Commission Response
Having considered these comments,
the Commission is modifying and
clarifying the proposal in a number of
ways. First, in response to concerns
from non-financial entities regarding the
cost and the challenges of pre-execution
negotiation, the Commission is
modifying the rule to require valuation
documentation only at the request of
non-financial entities. In other words,
non-financial entities will have the
ability, but not the obligation, to enter
into negotiations on valuation with their
SD or MSP counterparties. As discussed
below, the rule will continue to apply
to SDs, MSPs, and financial entities.
While the Commission agrees with
commenters regarding the importance of
using transparent models that can be
replicated, the Commission recognizes
concerns about protecting proprietary
information used in internal valuation
models. Thus, the Commission has
modified the rule to clarify the
requirement that the agreement on
valuation use objective criteria, such as
recently-executed transactions and
valuations provided by independent
third parties. In this regard, the

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Commission agrees with The Working
Group that the valuation requirements
for cleared swaps or swaps executed on
a trading facility would be satisfied by
referencing the price provided by the
relevant DCO, SEF, or DCM.
Additionally, the Commission
confirms commenters’ understanding
that proprietary models may be used for
purposes of valuation, provided that
both parties agree to the use of one
party’s confidential, proprietary model.
An agreement by the parties to use one
party’s confidential, proprietary model
is sufficient to satisfy the requirements
of § 23.504(b)(4)(i), including the
requirement that the parties agree on the
methods, procedures, rules and inputs
for determining the value of each swap.
On the other end of the spectrum from
simply agreeing to use one party’s
model, counterparties may, if they
choose, elect to negotiate precisely
which model and inputs will govern the
valuation of their swaps. Counterparties
would be free to elect either of these
options or many other possibilities
under the terms of § 23.504(b)(4) so long
as the resulting valuations are sufficient
to comply with the margin requirements
under section 4s(e) of the CEA and the
risk management requirements under
section 4s(j) of the CEA, and there is a
dispute resolution process in place or a
viable alternative method for
determining the value of the swap.
Moreover, the Commission is modifying
proposed § 23.504(b)(4)(iii) to clarify
that confidential, proprietary model
information is protected under the rule.
To address concerns that the use of
the phrase ‘‘methods, procedures, rules,
and inputs’’ could be interpreted as
requiring agreement on the precise
model and all inputs for valuing a swap,
the Commission is modifying the rule
text to require that parties agree on ‘‘the
process, including methods, procedures,
rules, and inputs for determining the
value of each swap.’’
Importantly, the Commission is
responding to commenters’ concerns
about the requirement that the valuation
documentation be stated with sufficient
specificity to allow the SD, MSP, the
Commission, and any prudential
regulator to value the swap
‘‘independently in a substantially
comparable manner.’’ Commenters
viewed this standard as problematic
because they read it to require
disclosure of proprietary information or
to prevent the updating or revising of
models, among other things.
Accordingly, the Commission has
determined to remove this provision
from the final rule. So long as the
valuation documentation is stated with
sufficient specificity to determine the

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value of the swap for purposes of
complying with the requirements of the
rule—namely, the margin and risk
management requirements under
section 4s of the CEA and Part 23 of
Commission regulations—the
requirements of § 23.504(b)(4)(i) would
be met.
Under this approach, parties may rely
on a general set of methods, inputs,
models, and fallbacks for valuation
purposes so long as the process is
sufficient to determine the value of a
swap. In response to concerns that the
proposal would require a methodology
that would be static or rigid over time,
the Commission is further modifying the
rule to make explicitly clear that the
parties may agree on a process,
including methods or procedures for
modifying or amending the valuation
process as circumstances require and as
the market changes over time.10
The Commission does not disagree
with commenters that differences in
valuations can provide valuable
information to both market participants
and regulators about pricing
dislocations and associated credit risks.
Moreover, the objective is not to
produce values that become
increasingly outdated over time. Rather,
the Commission believes that by
requiring agreement between
counterparties on the methods and
inputs for valuation of each swap,
§ 23.504(b)(4) will assist SDs and MSPs
and their counterparties to arrive at
valuations necessary for margining and
internal risk management, and to
resolve valuation disputes in a timely
manner, thereby reducing risk.
Agreement between SDs, MSPs, and
their financial entity counterparties on
the proper daily valuation of the swaps
in their swap portfolio is an essential
component of the Commission’s margin
proposal. Under proposed § 23.151,
non-bank SDs and MSPs must
document the process by which they
will arrive at a valuation for each swap
for the purpose of collecting initial and
variation margin in compliance with the
requirements of § 23.504. All non-bank
SDs and MSPs must collect variation
margin from their non-bank SD, MSP,
and financial entity counterparties for
uncleared swaps on a daily basis.
Variation margin requires a daily
valuation for each swap. For swaps
between non-bank SDs and MSPs and
10 To the extent that one or both parties foresee
that the valuation method or inputs agreed for a
swap or a class or category of swaps will likely
require modification, parties would be well-served
to agree in advance in their swap trading
relationship documentation on an appropriate
arrangement for accommodating such
modifications.

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non-financial entities, no margin is
required to be exchanged under
Commission regulation, but the nonbank SDs and MSPs must calculate a
hypothetical variation margin
requirement for each uncleared swap for
risk management purposes under
proposed § 23.154(b)(6).11 The daily
valuation agreed to by the
counterparties is necessary for
compliance with the margin
requirements proposed by the
Commission and the prudential
regulators under section 4s(e) of the
CEA.
In addition to the fact that arriving at
a daily valuation is one of the building
blocks for the margin rules, timely and
accurate valuations are essential for the
risk management of swaps by SDs and
MSPs. Under § 23.600(c)(4)(i), the
Commission required that SDs and
MSPs have risk management policies
and procedures that take into account
the daily measurement of market
exposure, along with timely and reliable
valuation data. The valuation
documentation requirements under
§ 23.504(b) and the risk management
provisions of § 23.600 work together to
ensure that SDs and MSPs have the
most accurate and reliable valuation
data available for internal risk
management and for collateralization of
risk exposures with counterparties. This
is not to say that valuation disputes can
be prevented entirely or that these
disputes do not, at times, offer useful
insight into the marketplace. Indeed,
risk management personnel and
management within the SD or MSP
should pay particular attention to
different valuations for the same swap
originating within their organization or
from outside the entity. For these
purposes, the Commission expects that
valuation disputes that are not resolved
in accordance with these rules be
elevated to senior management in the
firm.12 However, the final rule reflects
the recognition that accurate and
11 SDs and MSPs that are banks are subject to the
requirements of section 4s(i). In addition, under the
prudential regulators’ margin proposal, SDs and
MSPs that are banks would be required to have
documentation in place that specifies the ‘‘(1) [t]he
methods, procedures, rules, and inputs for
determining the value of each swap * * * for
purposes of calculating variation margin
requirements; and (2) [t]he procedures by which
any disputes concerning the valuation of swaps
* * * or the valuation of assets collected or posted
as initial margin or variation margin, may be
resolved.’’ Margin and Capital Requirements for
Covered Swap Entities, 76 FR 27564, 27589 (May
11, 2011).
12 Under § 23.600(c)(1)(1)(iii), the risk
management program requires SDs and MSPs to
have policies and procedures for detecting breaches
of risk tolerance limits set by an SD or MSP, and
alerting supervisors within the risk management
unit and senior management, as appropriate.

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reliable valuations are the foundation of
margining and risk management.
The Commission also agrees with
commenters that the trading
documentation should be permitted to
focus on the valuation dispute
resolution process rather than
exclusively on fallback methodologies,
and has further modified the rule to
allow for either fallback methodologies
or agreement on a dispute resolution
process, but does not think it necessary
or desirable to specify a standard
dispute resolution process at this time,
as requested by MetLife.
Lastly, the Commission wishes to
distinguish its use of the terms
‘‘valuation’’ under section 4s(i) of the
CEA and ‘‘daily mark’’ under section
4s(h). In its final rules for Business
Conduct Standards for SDs and MSPs
with Counterparties, the Commission
explained that the daily mark for
uncleared swaps represented the midmarket mark of a swap provided by an
SD or MSP to its counterparty.13 The
mid-market mark of the swap represents
an objective value that provides
counterparties with a baseline to assess
swap valuations for other purposes.14
By contrast, in § 23.504(b)(4), the
Commission is requiring that SDs,
MSPs, and their counterparties agree to
a process for determining the current
market value or net present value of a
swap for purposes of collateralizing the
risk posed by the swap and internal risk
management. The critical difference
being the agreement of both
counterparties to the process for
determining the value of a swap, rather
than just the SD’s or MSP’s calculation
of the mid-market value of the swap.

sroberts on DSK5SPTVN1PROD with RULES

13. Application to Cleared Swaps—
§ 23.504(b)(6)
Proposed § 23.504(b)(6) required the
swap trading relationship
documentation of SDs and MSPs to
include certain items upon acceptance
of a swap for clearing by a DCO,
including documentation of each
counterparty’s clearing member, the
date and time the swap was cleared, that
the swap conforms to the terms of the
DCO’s templates, and that the clearing
member’s books reflect the terms of the
swap at the DCO. The proposed
regulation also required the
documentation to contain a statement
13 See 77 FR 9734, 9767–68 (Feb. 17, 2012); see
also Swap Data Recordkeeping and Reporting
Requirements, 77 FR 2136, (Jan. 13, 2012) (defining
‘‘valuation data’’ by reference to section
4s(h)(3)(B)(iii) of the CEA and § 23.431.
14 See § 23.431(d). SDs and MSPs must provide a
daily mark for uncleared swaps that is the midmarket mark of the swap which does not include
amounts for profit, credit reserve, hedging, funding,
liquidity, or any other costs or adjustments.

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that the original swap is extinguished
and replaced by a swap subject to the
rules of the DCO.
ISDA & SIFMA urged the Commission
to clarify that the term ‘‘swap trading
relationship documentation’’ is used to
describe only bilateral documentation
between parties to uncleared swaps.
ISDA & SIFMA recommend that the
Commission not finalize § 23.504(b)(6)
because ISDA & SIFMA (1) Saw no need
to record the identity of its
counterparty’s clearing member; (2)
recommended that the obligation to
provide notice of the date and time of
clearing and the identity of the DCO is
deemed satisfied when the counterparty
receives a clearing report from the DCO;
(3) objected to notifying the
counterparty of the SD’s or MSP’s
clearing member as that information
may be sensitive and is not material to
the counterparty; and (4) saw no need
to state facts about the counterparty’s
cleared swap in trading relationship
documentation.
CME commented that existing
clearing houses use an agency model
with FCMs acting as the agent and
guarantor for customers, providing
numerous benefits. To preserve the
agency structure, CME requested that
§ 23.504(b)(6)(v)(B) be changed to read
‘‘The original swap is replaced by equal
and opposite swaps with the derivatives
clearing organization.’’
CME further commented that under
the rule the anonymity of the customer
of the clearing member on the other side
of the trade to the clearing member will
be lost. CME does not believe the
anonymity needs to be lost to serve the
purposes of the documentation rules.
MFA commented that one of the
benefits of central clearing is
anonymity, such that once parties
submit a swap for central clearing, it
need not retain or know any information
about the counterparty. MFA
recommended that the final rule not
require any identifying information
about the parties and their firms.
The Commission has considered the
commenters’ recommendation to delete
the clearing record provisions of
§ 23.504(b)(6)(iii) and (iv) and agrees
that there is no need to include in the
trading documentation a record of the
names of the clearing members for the
SD, MSP, or counterparty. The
Commission notes that the new
applicability provision added to
§ 23.504(a)(1) provides that the swap
trading relationship documentation rule
does not apply to swaps executed
anonymously on a DCM or SEF, but
believes that anonymity may also be
important in the execution of swaps
executed off-facility, such as in the

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execution of block trades with asset
managers where allocation may take
place following acceptance of the block
trade for clearing by a DCO. Once a
swap is accepted for clearing, the
identity of a counterparty’s clearing
member is no longer relevant and
requiring such a record has the
possibility to undermine the anonymity
of central clearing. Therefore, those
provisions have been deleted from the
final rule. Similarly, § 23.504(b)(6)(i)
and (ii) have been removed because
those records will be captured under the
SD and MSP recordkeeping
requirement, § 23.201(a)(3), and the
Commission believes those records are
sufficient.
With regard to proposed
§ 23.504(b)(6)(v), the Commission has
retained but streamlined the provision,
as recommended by ISDA & SIFMA and
CME, to include only the text in
§ 23.504(b)(6) set forth in the regulatory
text of this rule.
The Commission continues to believe
that swap trading relationship
documentation should make clear the
effects of clearing a trade with a DCO;
i.e., that the original swap is
extinguished and replaced with a swap
facing the DCO that conforms to the
terms established under the DCO’s
rules. The Commission has determined
that an orderly swap market requires
this notice to clarify that the terms of
the swap under a DCO’s rules are
definitive and trump any contradictory
terms that may have been included in
the swap as executed between an SD or
MSP and its counterparty.15
14. Annual Audit of 5 Percent of Swap
Trading Relationship Documentation—
§ 23.504(c)
Proposed § 23.504(c) required that
SDs and MSPs, at least once during each
calendar year, have an independent
internal or external auditor examine no
less than 5 percent of the swap trading
relationship documentation created
during the previous twelve month
period to ensure compliance with
Commission regulations and the written
policies and procedures established
pursuant to § 23.504.
In response to the proposal, ISDA &
SIFMA, FSR, and Hess urged the
Commission to adopt a principles-based
approach to the audit requirement and
only require SDs and MSPs to conduct
periodic audits sufficient to identify
material weaknesses in their
documentation policies and procedures.
15 This provision corresponds to § 39.12(b)(6),
which establishes parallel requirements for DCOs
clearing swaps. Both proposals have been modified
in a similar manner for the final rules.

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Similarly, IECA recommended that the
Commission require an audit of a
random sample, rather than 5 percent,
which IECA found too costly.
Commenting on a different aspect of the
proposal, Michael Greenberger thought
that allowing internal audits, as
opposed to external, could undermine
transparency and accountability.
In response to commenters and as a
cost-saving measure, the Commission is
modifying the proposed rule in
accordance with the alternative
recommended by ISDA & SIFMA, FSR,
and Hess by removing the 5 percent
audit requirement and replacing it with
a more general requirement that SDs
and MSPs conduct periodic audits
sufficient to identify material
weaknesses in their documentation
policies and procedures. With respect to
Mr. Greenberger’s comment, the
Commission continues to believe that
internal auditors are sufficient as a
record of the results of each audit will
be retained and can be reviewed by
Commission staff during examinations
of the SD or MSP or investigations by
Commission enforcement staff.
15. Dispute Reporting—§ 23.504(e)
The proposed regulations required
SDs and MSPs to notify the Commission
and any applicable prudential regulator
or the SEC of any swap valuation
dispute not resolved within one
business day, if the dispute is with a
counterparty that is an SD or MSP, or
within five business days if the dispute
is with any other counterparty.
In response to the proposal, ISDA &
SIFMA recommended that the
Commission should limit reporting to
material disputes at the portfolio level,
urging the Commission to accept the
materiality thresholds for reporting
established by the OTC Derivatives
Supervisors’ Group process, which
require reporting of disputes above a
certain dollar threshold and only after
such disputes have had a proper time to
mature. ISDA & SIFMA argued that rule
as proposed will be overly burdensome
and the over-reporting will cause
substantial informational ‘‘noise.’’
MFA strongly agreed that the
Commission should adopt rules related
to valuation disputes and their timely
resolution, but questioned whether
regulators need notice of every
unresolved dispute regardless of their
materiality from a systemic risk or
regulatory perspective. MFA also
commented that the proposed dispute
resolution period of one business day
for unresolved disputes among SDs and
MSPs is too short, arguing that valuation
disputes may require discussion and
negotiation by and among several levels

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of management and many different
operational teams at an SD or MSP.
MFA thus recommended that the
Commission provide for five business
days to resolve a valuation dispute in an
account before they must give regulators
notice and only require notice to
regulators where the amount in dispute
exceeds either (a) $100 million, or (b)
both 10 percent of the higher of the
parties’ valuation and $50 million. In
addition, MFA strongly believes that
any notices of disputes should be
treated confidentially by regulators, and
not be subject to public access.
IECA argued that the proposed rule
should be removed because it creates an
unlevel playing field by creating
pressure on a party that wants to avoid
reporting to concede in any dispute.
MetLife agreed that the Commission
should establish strict timelines for
reporting disputes, but argued that the
periods proposed are too short to allow
parties to resolve disputes on their own.
MetLife recommended that disputes
between SD/MSPs should be given 3
days before reporting is required and be
subject to a materiality condition of 10
percent of the calculated valuation of
the swap in dispute.
Hess recommended that the
Commission limit reporting to material
disputes dependent on the risk the
dispute may pose to the financial
system taking into account the size of
the dispute relative to the size of the
trade, the collateral involved, and the
size of the parties involved.
For the reasons submitted by these
commenters, the Commission has
determined that only material swap
valuation disputes should be reported to
the Commission, any applicable
prudential regulator, and the SEC (with
regard to swaps defined in section
1a(47)(A)(v) of the Act). Thus, the
Commission is modifying the rule to
provide that SDs and MSPs shall
provide notice of any swap valuation
dispute in excess of $20,000,000 (or its
equivalent in any other currency).16 The
Commission has determined that the
$20,000,000 materiality threshold for
reporting is sufficiently high to
eliminate unnecessary ‘‘noise’’ from
over-reporting, but not so high as to
eliminate reporting that the Commission
may find of regulatory value, such as a
large number of relatively small
16 Compare with ESMA Draft Technical
Standards, Article 4 RM, subsection 2, (stating that
‘‘counterparties shall report to the competent
authority * * * any disputes between
counterparties relating to an OTC derivative
contract, its valuation or the exchange of collateral
for an amount or a value higher than EUR 15
million and outstanding for at least 15 business
days.’’)

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disputes that in aggregate could provide
the Commission with information
regarding a widespread market
disruption.
In addition, the Commission is
modifying the requirement for SDs and
MSPs to report unresolved valuation
disputes within one business day if the
dispute is with a counterparty that is a
SD or MSP. SDs and MSPs now will be
required to report unresolved valuation
disputes within three business days. For
disputes with counterparties that are not
SDs or MSPs, the rule is unchanged
from the proposal, requiring that
unresolved disputes be reported within
five business days.
The Commission has also determined
that the reporting requirement of the
rule better fits with the resolution
requirement under the portfolio
reconciliation rule at § 23.502 and has
renumbered the rule as § 23.502(c). The
Commission notes that the reporting
requirement under the rule as adopted
is distinct from the swap valuation
methodology requirement under
§ 23.504(b)(4), discussed above, and the
time period requirement for SDs and
MSPs to resolve swap valuation
disputes in § 23.502, discussed below.
16. Orderly Liquidation Termination—
§ 23.504(b)(5)
Proposed § 23.504(b)(5) required SDs
and MSPs to include in their swap
trading relationship documentation an
agreement with their counterparties
that, in the event a counterparty is a
covered financial company (as defined
in section 201(a)(8) of the Dodd-Frank
Act) or an insured depository institution
(as defined in 12 U.S.C. 1813) for which
the Federal Deposit Insurance
Corporation (FDIC) has been appointed
as a receiver (the ‘‘covered party’’), the
non-covered party is subject to certain
limitations specified by law following
the appointment of the FDIC as receiver
of the covered party and the noncovered party acknowledges that the
FDIC may take certain actions with
respect to the transactions governed by
such documentation.
In response to the proposal, ISDA &
SIFMA and FSR argued that because the
rule language is not identical to section
210 of the Dodd-Frank Act, the
proposed rule requiring an agreement
between counterparties in swap trading
relationship documentation could
inadvertently expand FDIC powers
beyond limits set by Congress by
creating a discrepancy between the
FDIC’s actual powers under Title II of
the Dodd-Frank Act and the treatment
consented to by the parties. ISDA &
SIFMA believe that any discrepancy
could operate to strip parties of legal

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rights to challenge their treatment under
Title II of the Dodd-Frank Act. This, in
turn, could raise questions about
whether the rule is a proper exercise of
the Commission’s rulemaking authority.
ISDA & SIFMA recommended that the
Commission revise the rule to only
require a notice of the relevant
provisions of Title II.
CIEBA also noted that the proposed
language is similar to, but not the same
as, the statutory text in the Dodd-Frank
Act and the FDIA, and could harm its
constituents. By substituting terms and
apprising parties of some, but not all, of
their rights, the proposed rule increases
the risk of disputes and creates
uncertainty as to what will be required
to comply with both the statute and the
regulatory regime. As an example,
CIEBA cited section 210(c)(9)(A)(i) of
the Dodd-Frank Act, which states that,
in the context of orderly liquidation, the
FDIC may elect to ‘‘transfer to one
financial institution, (i) all qualified
financial contracts * * * or (ii) transfer
none of the qualified financial contracts,
claims, property or other credit
enhancement referred to in clause (i)
(with respect to such person and any
affiliate of such person).’’ In contrast to
this statutory language, the proposed
rule uses ‘‘may,’’ which suggests that
the FDIC has the discretion to transfer
less than all qualified financial contracts
in contrast to its statutory requirement
to transfer all or none. CIEBA also notes
that the proposed regulation would
remain effective even if the statutory
provision it implements is repealed or
amended. This could result in parties
being forced to waive rights that protect
their financial interest in times of
market turmoil. In the alternative,
CIEBA recommended that the
Commission require the documentation
to include a written statement in which
the counterparties agree that they will
comply with the requirements, if any, of
section 210(c)(10)(B) of the Dodd-Frank
Act and section 11(e)(10)(B) of the
Federal Deposit Insurance Act, or
instead, require an SD or MSP to
include a statement thereof in its risk
disclosure documents. At the least,
CIEBA requests that the Commission
add an additional section to proposed
§ 23.504(b)(5) to reflect a counterparty’s
right to suspend payments to the
covered party for the period of the stay,
as provided in section 210(c)(8)(F)(ii) of
the Dodd-Frank Act.
EEI & NRECA also objected to the
proposed rule, arguing that a statutory
provision intended to encourage
cooperation between the FDIC and the
Commission does not provide the
Commission with authority to
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for itself and that the Commission
should allow the FDIC to take the lead
as contemplated by Title II of the DoddFrank Act. EEI & NRECA stated that
energy end users would be particularly
harmed by the proposed rule because
swaps would be covered by the rule, but
not physical transactions, causing
energy end users to separately
collateralize swaps and physical
transactions, eliminating their ability to
cost-effectively hedge commercial risks
using swaps.
The FHLBs acknowledged the
potential applicability of the orderly
liquidation provisions of the DoddFrank Act, but also objected to the
inclusion of the provisions in the swap
documentation as the provisions would
apply notwithstanding such inclusion
and doing so could create legal
uncertainty since other liquidation
regimes are not listed in the documents.
MetLife objected specifically to the
requirement to include consent to FDIC
liquidation, arguing that such consent
may foreclose a party’s right to appeal
or challenge the FDIC’s actions. MetLife
also raised concerns that blanket
consent could place the remaining party
in a position where it has unwanted
excessive credit exposure to the new
counterparty, resulting in violation of
state law requirements with respect to
credit ratings and other credit quality
requirements. MetLife requested that the
section be removed or that a provision
be added to allow a party to object to
any proposed transfer.
Hess argued that the provision is not
appropriate because the large majority
of SDs and MSPs will likely not be
‘‘covered financial companies’’ and as of
now, the actual application of Title II is
unclear. Hess recommended that the
rule only require SDs and MSPs to
provide notice of the possibility of FDIC
liquidation.
Chris Barnard commented that the
authority of the FDIC is statutory in
nature, and so would automatically
apply to the relevant swaps, overriding
any current practice. Given this point,
Mr. Barnard believes the provision is
redundant.
In contrast to the foregoing, Better
Markets fully supported the proposed
rule, stating that the proposed rule
represents a clarification of a
fundamental feature of swaps; the
consequences of a default by an SD or
MSP. Better Markets stated that a basic
premise of derivatives in bankruptcy is
the exemption from the automatic stay
such that the non-defaulting party may
immediately terminate and apply
collateral post insolvency. Better
Markets agreed that the proposed rule
documents an important exception to

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that right newly created in the DoddFrank Act. Better Markets believes that
clarity, both at inception of a swap and
at default, is the foundation of the
Dodd-Frank Act, because lack of clarity
contributed heavily to the financial
crisis and caused much harm.
The Commission has carefully
considered each of the comments
received on the proposal. At the outset,
the Commission believes that, in the
context of the proposed rules, it is not
possible to track the statutory language
of Title II of the Dodd-Frank Act any
more closely. Given the imperfectability
of reproducing such statutory language
and the context in which it appears in
the rule, the Commission is sensitive to
commenters’ concerns that the rule
could have a different legal effect in
application as compared to application
of the statutory language. The
Commission is also aware that the
statutory provisions will apply to
covered financial companies and
insured depository institutions placed
into FDIC receivership even if not
included in this rule. Therefore, the
Commission has determined that the
best course is to revise the proposed
rule to require that swap trading
relationship documentation contain
only a notice as to whether the SD or
MSP or its counterparty is an insured
depository institution or financial
company and that the orderly
liquidation provisions of the DoddFrank Act and the FDIA may limit the
rights of the parties under their trading
relationship documentation in the event
either party is deemed a ‘‘covered
financial company’’ or is otherwise
subject to having the FDIC appointed as
a receiver.
C. End User Exception Documentation—
§ 23.505
1. Overlap With Proposed § 39.6
The proposed regulation required SDs
and MSPs, when transacting with
market participants claiming the
exception to clearing under section
2(h)(7) of the CEA, to obtain
documentation sufficient to provide a
reasonable basis on which to believe
that its counterparty meets the statutory
conditions required for the exception.
Various requirements for the
documentation were listed in the
proposed rule.
In response to the proposal, The
Working Group and Encana Marketing
(USA), Inc. (Encana) argued that
because proposed § 39.6 would require
SDs and MSPs to collect and report the
information relevant to the section
2(h)(7) clearing exception, the proposed
rule should be revised to impose no

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documentation obligations with regard
to this exception. Encana also
commented that in the alternative,
§ 23.505 should only require that SDs
and MSPs obtain ‘‘documentation’’ that
the counterparty qualifies as an end user
in the transaction documents, but did
not specify what form such
documentation should take. COPE also
commented that the proposed rule is
burdensome and redundant to proposed
§ 39.6 and believes that the attestation
required by proposed § 39.6 should be
sufficient.
Michael Greenberger, on the other
hand, believes a check-the-box approach
is insufficient, and recommended
enhanced reporting requirements
ensuring that the calculation
methodology and the effectiveness of
the hedged position are well
documented. Better Markets also
recommended enhanced reporting,
suggesting that end users report their
hedging transactions to SDRs as
provided in proposed § 39.6. Requiring
end users to provide information for
each transaction to SDs and MSPs
separately is overly burdensome
whereas direct reporting to SDRs would
amount to only a slight change from
current prudent practice at many end
users.
Having considered these comments,
the Commission is adopting the rule as
proposed with one exception. The
Commission has permitted entities that
qualify for the exception to the clearing
requirement under section 2(h)(7) of the
Act to report information directly to an
SDR regarding how they generally
expect to meet their financial
obligations associated with non-cleared
swaps on an annual basis in
anticipation of electing the exception for
one or more swaps.17 Thus, an electing
counterparty could be directly reporting
the information necessary for SD and
MSP compliance with proposed
§ 23.505(a)(3) through (5). Therefore, the
Commission has modified the proposed
rule to clarify that SDs and MSPs need
not obtain documentation from any
counterparty that claims an exception
from required clearing if that
counterparty is reporting directly to an
SDR regarding how it generally expects
to meet its financial obligations
associated with its non-cleared swaps,
and the SD or MSP has confirmed that
the counterparty has made its annual
submission.
17 See End-User Exception to the Clearing
Requirement for Swaps, 77 FR 42560, 42590 (July
19, 2012).

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2. Reasonable Basis—§ 23.505(a)
The proposed regulation required that
SDs or MSPs have a reasonable basis to
believe its counterparty meets the
statutory conditions required for an
exception from a clearing requirement.
In response to the proposal, ISDA &
SIFMA requested that the Commission
clarify that the ‘‘reasonable basis to
believe’’ standard in the proposed rule
may be satisfied by reliance on written
representations from the counterparty,
absent facts that reasonably should have
put the swap dealer or major swap
participant on notice that its
counterparty may be ineligible for the
end user exception. ISDA & SIFMA
argued that registrants should not have
to investigate their counterparty’s
representations or obtain detailed
representations as to the facts
underlying the company’s
qualifications.
The Coalition for Derivatives EndUsers supports the ‘‘check-the-box’’
approach in proposed § 39.6 for end
users to use to qualify for the clearing
exception, and is therefore concerned
that the ‘‘reasonable basis’’ obligation in
proposed § 23.505(a) could undermine
the simplicity of the check-the-box
approach. The Coalition for Derivatives
End-Users argues that if SDs and MSPs
must verify end user information, they
may start to require unnecessary and
costly documentation from end users
such as legal opinions or other
documents, rather than serving as
passive conduits of information.
After considering these comments, the
Commission has determined to adopt
the rule as proposed on this issue. The
Commission is of the view that, contrary
to commenters’ concerns, the
‘‘reasonable basis’’ standard in the
proposed rule does not require
independent investigation of
information or documentation provided
by a counterparty electing the exception
from required clearing. The Commission
believes that so long as an SD or MSP
has obtained information,
documentation, or a representation that
on its face provides a reasonable basis
to conclude that the counterparty
qualifies for the exception under section
2(h)(7), then, in the absence of facts that
reasonably should have put the SD or
MSP on notice that its counterparty may
be ineligible for the exception, no
further investigation would be
necessary. The Commission does not
believe that the rule requires legal
certainty on the part of SDs or MSPs.

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3. Disclosure of Information by End
Users
The proposed regulation required SDs
and MSPs to obtain documentation that
its counterparty seeking to qualify for
the clearing exception generally meets
its financial obligations associated with
non-cleared swaps.
Better Markets argued that the
proposed rule should require
documentation in accordance with the
Dodd-Frank Act, i.e., documentation as
to how the counterparty generally meets
its obligations associated with noncleared swaps, including how it would
meet any obligation to immediately
fund margin upon the occurrence of a
credit trigger.
ISDA & SIFMA commented that the
Dodd-Frank Act merely requires a
counterparty to notify the Commission
as to how it generally meets its financial
obligations. ISDA & SIFMA
recommended that § 23.505(a)(5) be
deleted or clarified such that a registrant
can satisfy the requirement by obtaining
a representation from its counterparty or
by obtaining the documentation only
with respect to swap-related obligations
to the particular SD or MSP.
In the view of COPE, EEI, and CIEBA,
the requirement for the SD/MSP to get
information from end users is anticompetitive and inappropriate as it
requires an end user to inform its SD or
MSP counterparty, a potential
competitor, of proprietary details about
its business, including its hedging
activities. Each recommended that no
more than a representation from the end
user should be required. COPE also
objects to the rule placing the SD or
MSP in the role of regulator responsible
for determining if the information
received is sufficient.
As explained above, the Commission
is modifying the proposed rule to clarify
that SDs and MSPs need not obtain
documentation from any counterparty
that claims an exception from required
clearing if that counterparty is reporting
directly to an SDR under § 39.6(b)
regarding how it generally expects to
meet its financial obligations associated
with its non-cleared swaps, and the SD
or MSP has confirmed that the
counterparty has made its annual
submission. Thus, any entity seeking to
claim the exception from clearing may
avoid revealing any information it
considers sensitive to its SD or MSP
counterparty by self-reporting directly
to an SDR under § 39.6(b). The
Commission notes that protections
against release of reported proprietary
information are addressed in the SDR
rules finalized by the Commission.

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D. Swap Confirmation—§ 23.501
Confirmation has been recognized as
an important post-trade processing
mechanism for reducing risk and
improving operational efficiency by
both market participants and their
regulators. Prudent practice requires
that, after coming to an agreement on
the terms of a transaction, parties
document the transaction in a complete
and definitive written record so there is
legal certainty about the terms of their
agreement.
Over the past several years, OTC
derivatives market participants and
their regulators have paid particular
attention to the timely confirmation of
swaps. The Government Accountability
Office (GAO) found that the rapid
expansion of the trading volume of
swaps, such as credit derivatives since
2002, caused stresses on the operational
infrastructure of market participants.
These stresses in turn caused the
participants’ back office systems to fail
to confirm the increased volume of
trades for a period of time.18 The GAO
found that the lack of automation in
trade processing and the purported
assignment of positions by transferring
parties to third parties without notice to
their counterparties were factors
contributing to this backlog. If
transactions, whether newly executed or
recently transferred to another party, are
left unconfirmed, there is no definitive
written record of the contract terms.
Thus, in the event of a dispute, the
terms of the agreement must be
reconstructed from other evidence, such
as email trails or recorded trader
conversations. This process is
cumbersome and may not be wholly
accurate. Moreover, if purported
transfers of swaps, in whole or in part,
are made without giving notice to the
remaining parties and obtaining their
consent, disputes may arise as to which
parties are entitled to the benefits and
subject to the burdens of the transaction.
The Commission believes the work of
the OTC Derivatives Supervisors Group
(ODSG) demonstrates that the industry
is capable of swift movement to
contemporaneous execution and
confirmation. A large back-log of
unexecuted confirmations in the credit
default swap (CDS) market created by
prolonged negotiations and inadequate
confirmation procedures were the
subject of the first industry
commitments made by participating
18 U.S. Government Accountability Office,
‘‘Credit Derivatives: Confirmation Backlogs
Increased Dealers’ Operational Risks, But Were
Successfully Addressed After Joint Regulatory
Action,’’ GAO–07–716 (2007) at pages 3–4.

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dealers to the ODSG.19 In October 2005,
the participating dealers committed to
reduce by 30 percent the number of
confirmations outstanding more than 30
days within four months. In March
2006, the dealers committed to reduce
the number of outstanding
confirmations by 70 percent by June 30,
2006. By September 2006, the industry
had reduced the number of all
outstanding CDS confirmations by 70
percent, and the number of CDS
confirmations outstanding more than 30
days by 85 percent. The industry
achieved these targets largely by moving
80 percent of total trade volume in CDS
to confirmation on electronic platforms,
eliminating backlogs in new trades.
By the end of 2011, the largest dealers
were electronically confirming over 95
percent of OTC credit derivative
transactions, and 90 percent were
confirmed on the same day as execution
(T+0). For the same period, the largest
dealers were electronically confirming
over 70 percent of OTC interest rate
derivatives (over 90 percent of trades
with each other), and over 80 percent
were confirmed T+0. The rate of
electronic confirmation of OTC
commodity derivatives was somewhat
lower—just over 50 percent, but over 90
percent for transactions between the
largest dealers.20
The Commission further recognizes
the ODSG supervisory goal for all
transactions to be confirmed as soon as
possible after the time of execution.
Ideally, this would mean that there
would be a written or electronic
document executed by the parties to a
swap for the purpose of evidencing all
of the terms of the swap, including the
terms of any termination (prior to its
scheduled maturity date), assignment,
novation, exchange, or similar transfer
or conveyance of, or extinguishing of
rights or obligations.
The Commission believes that timely
and accurate confirmation of swaps is
critical for all downstream operational
and risk management processes,
including the correct calculation of cash
flows, margin requirements, and
discharge of settlement obligations as
well as accurate measurement of
counterparty credit exposures. Timely
confirmation also allows any rejections,
exceptions, and/or discrepancies to be
identified and resolved more quickly.
To this end, in the Confirmation NPRM,
19 See October 4, 2005 industry commitment
letter to the Federal Reserve Bank of New York,
available at http://www.newyorkfed.org/
newsevents/news_archive/markets/2005/
an050915.html.
20 See G15 Industry Confirmation Data dated
April 4, 2012 provided by ISDA, available at
www.cftc.gov.

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the Commission proposed § 23.501,
which prescribed standards for the
timely and accurate confirmation of
swap transactions. The Commission
received approximately 27 comment
letters in response to the Confirmation
NPRM and considered each in
formulating the final rules, as discussed
below.
1. Uniform Application of Proposed
Rules to All Asset Classes
In the Confirmation NPRM, the
Commission solicited comments on
whether certain provisions of the
proposed regulations should be
modified or adjusted to reflect the
differences among asset classes.
In response to the request for
comments, ISDA noted that the work
done by the industry with the ODSG led
to customization of documentation and
confirmation timeframes to account for
the differences between asset classes,
and even between products within asset
classes, but the proposed confirmation
requirements do not allow for this same
flexibility. However, ISDA did not
suggest specific timeframes for the
Commission’s rules.
The FHLBs recommended that the
Commission exercise caution in
applying rules to all swap asset classes
equally as procedures that are
appropriate for interest rate swaps may
be insufficient or unnecessary for other
types of swaps.
The Global Foreign Exchange Division
of AFME, SIFMA, and ASIFMA (GFED)
commented that the Commission should
take into account the high volume of
transactions and wider universe of
participants in the foreign exchange
industry when promulgating its final
rules.
The Working Group requested that the
Commission revise the rules to permit
current practice in the energy swap
market where one party sends an
acknowledgement to the other party and
the acknowledgement is deemed a
legally binding confirmation if the
receiving party does not object within
three business days. The Working Group
believes this practice is efficient because
(i) It eliminates the risk of open
confirmations, (ii) dealers need not
chase for a physically signed
confirmation, and (iii) counterparties
need not respond if terms are
acceptable.
BG Americas & Global LNG (BGA)
commented that energy commodity
trading companies typically extract
trading data in a batched cycle at the
end of the day and generate
confirmations the following day. BGA
does not believe it is clear that
expedited confirmation would enhance

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transparency or reduce systemic risk
and is therefore outweighed by the
enormous cost for registrants that would
have to add resources to perform rolling
confirmations and correct errors.
As discussed further below, in section
III.B.2, the Commission has made every
effort to tailor the confirmation
requirements by asset class based on
data provided by major market
participants. The Commission has
achieved such tailoring by modifying
the time periods for confirmation by
asset class along with a generous
compliance phase-in period, but has
retained an otherwise uniform rule
across asset classes. The Commission
believes the uniform standard with
appropriate differences in time periods
and compliance periods will lead to
efficient use of limited regulatory
resources, while also reducing
implementation costs for affected
market participants.
2. Use of ‘‘Enforce’’ in Proposed Rules
§ 23.501(a)(3), § 23.502(b),
§ 23.502(b)(4), and § 23.503(d)
The proposed regulations require SDs
and MSPs to establish, maintain, and
enforce written policies and procedures
to accomplish a number of
requirements, including confirmation
with financial entities and non-financial
entities; portfolio reconciliation;
valuation dispute resolution; and
bilateral and multilateral compression
and termination of fully offsetting
swaps.
In regard to the use of ‘‘enforce’’ in
these provisions, ABC & CIEBA
requested that the Commission delete
the term wherever it appears because
SDs and MSPs are not ‘‘registered
entities’’ under section 1(a)(40) of the
CEA and therefore Congress did not
intend for SDs and MSPs to have the
self-regulatory authority to enforce
compliance with their internal policies
and procedures. Similarly, Freddie Mac
commented that the requirement in the
proposed rules that SDs enforce policies
designed to ensure confirmation with
non-SD, non-MSP counterparties within
the short deadlines mandated by the
proposed rules could result in SDs
exerting undue pressure on such
counterparties to quickly assent to the
terms of a trade as framed by the SD in
the form of a condition to execution of
a swap, with the risk that the swap
could become void or otherwise fail.
The Commission is sensitive to these
concerns, and has accordingly modified
the proposed rules by replacing each
instance of the term ‘‘enforce’’ with the
term ‘‘follow.’’ The Commission
observes that the intent of the term
‘‘enforce’’ in the proposed rules was to

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require SDs and MSPs to in fact follow
the policies and procedures established
to meet the requirements of the
proposed rules, rather than to require an
SD or MSP to enforce its internal
policies and procedures against third
parties.
3. Definition of ‘‘Acknowledgement’’—
§ 23.500(a)
The proposed regulations defined
‘‘acknowledgement’’ to mean ‘‘a written
or electronic record of all of the terms
of a swap signed and sent by one
counterparty to the other.’’
Commenting on this definition, GFED
requested that the Commission clarify
whether an ‘‘acknowledgement’’ is the
same as a ‘‘trade affirmation’’ in the FX
market, which is matching of economic
fields only, and MFA recommended that
the Commission revise the definition to
provide that an acknowledgement need
only specify the primary economic
terms of a swap (rather than all terms).
Despite these comments, the
Commission is adopting the definition
of acknowledgement as proposed. The
intent of the definition was to make
clear that an SD or MSP must provide
its non-SD, non-MSP counterparties
with a complete record of all terms of
an executed swap transaction. The
Commission believes that to achieve the
timely confirmation goals of § 23.501,
mistaken, misunderstood, or disputed
terms must be identified quickly. To do
so, a counterparty needs to see
documentation reflecting all of the
terms of the swap transaction as the SD
or MSP understands them. The
Commission therefore does not agree
with commenters that an
acknowledgement need contain only the
primary economic terms of a swap
transaction. In reaching this conclusion,
the Commission recognizes that
requiring delivery of an
acknowledgement containing all terms
may require the parties to agree to more
terms at execution than are agreed
under some current market practices,
but, given the critical role confirmation
plays in all downstream operational and
risk management processes, the
Commission believes that any
additional pre-execution burden
imposed is justified.
4. Definition of ‘‘Confirmation’’—
§ 23.500(c)
The proposed regulations defined
‘‘swap confirmation’’ to mean ‘‘the
consummation (electronically or
otherwise) of legally binding
documentation (electronic or otherwise)
that memorializes the agreement of the
parties to all the terms of the swap. A
confirmation must be in writing

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(whether electronic or otherwise) and
must legally supersede any previous
agreement (electronically or
otherwise).’’
Reacting to this definition, ABC &
CIEBA explained that where a lead
fiduciary for a pension fund negotiates
ISDA documentation on a relationship
basis, there sometimes will be a
provision that the master agreement’s
terms legally supersede the
confirmation’s terms unless the
fiduciary entering the plan into the
swap represents that inconsistent terms
in the confirmation are more beneficial
to the plan. ABC & CIEBA therefore
requested that the Commission clarify
that the phrase ‘‘legally supersede any
previous agreement’’ is only intended to
apply to prior agreements outside the
scope of the package of documentation
that makes up the master agreement
between the parties (i.e., master
agreements, credit support agreements,
all confirmations, etc.).
Similarly, the Asset Management
Group of SIFMA (AMG) explained that
in current practice, some clients to asset
managers require that terms in the
confirmation of a swap cannot
supersede conflicting terms in a client’s
master agreement. AMG therefore also
recommended that the Commission
clarify the proposed rule to provide that
a confirmation will not legally
supersede the contractual arrangements
agreed on by the parties.
On a different tack, GFED requested
clarification as to whether
‘‘confirmation’’ means only actual legal
confirmation execution or whether it
may also include matching services that
do not provide a legally binding
confirmation of all terms, but merely
affirmation of trade economics, and
ISDA requested clarification that
confirmation may be accomplished by
use of matching services under which
some buy-side firms ‘‘affirm’’ trades.
Jason Copping offered an alternative
definition of ‘‘confirmation’’ under
which a swap is confirmed when all
parties accept the terms and no change
to the terms would be legally binding
until all parties agree to such changes.
In response to these comments, the
Commission reiterates that the intent of
the proposed rule was to require the
terms of a confirmation to include all of
the binding terms of the swap. This
definition is the same definition
adopted by the Commission in the Swap
Data Recordkeeping and Reporting rules
in part 45 of the Commission’s
regulations.21 In addition, under the
Swap Data Recordkeeping and
Reporting rules, all terms agreed in a
21 See

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confirmation must be reported to an
SDR.22 Therefore, in addition to the
need for all terms to be confirmed for
purposes of downstream operational
processing and risk management, the
Commission has a strong interest in
consistent rules for the swap market.
For these reasons, the Commission is
adopting the definition of confirmation
as proposed.
With respect to the comments of ABC
& CIEBA and AMG, the Commission
understands the practice explained by
these commenters to mean that some
confirmations of swaps incorporate by
reference certain terms that are
delineated in master agreements and
that the parties have agreed that such
terms trump any inconsistent terms that
may appear in a confirmation. The
Commission clarifies that the rules
adopted herein do not prohibit the
practice of incorporation by reference.
Therefore, if counterparties want to
include certain standard provisions in
their master agreements that will control
each swap transaction executed, this
approach would be acceptable so long
as they ensure that their books and
records and the confirmation data
reported to an SDR reflects the actual
terms of each swap transaction. Given
the Commission’s interest in ensuring
the integrity of data reported to an SDR,
contradictory or conflicting swap
transaction terms in an SD’s or MSP’s
books and records or in data reported to
an SDR when reconciled with an SD’s
or MSP’s books and records could
indicate non-compliance with the both
the confirmation rule adopted herein
and the swap data reporting rules under
part 45 of the Commission’s regulations.
Moreover, the Commission clarifies
that any specific agreed-upon collateral
requirements in a confirmation, which
may go beyond what exists in the
collateral support arrangements under
the swap trading relationship
documentation, would be required to be
confirmed according to the timeframes
discussed below.
5. Definition of Financial Entity–
§ 23.500(e)
The Commission proposed to define
‘‘financial entity’’ to have the same
meaning as given to the term in section
2(h)(7)(C) of the Act, excepting SDs and
MSPs. Subsequent to the proposal, the
Commission proposed a number of rules
that contained slightly differing
definitions of the term.23 The
Commission has therefore determined to
22 See

17 CFR 45.3.
e.g., Margin Requirements for Uncleared
Swaps for Swap Dealers and Major Swap
Participants, 76 FR 23732, 23744 (Apr. 28, 2011).
23 See

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revise the definition of ‘‘financial
entity’’ for purposes of the rules adopted
herein to be consistent with its other
rules applicable to SDs and MSPs. Thus,
‘‘financial entity’’ has been defined in
the rule adopted in this release to mean
‘‘a counterparty that is not a swap dealer
or a major swap participant and that is
one of the following. (1) A commodity
pool as defined in section 1a(5) of the
Act, (2) A private fund as defined in
section 202(a) of the Investment
Advisers Act of 1940, (3) An employee
benefit plan as defined in paragraphs (3)
and (32) of section 3 of the Employee
Retirement Income and Security Act of
1974, (4) A person predominantly
engaged in activities that are in the
business of banking, or in activities that
are financial in nature as defined in
section 4(k) of the Bank Holding
Company Act of 1956, and (5) a
security-based swap dealer or a major
security-based swap participant.’’
6. Electronic Execution and
Processing—§ 23.501(a)(1) & (2);
Definition of ‘‘Processed
Electronically’’—§ 23.500(j)
The proposed regulations prescribed
trade acknowledgement delivery and
confirmation deadlines for swap
transactions that are executed and
processed electronically, and different
deadlines for swaps that are not
executed electronically but are
processed electronically. The proposed
regulations provided that ‘‘processed
electronically’’ means ‘‘to be entered
into a swap dealer or major swap
participant’s computerized processing
systems to facilitate clearance and
settlement.’’ In addition, the
Commission requested comment on
whether the term ‘‘processed
electronically’’ required more
clarification, and, if so, what definition
would be effective and flexible enough
to accommodate future market
innovation.
In response to the proposal, ABC &
CIEBA urged the Commission to ensure
that the proposed confirmation rule
does not indirectly impose on benefit
plans processes that will require thirdparty service providers or new
technology by expressly stating that a
party to an uncleared swap that is not
an SD or MSP has the right to determine
whether the confirmation will occur
electronically or manually. AMG also
recommended that a party to an
uncleared swap that is not an SD or
MSP should have the right to determine
whether the confirmation will occur
electronically or manually.
The Working Group and MFA warned
that the Commission should not
mandate confirmation through an

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electronic matching platform because
electronic matching is unlikely to be
able to capture all terms of customized
transactions. Chatham Financial Corp.
(Chatham) also argued that the
Commission should not mandate
confirmation through an electronic
matching platform, because such a
mandate could preclude end-users from
entering into swaps not yet available on
matching platforms and could increase
costs for end-users that do not engage in
the volume of swaps necessary to justify
the additional costs of connecting to
electronic matching platforms.
ISDA commented that electronic
execution and processing standards
should be phased and aspirational
because development by the industry
will be required to meet the timelines of
the proposed rules. ISDA also argued
that the proposed life cycle
confirmation requirement will
undermine the move to electronic
execution and processing, because not
all life cycle events are currently
supported by electronic platforms across
asset classes.
MarkitSERV supports the
Commission’s goal of having as many
transactions as possible be executed on
electronic platforms, and recommended
that the Commission require all swap
transaction information to be
communicated electronically if a
registrant has the ability to do so, and
encourage (but not require in all cases)
the use of electronic matching and
confirmation platforms.
Many commenters raised questions
regarding what would constitute
electronic processing. MFA requested
that the Commission clarify if
‘‘processed electronically’’ only refers to
swaps confirmed through electronic
confirmation or matching services, or
whether ‘‘processed electronically’’
could refer to a registrant entering trade
information into its trade capture
system, the generation of an
acknowledgement from such system and
the forwarding of such
acknowledgement to a counterparty by
facsimile, email, or other electronic
method, while GFED requested that the
Commission clarify whether a SWIFT
confirmation would meet the definition
of ‘‘processed electronically’’ under the
proposed rules. The Working Group also
questioned whether confirming a swap
via email would constitute electronic
processing. The FHLBs requested that
the Commission clarify if ‘‘processed
electronically’’ only refers to swaps
confirmed through electronic
confirmation or matching services,
while ISDA recommended that the
Commission not define ‘‘processed
electronically’’ to include all

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transactions for which some element of
the transaction is captured or processed
through electronic means, but define it
with reference to a firm or platform’s
‘‘middleware,’’ which will actually
drive the process. Finally, MetLife
recommended that the Commission
more clearly define the terms
‘‘processed electronically’’ and
‘‘executed electronically’’ because
MetLife needs more information to
determine whether the proposed time
frames for confirmation are realistic
within current market capabilities.
Having considered these comments,
the Commission acknowledges the
concerns expressed by market
participants regarding the coerced use of
matching platforms and is accordingly
modifying the proposed rule to delete
the definition of ‘‘processed
electronically’’ and delete the
provisions of the rule mandating
acknowledgement and confirmation
deadlines for swaps that are executed or
processed electronically. In place of
these provisions, the rule has been
modified to provide that swap
transactions among SDs and MSPs or
between such registrants and financial
entities should be confirmed as soon as
technologically practicable, but in any
event by the end of the first business
day following the day of execution (as
modified for time zone and business day
differences, discussed in detail below).
The Commission believes this change
will eliminate any confusion as to
whether a method of swap execution
and confirmation qualifies as
‘‘electronic.’’ As explained further
below, the modified rule would provide
a single deadline for confirmation of
swap transactions among registrants, a
single deadline for confirmation of swap
transactions between registrants and
financial entities, and a single deadline
for confirmation of swap transactions
between registrants and all other
entities, with appropriate adjustments of
the compliance deadlines by swap asset
class for implementation of the rule.
7. Delivery of Draft Acknowledgement
to Non-SD, Non-MSP Counterparties
§ 23.501(a)(3)
Proposed § 23.501(a)(3) required SDs
and MSPs to establish a procedure such
that, prior to execution of any swap
with a non-SD or non-MSP, the
registrant furnish to a prospective
counterparty a draft acknowledgment
specifying all terms of the swap
transaction other than the applicable
pricing and other relevant terms that are
to be expressly agreed at execution.
Commenting on the proposal, ISDA
argued that the requirement to provide
a draft acknowledgement prior to

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execution may cause loss of timely
execution opportunities, and may
require end-users to engage significant
legal resources for review of all
proposed transactions, rather than just
executed transactions. ISDA
recommended that non-dealer
counterparties be permitted to waive the
delivery of draft acknowledgements.
MFA similarly argued that the proposed
rule will (i) Prevent end users from
executing promptly when the market is
favorable; (ii) cause end users to
concede on terms in order to get timely
execution; (iii) cause a decrease in the
number of transactions, which will
decrease liquidity and increase
volatility; and (iv) cause wider bid/ask
spreads or less market-making because
of an increase in risk between pricing
and execution. Freddie Mac also
believes that the proposed rule would
delay prompt execution of hedging
transactions because end users will be
required to review draft
acknowledgements.
MarkitSERV argued that requiring a
draft acknowledgement is unnecessarily
burdensome because (i) multiple SDs
competing for a trade would all be
required to furnish a draft
acknowledgement, and (ii) many
transactions executed through
automated electronic systems can
complete a confirmation promptly after
execution. MarkitSERV recommended
that the Commission require draft
acknowledgements to contain only
terms necessary to determine price
(rather than all terms) and only require
delivery of draft acknowledgements for
swaps that cannot be processed
electronically and where confirmation is
not reasonably expected to be
completed within 24 hours.
On the other hand, ABC & CIEBA
agreed with the Commission’s proposal
to require all terms, except terms related
to price, be disclosed in writing prior to
the time of execution. AMG also
supported the proposed rule, but
recommended that the Commission
revise the rule to provide an exception
for swaps where the parties have
previously agreed to non-pricing-related
terms.
Finally, MetLife recommended that
the Commission revise the proposed
rule to specifically indicate which party
is responsible for delivery of an
acknowledgement and which party is
responsible for the return confirmation.
Having considered the commenters’
concerns, but cognizant of the support
for the proposed rule by some
commenters, the Commission is
modifying the proposed rule to require
delivery of a draft acknowledgement,
but only upon request of an SD’s or

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MSPs’ non-SD, non-MSP counterparty
prior to execution.
With respect to MetLife’s comment,
the Commission believes the rule as
proposed clearly states that it is the SD’s
or MSP’s responsibility to deliver an
acknowledgement when trading with a
counterparty that is not an SD or MSP.
The SD or MSP is required to have
policies and procedures reasonably
designed to ensure that its counterparty
returns a confirmation or otherwise
completes the confirmation process.
With respect to trades solely among SDs
and MSPs, the Commission does not
believe it is necessary to prescribe
responsibility for delivery of an
acknowledgement because both parties
would be required to comply with the
confirmation deadline set forth in the
rule as adopted herein.
8. Time Period for Confirmation—
§ 23.501(a)(1) & (3)
Proposed § 23.501 provided time
periods for confirmation as set forth at
75 FR 81519, 81531 (Dec. 28, 2010).
The Commission received 27
comments with respect to the proposed
rule’s time periods for confirmation.
Below, the comments are described
according to the following categories:
(A) General comments on the
proposed time periods;
(B) Comments on proposed time
periods for confirmation with non-SDs
and non-MSPs;
(C) Comments on time periods for
confirmation with financial entities;
(D) Comments on confirmation of
swaps between parties in different time
zones; and
(E) Comments on confirmation of
swaps executed near end of trading day.
(A) Comments on Time Periods
Generally
ISDA stated that the proposed rules
place an unnecessary burden upon the
inception of transactions, may increase
risk by leading to needless disputes and
operational lapses, and require
substantially more than is necessary to
create an initial record of a legally
binding agreement. ISDA also argued
that: (i) The time periods proposed are
impractical as certain terms required to
be included in a confirmation may not
be known on the same calendar day as
execution (e.g., initial rates may follow
trade commitment by days); and (ii)
valuation methodologies required to be
agreed prior to execution pursuant to
proposed § 23.504(b)(4), may also slow
down the confirmation process to the
extent such methodologies are required
to be reflected in the confirmation. ISDA
recommended an alternative framework:

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Federal Register / Vol. 77, No. 176 / Tuesday, September 11, 2012 / Rules and Regulations
• Execution of a swap on a SEF or
DCM or clearing a swap should be
deemed to satisfy any confirmation
requirements.
• Electronic execution and processing
standards should be phased and
aspirational as development by the
industry will be required.
• The Commission should conduct a
study in order to better understand the
potential barriers to complying with the
proposed timelines for confirmation in
each asset class.
• The Commission should institute
an approach similar to that utilized by
the ODSG; an ongoing dialogue between
the Commission and leaders in the
industry to obtain a commitment from
the industry to tighten confirmation
timeframes over an extended period,
with existing risk mitigants to address
Commission concerns in the interim.
The Working Group also objected to
the time periods between execution and
confirmation in the proposed rules
because: (i) The time periods effectively
will require all terms of a swap to be
negotiated prior to execution, and that
such requirement will disadvantage the
party that is most sensitive to timing of
market conditions and may force that
party to accept less optimal economic
terms or reduced negotiating leverage in
order to meet the confirmation deadline;
and (ii) the Commission has not
articulated any benefit from the
requirement that non-registrants
confirm a swap no later than the day
after execution that would outweigh the
cost for most non-registrants to comply
with the rule.
MarkitSERV commented that the time
periods specified in the proposed rules
for confirmation are not feasible in
many cases and recommended the
following alternative:
• The time period within which
confirmation is required to be
completed should not begin with
execution, but only from the point when
all relevant data and information to
define the swap has been obtained (e.g.,
allocations).
• Acknowledgements should be sent
within a time period after all
information has been obtained and
confirmation should be completed
within a time period after an
acknowledgement has been received.
• Non-electronically executed and
non-electronically processed
transactions should be confirmed within
24 hours of execution, rather than
within the same calendar day.
• The confirmation requirement
should consist of ‘‘economic tie-out’’ of
key economic terms rather than
confirmation of all terms.

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• Electronic processing should be
defined to include the capability for
electronic communication.
AMG argued that same calendar day
or next business day confirmation may
not be appropriate for complex or
customized uncleared swaps, including
swaps entered by asset managers that
must allocate block trades among their
clients. AMG also recommended that
the Commission revise the proposed
rules to provide for a delay in
confirmation for legitimate disputes
between the parties if the parties are
seeking to resolve the dispute in a
timely fashion.
BGA commented that the 15 minute
and 30 minute deadlines for
confirmation or acknowledgement in
the proposed rules are unworkable and
inconsistent with current practice. BGA
stated that energy commodity trading
companies typically extract trading data
in a batched cycle at the end of the day
and generate confirmations the
following day. BGA does not believe it
is clear that expedited confirmation
would enhance transparency or reduce
systemic risk and is therefore
outweighed by the enormous cost for
registrants that would have to add
resources to perform rolling
confirmations and correct errors. BGA
also argued that swaps executed on
electronic platforms and through
broker/dealers as clearing agents should
not require a confirmation.
Chatham argued that the proposed
timeframes for confirmation could result
in decreased accuracy as parties will
rush to complete transaction
documentation without thorough
review.
The FHLBs stated that currently
available electronic swap processing
systems do not support customized
terms in swaps used by the FHLBs and
therefore the same business day
deadline is not sufficient for swaps that
require manual processing. The FHLBs
also stated that for some swaps (e.g.,
forward settling interest rate swaps), all
terms may not be known when the swap
is executed.
MetLife requested that the
Commission extend the timeframe for
delivery and return of confirmations for
transactions not executed on a SEF or
DCM as such are often highly structured
and customized and it is unreasonable
to expect parties to generate a
confirmation within the timeframe set
forth in the proposed rules. MetLife
recommended that the Commission
revise the proposed rules to provide
three business days following execution
for delivery of an acknowledgement for
such transactions and at least two
business days following receipt of an

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55921

acknowledgement to review and return
a confirmation.
GFED stated that the various
deadlines are significantly too short for
many FX swap trades and
inappropriately rely on both parties
complying with the proposed rules.
GFED recommends that the Commission
revise the proposed rules, as such are
applied to FX swap trades, taking into
account: (i) The method of confirmation
(electronic/paper); (ii) the complexity of
the underlying transaction (e.g., vanilla
options vs. basket options); and (iii) the
counterparty type.
MFA recommended that the
Commission specify no timeframe for
confirmation, allowing parties to
execute whenever market conditions are
favorable with the expectation that they
may negotiate non-economic terms later.
(B) Comments on Time Periods for
Confirmation With Non-SDs and NonMSPs
With respect to the proposed
confirmation time periods for swaps
between an SD or MSP and a non-SD or
non-MSP specifically, ISDA commented
that the rule lacks clarity on how nonregistrant counterparties can be required
to comply with the confirmation
requirements. The FHLBs echoed
ISDA’s comment, arguing that the
proposed timeframe may lead SDs and
MSPs to put undue pressure on end
users to execute confirmations before
such parties have had an opportunity to
fully review such confirmations. To
alleviate this concern, the FHLBs argued
that the proposed rules should allow
SDs and MSPs at least 48 hours to
provide end users with an
acknowledgement, at least two business
days for end users to review
acknowledgements and execute
confirmations, and provide for an
exception from the confirmation
deadlines for complex or unique swap
transactions (as determined by the
parties) upon notice to the Commission
detailing the unique or complex aspects
of the swap and the date by which a
confirmation will be executed.
Chatham recommended an alternative
confirmation requirement for swaps
with non-SDs and non-MSPs:
• For electronically confirmed swaps,
an acknowledgement would be required
to be submitted electronically on the
same or next business day after
execution, and swap terms would be
required to be affirmed, matched or
otherwise confirmed or a notice of
discrepancy provided within three
business days; any discrepancy would
be required to be resolved and the swap
confirmed within five business days

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after the discrepancy was
communicated.
• For non-electronically confirmed
swaps, an acknowledgement would be
required to be issued within one
business day of execution; a notice of
discrepancy provided within five
business days; and confirmation
required within 30 days.
Dominion commented that the energy
industry standard is to achieve
confirmation of uncleared swaps not
executed on an electronic platform
within three business days, and that
such standard is often documented in
participants’ existing master
agreements. Dominion thus argued that
the proposed next business day
confirmation requirement may conflict
with end user contractual rights and
obligations, and may cause end users to
incur costs even though the Commission
has not articulated a justifiable benefit
to end users or the market.
(C) Comments on Time Periods for
Confirmation With Financial Entities
Specifically with respect to
confirmation of swap transactions
between an SD or MSP and a financial
entity, ABC & CIEBA stated that the
‘‘same business day’’ confirmation
requirement would impose costly
increases in operational capacity for
pension funds, which may discourage
use of swaps or limit trading to earlier
parts of the trading day. ABC & CIEBA
recommended that the Commission
provide for a ‘‘close of next business
day’’ time limit for benefit plans and
other non-SD, non-MSP counterparties.
AMG also argued that financial entities
should not be subject to shorter time
periods for confirmation than nonfinancial end-users because many may
not have the operational resources to
meet the demands of the proposed rules.
Similarly, Freddie Mac argued that it
often takes several business days to
correct and execute confirmations, and
the proposed rules would not permit
sufficient time for correction of draft
confirmations or resolution of disputes
over trade terms.
While MFA agreed with the proposed
longer time period for confirmation for
swap transactions between an SD or
MSP and counterparties that are not SDs
or MSPs, but objected to a shorter time
period for financial entity end users as
compared to other end users. MFA
argued that designation as a financial
entity does not necessarily correlate
with a large swap portfolio or being
highly sophisticated with respect to
swaps, and the short time period for
confirmation applicable to financial
entities under the proposed rules may
cause unwarranted disadvantages in

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negotiation of swap terms with SDs and
MSPs.
Finally, the OCC believes that the
same calendar day trade confirmation
requirement for financial entities would
eliminate or significantly reduce
customized transactions between
registrants and such entities, leading to
less effective risk management. The
OCC argued that the short confirmation
deadline will require the parties to
negotiate all terms prior to execution,
leading to the unnecessary expenditure
of resources for transactions that are
never executed. The OCC further argued
that negotiation prior to execution will
delay execution, which itself can create
risks in fast moving markets.
(D) Comments on Confirmation of
Swaps Between Parties in Different
Time Zones
The Commission received several
comments concerned with the proposed
time periods for confirmation as applied
to swap transactions between parties in
different time zones.
Commenting on this aspect of the
proposed rule, ISDA stated that crossborder transactions frequently require
more than one day to confirm due to
business day and time zone differences;
Chatham and GFED also commented
that the proposed timeframes fail to
account for coordination across time
zones.
(E) Comments on Confirmation of
Swaps Executed at End of Day
The Commission also received several
comments concerned with the proposed
same day confirmation requirement for
swap transactions among SDs and MSPs
and between an SD or MSP and a
financial entity as applied to swap
transactions executed near the end of
the trading day.
In this regard, ISDA, Chatham, the
FHLBs, AMG, and GFED each
commented that the rules should
account for transactions executed
toward the end of the business day that
leave little or no time for same-day
confirmation. To account for this issue,
AMG recommended that parties should
be given no less than 24 hours to
confirm trades, while the FHLBs
recommended that swap transactions
executed after 3:00 p.m. EST should be
considered executed on the immediately
following business day.
Commission Response
The Commission has considered the
many comments with respect to the
proposed time periods for confirmation
and has decided to revise the proposed
rule in a number of ways to better attune
the rule to the intention of the

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Commission’s proposal, the concerns
raised by commenters, and the needs of
the market. The Commission has revised
the proposed rule as discussed below.
The proposed time periods for swaps
executed or processed electronically
have been replaced in their entirety by
a requirement that, subject to a
compliance phase-in schedule, all
swaps among SDs and MSPs or between
SDs, MSPs, and financial entities be
confirmed ‘‘as soon as technologically
practicable,’’ but no later than the end
of the first business day following the
day of execution.24 The Commission
believes this change still requires
electronically executed or processed
trades to be confirmed quickly, but is
responsive to commenters that have
provided examples of processing
operations that contain some electronic
elements but are not ‘‘straight-through’’
in the sense intended by the proposed
rules and therefore are incapable of
meeting the proposed 15 or 30 minute
deadlines.
In revising the rule, the Commission
also was persuaded by the comments of
market participants that are concerned
with the possibility of pressure by their
dealer counterparties to make costly
changes to their operating systems in
order to meet the required confirmation
deadlines. The Commission notes that
these changes also make the
confirmation rule consistent with the
real-time public reporting rules and the
rules mandating deadlines for the
reporting of swap data to SDRs, both of
which use ‘‘as soon as technologically
practicable’’ as the applicable
standard.25
With respect to the proposed time
periods for swaps executed between SDs
and MSPs and counterparties that are
not SDs, MSPs, or financial entities, the
Commission has modified the rule to
require, subject to a compliance phasein schedule, policies and procedures
reasonably designed to ensure that a
confirmation is executed no later than
the end of second business day after
execution.26 The Commission believes
this change will afford SDs and MSPs an
24 Compare with ESMA Draft Technical
Standards, Article 1 RM, subsection 2, (stating that
uncleared OTC derivatives ‘‘shall be confirmed,
where available via electronic means, as soon as
possible and at the latest by the end of the same
business day.’’).
25 See 17 CFR 43.2, Real-Time Public Reporting
of Swap Transaction Data, 77 FR 1182, 1243–44
(Jan. 9, 2012); 17 CFR 45.3, Swap Data
Recordkeeping and Reporting Requirements, 77 FR
2136, 2199–2200 (Jan. 13, 2012).
26 Compare with ESMA Draft Technical
Standards, Article 1 RM, subsection 3, (stating that
uncleared OTC derivatives ‘‘shall be confirmed as
soon as possible and at the latest by the end of the
second business day following the date of
execution.’’).

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Federal Register / Vol. 77, No. 176 / Tuesday, September 11, 2012 / Rules and Regulations
extra business day to confirm their swap
transactions with non-financial entities
and is more consistent with the time
periods suggested by commenters.
In response to commenters, as
discussed above, the Commission is
revising the proposed rule to state
explicitly that swaps executed on a SEF
or DCM, and swaps cleared by a DCO,
will be deemed to have met the
confirmation requirements so long as: (i)
confirmation of all terms of the
transaction takes place at the same time
as execution on a SEF or DCM; or (ii)
the parties submit the swap for clearing
no later than the time that confirmation
would otherwise be required and the
DCO confirms the terms of the swap
upon acceptance for clearing. To ensure
that no swap transaction goes
unconfirmed, the modified rule also
contains a backstop requirement for SDs
and MSPs to confirm a swap for which
the registrant receives notice that a SEF,
DCM, or DCO has failed to provide a
confirmation on the same day as it
receives such notice.
Based on the comments received, the
Commission is also modifying the
proposed rule to adjust the confirmation
deadline for swaps among SDs and
MSPs and between SDs, MSPs, and
financial entities whenever the parties
(i) execute a swap near the end of the
trading day (i.e., after 4 p.m.), or (ii)
execute a swap with a counterparty
located in a different time zone. The
Commission has been persuaded by
commenters that registrants should not
be required to maintain back-office
operations 24 hours a day or 7 days a
week in order to meet the proposed
confirmation deadlines. The
Commission has been particularly
sensitive to comments stating that the
proposed confirmation deadlines may
discourage trade execution late in the
day. Specifically, the Commission has
made the following changes to the
proposed rule:
• To account for time-zone issues, the
‘‘day of execution’’ has been defined to
be the calendar day of the party to the
swap that ends latest, giving the parties
the maximum amount of time to
confirm the transaction within the
deadlines required by the rule.
• To account for end-of-day trading
issues, the definition of ‘‘day of
execution’’ deems such day to be the
next succeeding business day if
execution occurs after 4:00 p.m. in the
place of either counterparty.
• To account for non-business day
trading, the ‘‘day of execution’’ is also
deemed to be the next succeeding

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business day if execution occurs on a
day that is not a business day.27
The Commission notes that this
approach is consistent with the business
day definition in the Swap Data
Recordkeeping and Reporting Rules
finalized by the Commission in
December 2011.28
Despite several commenters’
concerns, however, the Commission has
declined to modify the proposed
requirement that SDs and MSPs
establish policies and procedures
reasonably designed to ensure that
swaps with financial entities meet the
same confirmation deadlines as swaps
among SDs and MSPs. While the
Commission recognizes that an SD or
MSP may not be able to ensure that a
non-registrant financial entity abides by
the confirmation deadline in each and
every instance, it believes that ‘‘policies
and procedures reasonably designed to
ensure’’ is not the same as requiring a
guarantee of compliance. Therefore, the
Commission believes that the rule
contains sufficient flexibility because it
only requires that the SDs and MSPs
make reasonable efforts to confirm
swaps with financial entities by the
stated deadline.
As discussed below in section III.B.2,
the Commission is phasing in
compliance with each of the time
periods required under § 23.501. This
compliance schedule is set forth in the
rule text and seeks to further address
concerns from market participants
regarding the timing of compliance.
9. Allocation of Block Trades
The proposed regulations did not
address confirmation in the context of
block trades that must be allocated prior
to confirmation.
With respect to the allocation of block
trades, ISDA argued that the proposed
confirmation rule will be difficult for
asset managers to implement because
asset managers often execute block
trades and then allocate the block to two
or more clients, a process than can take
significantly longer than the
confirmation time periods because the
allocation process hinges on compliance
processes or receipt by investment
managers of instructions from their
clients. In ISDA’s view, if finalized as
proposed, the rule could force
27 Compare with ESMA Draft Technical
Standards, Article 1 RM, subsection 3, (stating that
where an uncleared OTC derivative transaction ‘‘is
concluded after 16.00 local time, or when the
transaction is concluded with a counterparty that is
located in a different time zone that does not allow
for same day confirmation, the confirmation shall
take place as soon as possible and at the latest by
the end of the next business day.’’)
28 See 71 CFR 45.1, Swap Data Recordkeeping and
Reporting, 77 FR 2136, 2197 (Jan. 13, 2012).

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investment managers to execute
individual trades for their clients,
increasing pricing and operational costs.
AMG echoed this point.
Intercontinental Exchange, Inc. (ICE)
also pointed out that the confirmation
deadlines in the proposed rules may
make it impossible for asset managers to
make post-execution allocation of
trades. ICE stated that its own trade
processing service for CDS requires that
trades be allocated within two hours of
execution and recommended that the
Commission adopt a similar standard.
While the Commission acknowledges
that allocation of block trades is
required to achieve confirmation, it
notes that the modifications to the rule
outlined above replaces the 15 and 30
minute confirmation deadlines with a
requirement that swaps be confirmed
‘‘as soon as technologically practicable,
or in any event by the end of the first
business day following the day of
execution.’’ The Commission thus
believes that the rule as modified allows
registrants and the asset managers for
their counterparties the flexibility to
work out an efficient and timely
allocation process within the deadlines
for confirmation as adopted in this
release. The Commission also notes that
recent amendments to Commission
regulation § 1.35 address the allocation
issue by requiring that account
managers must provide allocation
information to the counterparty no later
than the end of the calendar day that the
swap was executed.29
10. Time Period for Delivery of
Acknowledgement—§ 23.501(a)(2)
Proposed § 23.501(a)(2) set forth at 75
FR 81519, 81531 (Dec. 28, 2010)
required SDs and MSPs to send an
acknowledgement containing all of the
terms of a swap transaction to each
counterparty that is not an SD or MSP.
In response to the proposal, ISDA
asserted that the time periods proposed
are impractical because: (i) Certain
terms required to be included in an
acknowledgement may not be known on
29 See Customer Clearing Documentation, Timing
of Acceptance for Clearing, and Clearing Member
Risk Management, 77 FR 21278, 21306 (Apr. 9,
2012) (providing that ‘‘Orders eligible for postexecution 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.’’).

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the same calendar day as execution (e.g.,
initial rates may follow trade
commitment by days); and (ii) valuation
methodologies required to be agreed
prior to execution pursuant to proposed
§ 23.504(b)(4) may also slow down the
acknowledgement process to the extent
such methodologies are required to be
reflected in the acknowledgement.
Similarly, MarkitSERV recommended
that acknowledgements be sent within a
time period after all information has
been obtained (rather than after
execution), while AMG argued that the
time periods are unnecessarily short and
do not bear a reasonable relationship to
the systemic risk goals of the DoddFrank Act, would be burdensome for
uncleared swaps which merit more
individualized treatment, and could
impose excessive costs on swap market
participants.
Based on these comments and other
considerations discussed above, the
Commission has revised the proposed
rule to delete the 15 and 30 minute
acknowledgement delivery deadlines
and replace them with a requirement,
subject to a compliance phase-in
schedule, that an acknowledgement be
provided ‘‘as soon as technologically
practicable, but in any event by the end
of the day of execution;’’ to state
explicitly that the acknowledgement
requirement will be deemed satisfied by
executing a swap on a DCM or SEF, or
clearing the swap through a DCO; and
to provide for an adjustment to the ‘‘day
of execution’’ to account for time-zone
differences and end-of-day trading
issues. The Commission believes these
changes are responsive to the foregoing
comments. However, in response to the
comments of ISDA and MarkitSERV
regarding terms that may not be known
until after the acknowledgement
delivery deadline has passed, the
Commission believes that an
acknowledgement could meet the
requirement that all terms be included
by describing where and when the ‘‘to
be determined’’ terms will be obtained
and provide for incorporation by
reference once the terms are known.
As discussed below in section III.B.2,
the Commission is phasing in
compliance with each of the time
periods required under § 23.501,
including the acknowledgement
requirement.
11. Confirmation Through Execution on
a SEF or DCM and/or Clearing on a DCO
The proposed regulations did not
contain specific provisions regarding
confirmation through execution on a
SEF or DCM, or clearing on a DCO.
However, in the Confirmation NPRM,
the Commission stated: ‘‘It is important

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to note at the outset, that the
Commission expects that swap dealers
and major swap participants would be
able to comply with each of the
proposed rules by executing a swap on
a swap execution facility (SEF) or on a
designated contract market (DCM), or by
clearing the swap through a derivatives
clearing organization (DCO). For swaps
executed on a SEF or a DCM, the SEF
or DCM will provide the counterparties
with a definitive written record of the
terms of their agreement, which will
serve as a confirmation of the swap.
Similarly, if a swap is executed
bilaterally, but subsequently submitted
to a DCO for clearing, the DCO will
require a definitive written record of all
terms to the counterparties’ agreement
prior to novation by the DCO; this too
would serve as a confirmation of the
swap.’’ 30
Commenting on this aspect of the
proposal, Chris Barnard supported the
idea that SDs and MSPs will be able to
comply with the proposed rule by
executing a swap on a SEF, a DCM, or
by clearing the swap through a DCO,
and supported the greater use of these
facilities. Each of ISDA, CME, ICE, The
Working Group, the FHLBs, MetLife,
MFA, and Chatham recommended that
the Commission explicitly clarify in the
final rules that the confirmation
processes of SEFs, DCMs, and DCOs
satisfy the requirements of the
confirmation rules.
MarkitSERV however asserted that the
Commission should not presume that
execution on a SEF will automatically
result in confirmation of a swap because
the execution and confirmation of a
swap are separate and distinct activities,
and it is possible that SEFs and DCMs
may offer execution services without
necessarily providing confirmation
services. MarkitSERV recommended
that the Commission prescribe
standards for any confirmation service
that may be offered to ensure that SEFs
and DCMs produce a complete, legally
binding record of each swap based on a
recognized legal framework.
MarkitSERV also recommended that
SEFs and DCMs be permitted to allow
qualified third parties to perform the
confirmation function after swap
execution.
Based on these comments and other
considerations discussed above, the
Commission has revised the proposed
rules to state explicitly that swaps
executed on a SEF or DCM, and swaps
cleared by a DCO, will be deemed to
have met the confirmation requirements
so long as: (i) confirmation of all terms
of the transaction takes place at the
30 See

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same time as execution on a SEF or
DCM; or (ii) the parties submit the swap
for clearing no later than the time that
confirmation would otherwise be
required and the DCO confirms the
terms of the swap upon acceptance for
clearing. Under § 39.12(b)(8), DCOs are
required to provide a confirmation of all
the terms of each cleared swap, and this
confirmation is required to take place at
the same time the swap is accepted for
clearing.31 Under Core Principle 11 for
DCMs and § 38.601, DCMs must clear all
transactions executed on or through the
DCM through a Commission-registered
DCO.32 In essence, confirmation for
DCM-executed swaps will occur either
at the same time as execution or upon
submission to a DCO. The Commission’s
rules for SEFs, including the proposed
confirmation rule, § 37.6(b), have yet to
be finalized.33 However, to the extent
that a SEF offers confirmation services
upon execution or provides for the
timely submission of a swap for
clearing, SDs and MSPs would be able
to take advantage of the provisions of
§ 23.501(a)(4).
With respect to MarkitSERV’s
comments, the Commission notes that if
a SEF or DCM does not provide
confirmation services, the confirmation
deadlines of the rule will control. The
standards for confirmation by SEFs and
the ability of a SEF to allow a third
party to provide the confirmation
service are outside the scope of this
adopting release.
12. Confirmation of Swap Transaction
and Ownership Modifications—
§ 23.500(m)
The proposed regulations required
SDs and MSPs to comply with the
confirmation requirements for all ‘‘swap
transactions.’’ The proposed regulations
defined ‘‘swap transaction’’ as any event
that results in a new swap or in a change
to the terms of a swap, including
execution, termination, assignment,
novation, exchange, transfer,
amendment, conveyance, or
31 See Derivatives Clearing Organization General
Provisions and Core Principles, 76 FR 69334, 69438
(Nov. 8, 2011). Under § 39.12(b)(7), DCOs are
required to 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 DCO and
are executed on or subject to the rules of a DCM
or a SEF. See Customer Clearing Documentation,
Timing of Acceptance for Clearing, and Clearing
Member Risk Management, 77 FR 21278, 21309
(April 9, 2012).
32 See Core Principles and Other Requirements for
Designated Contract Markets, 77 FR 36612, 36705
(June 19, 2012).
33 See Core Principles and Other Requirements for
Swap Execution Facilities, 76 FR 1214, 1240 (Jan.
7, 2011).

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extinguishing of rights or obligations of
a swap.
In response to this requirement, ISDA
stated that some ‘‘market’’ life cycle
events (e.g., option exercise notices,
various notices sent by calculation
agent, etc.) captured by the definition of
‘‘swap transaction’’ are already
described in the original confirmation
and sees no benefit to confirming those
events. ISDA distinguished ‘‘market’’
from ‘‘legal’’ life cycle events (e.g.,
novations and terminations), which
currently are confirmed. ISDA stated
that industry methodologies have been
developed around the confirmation of
legal life cycle events at great time and
expense and recommends that the
Commission defer to industry standards
and to allow market participants to
bilaterally agree that certain life cycle
events do not require subsequent
confirmation. ISDA believes that the
proposed life cycle confirmation
requirement will undermine the move
to electronic execution and processing,
because not all life cycle events are
currently supported by electronic
platforms across asset classes.
BGA recommended that the
Commission revise the proposed
definition of ‘‘swap transaction’’ to
include only those life-cycle events that
impact the economics or settlement of
the trade, as current practice of energy
commodity trading companies is not to
send new confirmations for events like
novations.
GFED believes that the Commission
should exclude FX swaps from any lifecycle event confirmation requirement.
GFED states that efficient processes
around trade events already exist (e.g.,
option exercises confirmed as new
trades), and that ISDA has developed a
novation protocol in wide use that is
moving the industry toward novation
without confirmation.
While MFA supports confirmation of
life-cycle events, it recommended that
the Commission not mandate specific
timing requirements for the
confirmation of life-cycle events. MFA
states that once a life-cycle event occurs,
parties to a swap may need to
renegotiate certain trade terms and a
timing requirement is likely to
disadvantage end users in such
negotiation with SDs.
The Working Group recommended
that confirmation of changes to material
economic or legal terms of a swap
should be confirmed, but the
confirmation should only be required
within a reasonable period of time,
rather than the time periods imposed for
newly executed swaps. The Working
Group also argued that events related to
the underlying exposure of a swap

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should not be subject to any
confirmation requirement as they are
generally addressed in master trading
agreements or the applicable
confirmation.
Having considered these comments,
the Commission has determined not to
modify the proposed rule with respect
to this issue. In reaching this
conclusion, the Commission observes
that the definition of ‘‘swap transaction’’
would require confirmation of changes
to the terms of a swap that have been
agreed between the parties or that
change the ownership of a swap.
However, the definition does not require
confirmation of events that may impact
the economics of the swap. To the
extent that the documented terms of a
swap are agreed to in advance and
provide for automatic changes to terms
upon the occurrence of a defined event,
the Commission believes that such
change would not require confirmation
pursuant to the rule.
13. Legal Uncertainty for Swaps
Following Failure to Comply With Swap
Confirmation Rules
The proposal did not address the
issue of the legal standing or
enforceability of a swap transaction that
is not confirmed within the time periods
mandated by the proposed rules.
In respect of this issue, the FHLBs
commented that such failure should not
affect the enforceability of the swaps
because such an outcome would lead to
legal uncertainty in the swap market,
and The Working Group recommended
that the Commission clearly indicate the
regulatory and legal consequences of
one or more parties to a swap failing to
meet the timing requirements for
acknowledgement and confirmation,
asserting its view that a swap should not
be invalidated for the failure to meet the
timing requirements of the proposed
rules.
MFA also argued that legal certainty
of trade execution is vital for all market
participants and the proposed rules may
lead to uncertainty as to the
enforceability of transactions that fail to
be confirmed in compliance with the
requirements of the proposed rules. To
avoid this result, MFA recommended
that the rule be revised to require only
that an SD or MSP deliver an
acknowledgement specifying the
primary economic terms of a swap
(rather than all terms), and specify no
timeframe for confirmation.
Recognizing the concerns raised by
commenters with respect to legal
certainty, the Commission notes that it
is not the intent of the confirmation rule
to provide swap counterparties with a
basis for voiding or rescinding a swap

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55925

transaction based solely on the failure of
the parties to confirm the swap
transaction in compliance with the
proposed rules. In the absence of fraud,
the Commission will consider an SD or
MSP to be in compliance with the
confirmation rule if it has complied in
good faith with its policies and
procedures reasonably designed to
comply with the requirements.
However, the Commission notes that it
does not have the authority to immunize
SDs or MSPs from private rights of
action for conduct within the scope of
section 22 of the CEA, i.e., violations of
the CEA.
14. Recordkeeping Requirements for
Acknowledgements and Confirmation—
§ 23.501(b)
Proposed § 23.501(b) required SDs
and MSPs to keep a record of the date
and time of transmission of
acknowledgements and confirmations, a
record of the length of time between
acknowledgement and confirmation,
and a record of the length of time
between execution and confirmation.
Commenting on the proposal, The
Working Group recommended that only
a time stamp on acknowledgements and
confirmations be required as the
remainder of the required records in the
proposed rules could be determined
from the timestamps on these
documents. The Working Group also
requested that the Commission clarify
how the recordkeeping requirements in
the proposed confirmation rule apply to
lifecycle events because timestamps for
some lifecycle events would not make
sense.
MarkitSERV recommended that the
Commission clarify that an SD’s or
MSP’s recordkeeping requirements may
be delegated to a third-party
confirmation platform and the
conditions under which such delegation
may be done.
BGA argued that energy commodity
traders place orders with broker/dealers
and may be unaware of the time at
which a trade is actually executed, and
unable to keep accurate records of the
length of time between execution and
confirmation of a swap. BGA therefore
recommended that the Commission
remove the recordkeeping requirements
from the proposed rules.
GFED commented that the time stamp
requirements of the proposed
recordkeeping rules would require
significant technology investment as
current systems typically do not time
stamp at issuance or receipt.
Having considered these comments,
the Commission is modifying the
recordkeeping requirement. First, the
Commission is removing the

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requirement that SDs and MSPs keep
records of the length of time between
the acknowledgment and confirmation
of a swap, as well as the time between
execution and confirmation, as this
information can be readily ascertained
by reviewing other records. Second, the
cross-reference to § 1.31 has been
changed to refer to the record retention
rule applicable to SDs and MSPs,
§ 23.203. Apart from these
modifications, the Commission believes
the records required to be made and
maintained under § 23.501(b) are the
minimum necessary to monitor
compliance with the rule. In addition,
the Commission notes that certain items
in the recordkeeping requirement is
information that will be required for
compliance with other Commission
rules, such as the time of execution for
real-time public reporting of pricing and
transaction data and for reporting to an
SDR.
In response to MarkitSERV, the rule
does not prohibit SDs and MSPs from
relying on third-party service providers
to achieve compliance with the rule,
although the responsibility for
compliance cannot be delegated.
Finally, in response to The Working
Group’s comment, the Commission is
not persuaded that it is impossible to
keep time-stamped records of key
changes in ownership including such
significant events as execution,
termination, assignment, novation,
exchange, transfer, amendment,
conveyance, or extinguishing of rights
or obligations. The Commission believes
that its clarification of the ‘‘swap
transaction’’ definition above alleviates
any concern that the rule imposes an
impossible recordkeeping requirement.
E. Portfolio Reconciliation—§ 23.502
Portfolio reconciliation is a postexecution processing and risk
management technique that is designed
to: (i) Identify and resolve discrepancies
between the counterparties with regard
to the terms of a swap either
immediately after execution or during
the life of the swap; (ii) ensure effective
confirmation of all the terms of the
swap; and (iii) identify and resolve
discrepancies between the
counterparties regarding the valuation
of the swap. In some instances, portfolio
reconciliation also may facilitate the
identification and resolution of
discrepancies between the
counterparties with regard to valuations
of collateral held as margin.
Accordingly, in the Confirmation
NPRM, the Commission proposed
§ 23.502, which required SDs and MSPs
to reconcile their swap portfolios with
one another and provide counterparties

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who are not registered as SDs or MSPs
with regular opportunities for portfolio
reconciliation. In order for the
marketplace to realize the full risk
reduction benefits of portfolio
reconciliation, the Commission also
proposed to expand portfolio
reconciliation to all transactions,
whether collateralized or
uncollateralized. For the swap market to
operate efficiently and to reduce
systemic risk, the Commission believed
that portfolio reconciliation should be a
proactive process that delivers a
consolidated view of counterparty
exposure down to the transaction level.
By identifying and managing
mismatches in key economic terms and
valuation for individual transactions
across an entire portfolio, the
Commission’s proposal sought to
require a process in which overall risk
can be identified and reduced. The
Commission received numerous
comments to the portfolio reconciliation
proposal and considered each in
formulating the final rules, as discussed
below.
1. Statutory Basis for Portfolio
Reconciliation
The proposed portfolio reconciliation
regulations were proposed pursuant to
section 4s(i) of the CEA, as added by
section 731 of the Dodd-Frank Act,
which directs the Commission to
prescribe regulations for the timely and
accurate confirmation, processing,
netting, documentation, and valuation
of all swaps entered into by SDs and
MSPs.
The Working Group commented that
the Commission should delete the
reconciliation requirements from the
proposed rule because section 731 of the
Dodd-Frank Act does not require the
Commission to issue rules on portfolio
reconciliation and the Commission has
not fully analyzed the potential effect on
the market.
In response to The Working Group’s
comment, the Commission notes that
portfolio reconciliation involves both
confirmation and valuation and serves
as a mechanism to ensure accurate
documentation. Thus, the reconciliation
requirements finalized herein are within
the scope of section 4s(i) of the CEA.
Moreover, the Commission reiterates its
statement in the Confirmation NPRM
that disputes related to confirming the
terms of a swap, as well as swap
valuation disputes impacting margin
payments, have long been recognized as
a significant problem in the OTC
derivatives market, and portfolio
reconciliation is considered an effective
means of identifying and resolving these
disputes.

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2. General Comments to Portfolio
Reconciliation—§ 23.502
Proposed § 23.502 required SDs and
MSPs to engage in periodic swap
portfolio reconciliation with their swap
counterparties. Swap portfolio
reconciliation is defined in the
proposed rule as a process by which the
two parties to one or more swaps: (i)
Exchange the terms of all swaps in the
portfolio between the parties; (ii)
exchange each party’s valuation of each
swap in a portfolio between the parties
as of the close of business on the
immediately preceding business day;
and (iii) resolve any discrepancy in
material terms and valuations.
While Chris Barnard supported the
proposed reconciliation requirements,
several commenters objected to certain
aspects of the rule.
GFED commented that the portfolio
reconciliation requirements are likely to
be onerous, require significant
investment in new infrastructure, and
have few benefits for shorter dated FX
swaps. GFED therefore recommended
that the rules require only: (i)
Reconciliation of portfolio valuations
(as opposed to differences in valuation
or trade specifics at the transaction
level) because there is existing market
infrastructure in place for this purpose;
and (ii) reconciliation on a weekly basis
with longer timeframes for resolving
discrepancies that reflect the global
nature of the FX market.
MFA stated that current market
practice is for market participants to
engage in portfolio reconciliation at the
transactional level only if there are
portfolio-level discrepancies that result
in margin disputes, and MFA
recommended that the Commission only
require portfolio reconciliation upon the
occurrence of a material dispute
regarding margin to avoid unnecessary
expense. MFA also believes the
Commission should accommodate
participants with differing policies,
procedures, business models, structures,
and types of swaps by providing general
principles and guidelines as to what
constitutes best practices, but not
prescriptive rules.
ISDA stated that current portfolio
reconciliation processes in the industry
are a means of identifying the source of
a material collateral dispute at the
portfolio level. ISDA believes the draft
2011 Convention on Portfolio
Reconciliation and the Investigation of
Disputed Margin Calls and the draft
2011 Formal Market Polling Procedure,
developed pursuant to industry
commitments to the ODSG, which ISDA
believes will be widely adopted by OTC
derivatives market participants, should

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play a more significant role in shaping
the proposed reconciliation rules.
Specifically, ISDA believes that
portfolio reconciliation should be
defined by reference to generallyaccepted industry standards, as
instituted through the ODSG process,
and reflected in data standards and best
practices as published by ISDA.
While TriOptima supports the regular
reconciliation of all portfolios and
believes that this will identify issues
that can minimize counterparty credit
exposure and operational risk,
TriOptima also believes that the
Commission should not require
registrants to agree on reconciliation
procedures, but should encourage the
use of industry-wide practices and
protocols.
The Commission has not modified the
rule based on these comments, but
certain elements of the rule have been
modified based on specific comments
received, as discussed below. The
Commission believes that regular
portfolio reconciliation will prevent
most disputes from arising and therefore
does not recommend that portfolio
reconciliation be performed only on an
ad hoc basis in response to a material
margin dispute at the portfolio level.
The Commission notes that portfolio
reconciliation is not required for cleared
swaps where the DCO holds the
definitive record of the trade and
determines a binding daily valuation for
each swap cleared by the DCO.
Therefore the Commission believes that
portfolio reconciliation will become less
burdensome as the bilateral portfolios of
SDs and MSPs become significantly
smaller over time as a result of required
clearing of swaps. In addition, the need
for portfolio reconciliation may be
obviated at such time as all swaps are
reported to SDRs. For example, if an
SDR record of a swap is, by agreement
of the parties, the legally operative
documentation of the swap, the parties
need only consult the SDR record to
reconcile their portfolios.34
3. Reconciliation of Material Terms—
§ 23.502(a)(4) & (b)(4)
The proposed regulations required
SDs and MSPs to resolve any
discrepancy in material terms of swaps
in a swap portfolio discovered during
the process of portfolio reconciliation.
Commenting on this aspect of the
proposal, ISDA stated that current
34 For example, DTCC’s Trade Information
Warehouse maintains the centralized global
electronic database for virtually all CDS contracts
outstanding in the marketplace. The repository
maintains the most current credit default swap
contract details on the official legal, or gold record,
for both cleared and bilateral CDS transactions.

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portfolio reconciliation processes in the
industry are not meant to resolve swap
terms that do not lead to a material
collateral dispute and that the proposed
rule would cause reconciliation to
become a replacement for the
confirmation process. Similarly, The
Working Group stated that the
Commission should not require
reconciliation of terms other than
valuations to avoid imposing substantial
costs on market participants in the
absence of any immediate need.
MarkitSERV asserted that the purpose
of portfolio reconciliation is the
resolution of disputes that materially
impact collateralization at the portfolio
level, and thus it is unnecessarily
burdensome to require any discrepancy
in material terms to be resolved.
MarkitSERV recommended that the
Commission only require reconciliation
of terms that could have a material
impact on the valuation or
collateralization of a swap.
The FHLBs commented that it is not
necessary to repeatedly reconcile all
terms of swaps that have been reported
to a SDR as most if not all such terms
will not change from day-to-day or even
month-to-month. The FHLBs believe
that SDRs will be in the best position to
efficiently and effectively detect and
manage discrepancies in the material
terms of a swap transaction. Likewise,
MetLife recommended that the
Commission revise the proposed
reconciliation rule to require only the
reconciliation of variable economic
terms, as the repeated review of static
terms confirmed during the
confirmation process would be an
undue burden and expense.
TriOptima, on the other hand,
recognized that the Commission’s
proposal focuses on reconciliation of
material terms in portfolios. TriOptima
believes that this is appropriate because
the priority in reconciliation is on
completeness of trade population, rather
than granularity in trade details.
Having considered these comments,
the Commission is not making any
change to the proposed requirement that
all discrepancies in material terms be
resolved. The Commission is not
persuaded by commenters that a
discrepancy in the terms of individual
swaps would not be material to the
swap portfolio as a whole unless such
discrepancies impact collateralization at
the portfolio level. Rather, the
Commission believes that a discrepancy
in the material terms of a swap indicates
a failure in the confirmation process or
a failure in a trade input or processing
system. As noted in the preamble to the
proposed rules, the Commission
believes that the requirement that all

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55927

swaps be reported to an SDR will reduce
the burden imposed by the rule by
facilitating efficient, electronic
reconciliation for SDs, MSPs, and their
counterparties. Accordingly, the two
requirements are consistent and
mutually reinforcing.
4. Frequency of Portfolio
Reconciliation—§ 23.502(b)
Proposed § 23.502(b) required SDs
and MSPs to reconcile swap portfolios
with other SDs or MSPs with the
following frequency: Daily for portfolios
consisting of 300 or more swaps, at least
weekly for portfolios consisting of 50 to
300 swaps, and at least quarterly for
portfolios consisting of fewer than 50
swaps. For portfolios with
counterparties other than SDs or MSPs,
the proposed regulations required SDs
and MSPs to establish policies and
procedures for reconciling swap
portfolios: Daily for swap portfolios
consisting of 500 or more swaps, weekly
for portfolios consisting of more than
100 but fewer than 500 swaps, and at
least quarterly for portfolios consisting
of fewer than 100 swaps.
Several commenters supported the
frequency of reconciliation required by
the proposed rule. Chris Barnard
supported the frequency of the proposed
reconciliation requirements, while
TriOptima stated that a large number of
SDs and MSPs already regularly
reconcile their portfolios with each
other and with other entities and that
the increased frequency and inclusion
of smaller portfolios as proposed should
prove no obstacle to such entities.
However, several commenters
recommended alternatives. ISDA
recommended that the Commission
accept the portfolio size/frequency
gradation established by the ODSG
process, as that may change over time,
which ISDA believes provides an
internationally consistent and flexible
standard. ISDA does not believe the
proposed rule should distinguish
between counterparty types for
determining frequency of reconciliation
because transaction population is an
adequate guide. The Working Group
argued that the frequency of portfolio
reconciliation should be left up to the
counterparties because they have the
sophistication necessary to determine
whether and with what frequency
reconciliation is required in their own
circumstances, which may be daily,
weekly, upon discovery of a dispute, or
not at all. In the alternative, The
Working Group recommended that
portfolio reconciliation be required
quarterly with any counterparty with
which a registrant has more than 100
swaps, and annually with all other

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counterparties. Finally, Chatham
recommended that the Commission
revise the proposed rules to provide that
reconciliation with end users is only
required for swaps with maturities
greater than one year and at the
following frequency: Weekly for
portfolios of 500 or more swaps;
quarterly for portfolios of 100 to 500
swaps; annually for portfolios of 50 to
100 swaps; and optional reconciliation
for portfolios of 50 or less swaps.
Still other commenters objected more
generally to the required frequency of
reconciliation. Dominion argued that
the rule should not override any
contractual right that end users may
have regarding reconciliation, including
frequency and the process for resolving
disputes, while AMG argued that
reconciliation required under the
proposed rules is unnecessarily frequent
and imposes excessive costs that do not
bear a reasonable relationship to the
systemic risk goals of the Dodd-Frank
Act.
Finally, the OCC stated that many SDs
will not be among the G–14 largest OTC
derivatives dealers and, given the
incremental progression that was
necessary for the G–14 OTC derivatives
dealers to develop the infrastructure
necessary to increase reconciliation
amongst themselves from weekly
reconciliation for portfolios with 5,000
or more trades in 2008 to the current
daily reconciliation for portfolios of 500
or more trades, the Commission should
provide sufficient time for all registrants
to develop required infrastructure.
Having considered these comments,
the Commission is modifying the
proposed rule to require daily
reconciliation of swap portfolios among
SDs and MSPs only for swap portfolios
of 500 or more swaps. The Commission
continues to believe that the
requirement that all swaps be reported
to an SDR will lead to efficient,
electronic reconciliation for SDs and
MSPs, but, at the urging of commenters,
has reduced the required frequency of
reconciliation to match the frequency of
reconciliation currently undertaken by
the largest prospective SDs.35 In
addition, the daily reconciliation
requirement for swap portfolios among

sroberts on DSK5SPTVN1PROD with RULES

35 In

December 2008, the ODSG’s group of 14
major dealers committed to execute daily portfolio
reconciliations for collateralized portfolios in
excess of 500 trades between participating dealers
by June of 2009. See June 2, 2009 summary of
industry commitments, available at http://www.
isda.org/c_and_a/pdf/060209table.pdf. As of May
2009, all participating dealers were satisfying this
commitment. The ODSG dealers expanded their
portfolio reconciliation commitment in March 2010
to include monthly reconciliation of collateralized
portfolios in excess of 1,000 trades with any
counterparty.

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SDs and MSPs of 500 or more swaps
brings the rule into conformance with
international regulatory efforts.36
For portfolios with counterparties
other than SDs or MSPs, the
Commission is adopting the
recommendation proposed by The
Working Group—that portfolio
reconciliation be required quarterly
with any counterparty with which a
registrant has more than 100 swaps, and
annually with all other counterparties.
The Commission believes this approach
is largely consistent with that
recommended by Chatham, and it
responds, in part, to concerns expressed
by AMG. The Commission believes it
also will serve to lower the costs of the
rule. Despite this change in the
frequency of reconciliation required for
portfolios with non-SD, non-MSP
counterparties, the Commission
reiterates its belief that periodic
reconciliation with all counterparties is
a best practice for those using swaps.
In response to Dominion’s concern
about the rule overriding contractual
rights of market participants, the
Commission wishes to clarify that
parties are free to negotiate and elect
whatever dispute resolution
mechanisms they so choose. The
reconciliation rule merely sets forth the
minimum requirements and timing for
reconciliation of swap portfolios. The
rule is not intended to override
contractual rights so long as SDs and
MSPs are in compliance with these
limited provisions.
5. Exchange of Swap Data for Portfolio
Reconciliation—§ 23.500(i) & § 23.502(b)
The preamble to the proposed
regulations stated that portfolio
reconciliation could consist of one party
reviewing the trade details and
valuations delivered by the other party
and either affirming or objecting to such
details and valuations. MarkitSERV
recommended that the Commission
clarify the circumstances in which both
parties would be required to exchange
swap data and circumstances in which
only one party would be required to
send swap data to its counterparty for
verification. Consistent with its prior
36 Compare with ESMA Draft Technical
Standards, Article 2 RM, subsection 4, (stating that
‘‘In order to identify at an early stage, any
discrepancy in a material term of the OTC
derivative contract, including its valuation, the
portfolio reconciliation shall be performed: * * *
each business day when the counterparties have
500 or more OTC derivative contracts outstanding
with each other; * * * once per month for a
portfolio of fewer than 300 OTC derivative contracts
outstanding with a counterparty; * * * once per
week for a portfolio between 300 and 499 OTC
derivative contracts outstanding with a
counterparty.’’)

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statement, the Commission prefers to
permit maximum flexibility and
innovation in the process and thus will
leave the circumstances of exchange or
verification to the discretion of SDs,
MSPs, and their counterparties.
6. Portfolio Reconciliation With NonSDs/MSPs—§ 23.502
The proposed regulation required SDs
and MSPs to establish written policies
and procedures for engaging in portfolio
reconciliation with non-SDs and nonMSPs, which includes the reconciliation
of valuations for each swap in the
parties’ portfolio.
Commenting on the proposal,
MarkitSERV stated that buy-side firms
view valuation data as private
information. To allow for
confidentiality, MarkitSERV
recommends that the Commission
permit non-SDs and non-MSPs to
perform portfolio reconciliation via
third parties in a process that would
only disclose valuation data when a
discrepancy exceeds the threshold set
forth in the proposed rules.
Dominion asserted that section 4s(i) of
the CEA required the Commission to
adopt regulations for netting and
valuation for SDs and MSPs, but not end
users, and objects that the proposed
rules require SDs and MSPs to establish
policies for reconciliation with end
users and for resolution of valuation
disputes with end users in a timely
fashion. Dominion is concerned that an
end user will be required to provide SDs
with proprietary market valuations that
could be used against the interests of the
end user. Dominion therefore
recommended that the Commission
clarify that an SD’s or MSP’s written
procedures may not require end users to
disclose any proprietary market
information for purposes of dispute
resolution.
The FHLBs argued that end users
should not be subject to the same
reconciliation requirements as SDs and
MSPs because the swap portfolios of
end users do not pose a significant risk
to the overall financial system and the
reconciliation requirements may
increase the costs of swaps for end
users. Chatham similarly argued that
non-SDs and non-MSPs using swaps to
hedge risk do not pose systemic risk so
daily or weekly reconciliation is not
necessary.
As discussed above, the Commission
is modifying the proposed rule to
change the word ‘‘enforce’’ to ‘‘follow.’’
Based on commenters’ concerns that an
SD or MSP cannot force a non-registrant
to abide by the portfolio reconciliation
requirements, the Commission is further
modifying the proposed rule to require

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only that SDs and MSPs establish
policies and procedures reasonably
designed to ensure that they engage in
portfolio reconciliation with nonregistrants with the modified frequency
discussed above. The Commission
believes that ‘‘reasonably designed to
ensure’’ is not the same as requiring a
guarantee of compliance. Therefore, the
Commission believes that the rule, as
modified, would require that the SDs
and MSPs make reasonable efforts to
engage in portfolio reconciliation with
non-registrants, but would not give SDs
or MSPs the authority to require it of
their non-registrant counterparties.
In addition, the Commission is
modifying the proposed rule to clarify
that discrepancies in material terms or
valuation disputes that become known
to the parties before the quarterly or
annual reconciliation with non-SDs,
non-MSPs, should be resolved in a
timely fashion. With this change, the
Commission notes that non-SD, nonMSP counterparties may bring a
discrepancy or dispute to an SD’s or
MSP’s attention and the SD or MSP
counterparty must work to resolve those
identified discrepancies and disputes.

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7. Portfolio Reconciliation With DCOs
for Cleared Swaps—§ 23.502(c)
The proposed regulations stated that
the portfolio reconciliation
requirements will not apply to swaps
cleared by a DCO.
With respect to this provision,
MarkitSERV recommended that the
Commission require SDs and MSPs to
regularly reconcile their positions in
cleared swaps against SDRs, DCOs, and
clearing brokers to correct discrepancies
between the DCO record and a firm’s
internal records.
The Commission has determined not
to follow MarkitSERV’s
recommendation on this point. DCOs
maintain the definitive record of the
positions of each of their clearing
members (both house and customer) and
mark those positions to a settlement
price at least once a day.37 Accordingly,
the Commission believes that cleared
swaps do not present the same
documentation and valuation issues that
uncleared swaps do. The Commission
notes that reconciliation of swap data
between DCOs and SDRs is beyond the
scope of this rulemaking, which is
adopting regulations with respect to SDs
and MSPs only.
37 Under typical DCO rules, clearing members are
bound by the settlement price of the DCO and the
product specifications of cleared swaps are set by
the DCO.

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8. Portfolio Reconciliation by ‘‘Qualified
Third Parties’’—§ 23.502(b)

brought to light through portfolio
reconciliation.

The proposed regulations permitted
portfolio reconciliation to be performed
on behalf of SDs, MSPs, and their
counterparties by a qualified third party.
Commenting on this proposal, ABC &
CIEBA and AMG separately
recommended that the Commission not
require use of ‘‘qualified’’ third parties
for portfolio reconciliation, but, rather
should explicitly require that use of any
third party service provider must be
agreed by both parties and recognize
that each party may use a different third
party for reconciliation. Specifically,
ABC & CIEBA recommended that
§ 23.502(b)(1) and (2) be revised to read
as follows:

10. Time Period for Resolution of
Discrepancies in Material Terms—
§ 23.502(a)(4) & (b)(4)
With regard to portfolio reconciliation
among SDs and MSPs, the proposed
regulations required that any
discrepancy in material terms be
resolved immediately.
Freddie Mac stated that in some cases
it may be impossible to resolve a
discrepancy in material terms
immediately, as required under
§ 23.502(a)(4). Freddie Mac
recommended that the Commission
should revise the proposed rules to
provide that the timely and accurate
processing and valuation requirements
of the Dodd-Frank Act will be deemed
satisfied whenever swaps are subject to
a master netting agreement and
collateral pledge agreement under
which the parties mark net portfolio
value to market and exchange collateral
on the basis of such valuation as
promptly as commercially reasonable.
Having considered Freddie Mac’s
comment, the Commission is adopting
the rule as proposed with respect to
immediate resolution of discrepancies
in material terms in swaps among SDs
and MSPs. Given the timely
confirmation requirements of all terms
of a swap as established under § 23.501,
the Commission believes an immediate
resolution of any material term
discrepancy is appropriate.
Additionally, the Commission believes
that a longer period is not justified
because resolution of a discrepancy in a
material term will likely require an
amendment of the trade record in the
relevant SDR, which, for regulatory
oversight purposes, should be as
accurate as possible.

‘‘(1) Each swap dealer or major swap
participant shall agree in writing with each
of its counterparties on the terms of the
portfolio reconciliation, including agreement
on the selection of any third party.
(2) The portfolio reconciliation may be
performed on a bilateral basis by the
counterparties or by one or more third parties
selected by the counterparties in accordance
with § 23.502(b)(1).’’

In response to these comments, the
Commission is modifying the proposed
rule to delete the word ‘‘qualified,’’ to
require that the use of a third-party
service provider be subject to agreement
of the parties, and to provide that each
party may use a different third party so
long as the provisions of the rule are
met. Further, per AMG’s comments, the
Commission expects that parties will
determine if the third-party is qualified
based on their own policies.
9. Reconciliation Discrepancy
Resolution Procedures—§ 23.502(b)(4)
The proposed regulations required
that SDs and MSPs establish procedures
reasonably designed to resolve any
discrepancies in the material terms or
valuation of each swap identified in the
portfolio reconciliation process.
Commenting on this aspect of the
proposal, ABC & CIEBA recommended
that the Commission revise
§ 23.502(b)(4) in order to ensure that
reconciliation dispute resolution by SDs
and MSPs is fair, impartial, and evenhanded.
The Commission agrees that
reconciliation dispute resolution should
be fair, impartial, and even-handed as
recommended by ABC & CIEBA, but
believes that the commenter’s concern
will be addressed by deleting the word
‘‘enforce’’ as discussed above. The
Commission expects that SDs and MSPs
will cooperate with their counterparties
and any applicable third-party service
provider in resolving discrepancies

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11. Resolution of Valuation Disputes in
Portfolio Reconciliation—§ 23.502(a)(5)
& (b)(4)
With regard to portfolio reconciliation
among SDs and MSPs, the proposed
regulations required that any
discrepancy in the valuation of a swap
be resolved within one business day.
With regard to portfolio reconciliation
between SDs or MSPs and nonregistrants, the proposed regulations
required that SDs and MSPs have
policies and procedures reasonably
designed to resolve any discrepancy in
the valuation of a swap in a timely
fashion.
With respect to this aspect of the
proposal, ISDA commented that parties
to a good-faith dispute should have a
commercially reasonable timeframe in
which to consult in order to find an

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appropriate resolution of the dispute.
ISDA believes the draft 2011
Convention on Portfolio Reconciliation
and the Investigation of Disputed
Margin Calls and the draft 2011 Formal
Market Polling Procedure, developed
pursuant to industry commitments to
the ODSG, which ISDA believes will be
widely adopted by OTC derivatives
market participants, should play a more
significant role in shaping the proposed
reconciliation rules. The Working
Group, the FHLBs, and AMG also
recommended that the Commission
support the valuation dispute resolution
methodology sponsored by ISDA.
In addition to its general comments,
ISDA made specific recommendations:
• Resolution is labor intensive and to
avoid undue costs, discrepancies in
terms and valuations should only
require resolution if such are causing
material portfolio-level collateral
transfer disputes, rather than on a
transaction by transaction basis, as it
allows for the possibility that material
but offsetting differences may exist in a
portfolio.
• Again to avoid undue costs, a
materiality standard should apply to
any mandated resolution requirement,
because, in the absence of a
collateralization requirement or a live
dispute as to collateralization,
discrepancies in valuation may be
allowed to subsist as potentially
harmless and may disappear through
changes in portfolio composition over
time. ISDA recommends that the ODSG
resolution tolerances be adopted by the
Commission, as such tolerances may be
amended over time.
• Resolution of a valuation dispute
should mean that the discrepancy in a
portfolio-level margin dispute is
reduced such that it is within the
applicable resolution tolerance, rather
than requiring exact agreement.
• Resolution of a valuation dispute
should not require parties to make
adjustments to their books and records.
• Parties should be free to agree to
accept that there is a difference in
opinion as to value, so long as
appropriate capital is held against any
potential collateral shortfall.
With respect to the proposal to
require valuation disputes to be
resolved within one business day, ISDA
stated that a one-day timeframe for
resolution of valuation discrepancies is
infeasible, especially when applied to
parties across vastly different global
time zones, due to the need to analyze
reconciliation results, escalate for
trader-to-trader discussion or to senior
management. Further, ISDA argued that
some disputes prove to be intractable
and must be resolved through a market

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poll, which requires time to build and
populate a valuation model, which may
take hours or even days. AMG also
argued that the time periods are
unnecessarily short and do not bear a
reasonable relationship to the systemic
risk goals of the Dodd-Frank Act, noting
that the time periods are not consistent
with recent ISDA dispute resolution
protocols or other methodologies
incorporated in master agreements, and
could impose excessive costs on swap
market participants.
AMG recommended that the
Commission clarify the consequences of
failing to resolve a valuation dispute
within the mandated timeframe. Freddie
Mac stated that in some cases it may be
impossible to resolve a discrepancy in
valuation within one business day,
while BGA does not believe that
registrants should be penalized for
failing to meet the one business day
resolution deadline. BGA argued that (i)
SDs and MSPs do not have control over
their counterparties so resolution may
take more than a day; and (ii) a hard
deadline may disadvantage SDs and
MSPs in negotiating a resolution with a
counterparty that is not subject to a
deadline. Finally, The Working Group
argued that the proposed requirement
that valuation disputes between
registrants be resolved within one
business day is not workable due to the
complex calculations required,
involvement of multiple functional
groups within a registrant, and
possibility that resolution of a dispute
may require modifications to a valuation
model that could create further
discrepancies for other swaps that are
valued using the same model. The
Working Group believes the
Commission should require only that
registrants begin the valuation dispute
resolution process upon discovery of a
dispute, but permit counterparties to
resolve the dispute within a reasonable
time period.
The FHLBs requested that the
Commission specify the meaning of ‘‘in
a timely fashion’’ as it relates to
discrepancy resolution with end users.
The Working Group also had a
number of recommendations with
respect to the proposed rule:
• The Commission should not adopt
valuation dispute resolution rules that
may be burdensome for markets where
no problem exists, such as swap markets
with underlying physical markets that
provide an objective basis for swap
valuations.
• The proposed reconciliation rules
should apply only to valuation disputes
on a portfolio basis, and not on a
transaction basis, as it would be
unnecessarily burdensome to analyze

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the valuation of individual swaps unless
there is a material dispute as to the
portfolio level exposure between the
parties.
• Parties should have the right to
continue to exchange collateral without
resolving a discrepancy exceeding 10
percent if they conclude that the
discrepancy is not material in their
particular circumstances.
With respect to the proposed 10
percent threshold before a dispute
would require resolution, Chatham
argued that a percentage threshold of 10
percent difference is insufficient
because it will impose a significant
burden in cases where the absolute
value of the swap is small, such as just
after a swap is executed and in the
period just before maturity. MFA also
recommended that the Commission
revise the proposed rule to provide that
a valuation discrepancy must not only
exceed 10 percent, but must also exceed
some reasonable dollar threshold, and
must result in one party being unwilling
to satisfy a collateral call from the other
party. On the other hand, MetLife
supported the 10 percent buffer for
designation of valuation discrepancies,
but recommended that the Commission
extend the deadline for valuation
dispute resolution from 1 to at least 3
business days with respect to highly
structured and customized swaps.
TriOptima provided context with
respect to valuation dispute resolution
in the swaps market. TriOptima
commented that swaps are valued using
internal models, which use inputs
derived from observable sources or
internal calculations and reflect a
party’s view on the market; that for
many swaps, there is only sparse or
episodic liquidity in similar contracts,
which can be used to calibrate internal
valuation models; and that there is
valuable information for regulators in a
spectrum of differing valuations of a
swap. As an example, TriOptima
hypothesized that regulators could have
had an early warning sign in the run up
to the 2008 financial crisis when some
market participants realized earlier than
others that the price of credit risk was
too low and raised the price in their
internal valuations as opposed to
counterparties that did not recognize the
change in credit risk. With respect to the
proposal, TriOptima argued that forcing
convergence on swap valuations
between parties could be detrimental to
the stability and resilience of the
financial system by creating a
disincentive for firms to use their own
judgment in setting market values,
removing a valuable diagnostic tool for
regulators. TriOptima further stated that
there is a difference between an internal

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valuation used for regulatory capital
purposes and a valuation agreed with a
counterparty for use in calculating
margin. If the agreed valuation is lower
than the internal valuation, a party must
reserve capital for the unsecured
exposure. Therefore, TriOptima argued
that if the Commission requires the
parties to agree on a valuation for
internal purposes, the unsecured
exposure disappears and less capital
will be reserved, reducing stability and
resilience in the financial markets.
TriOptima recommended that the
Commission focus on establishing
principles for how to determine the
margining amount on a portfolio level,
rather than forcing parties to agree on
valuation of individual transactions,
with a key element in such principles
being consistency. For valuation
differences that persist after excluding
errors and inconsistencies, TriOptima
believes the parties should be allowed
to agree to disagree and face the credit
risk and capital consequences of having
unsecured exposures.
The Commission recognizes the view
that there is valuable information for
market participants and regulators in a
spectrum of differing valuations of a
swap. The Commission also is cognizant
of the ongoing efforts by industry and
ISDA to improve the existing valuation
dispute resolution process. Based on
meetings between Commission staff and
ISDA’s Collateral Steering Committee,
the Commission understands that
ISDA’s draft 2011 Convention on
Portfolio Reconciliation and the
Investigation of Disputed Margin Calls
and the draft 2011 Formal Market
Polling Procedure has reduced valuation
dispute resolution to a 30-day process.
Issues related to swap valuations are
woven through a number of
Commission rule proposals. For
instance, § 23.504(e), as adopted in this
release, requires SDs and MSPs to report
valuation disputes in excess of
$20,000,000 lasting longer than three
business days to the Commission, while
under § 23.504(b)(4) SDs and MSPs are
required to agree on valuation
methodologies with their
counterparties. The Commission
believes that by requiring agreement
with each counterparty on the methods
and inputs for valuation of each swap,
it is expected that § 23.504(b)(4) will
assist SDs and MSPs to resolve
valuation disputes in a timely manner,
thereby reducing risk.
Agreement between SDs, MSPs, and
their counterparties on the proper daily
valuation of the swaps in their swap
portfolio also is essential for the
Commission’s margin proposal. As
discussed above, under proposed rule

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§ 23.151, non-bank SDs and MSPs must
document the process by which they
will arrive at a valuation for each swap
for the purpose of collecting initial and
variation margin. All non-bank SDs and
MSPs must collect variation margin
from their non-bank SD, MSP, and
financial entity counterparties for
uncleared swaps on a daily basis.
Variation margin requires a daily
valuation for each swap. For swaps
between non-bank SDs and MSPs and
non-financial entities, no margin is
required to be exchanged under
Commission regulation, but the nonbank SDs and MSPs must calculate a
hypothetical variation margin
requirement for each uncleared swap for
risk management purposes under
proposed § 23.154(b)(6).
Given that arriving at a daily
valuation is one of the building blocks
for the margin rules and is essential for
the mitigation of risk posed by swaps,
the Commission expects that SDs and
MSPs as a matter of best practice will
work to resolve valuation disputes for
swaps with other SDs and MSPs within
one business day. However, the
Commission is modifying this provision
to require that valuation disputes be
subject to policies and procedures
reasonably designed to ensure that such
disputes are resolved within five
business days, as discussed further
below. The Commission has determined
to make no change to the requirement
that valuation disputes between SDs,
MSPs, and non-SDs or non-MSPs be
subject to policies and procedures
reasonably designed to ensure that such
disputes are resolved ‘‘in a timely
fashion.’’
The Commission is persuaded by
commenters that some valuation
disputes may be difficult to resolve
within the one-day timeframe and is
therefore modifying the rule such that it
no longer requires resolution, but
instead requires that SDs and MSPs
establish procedures reasonably
designed to ensure that swap valuation
disputes are resolved within five
business days.38 Thus SDs and MSPs
will not violate the rule if they fail to
resolve a particular dispute within five
business days, so long as they have
followed their reasonably designed
procedures. In addition, the rule will
require SDs and MSPs to have policies

and procedures identifying how they
will comply with any variation margin
requirements pending resolution of a
valuation dispute. The rule already
requires SDs and MSPs to establish
procedures to resolve valuation disputes
with non-SD/MSP counterparties in a
timely fashion.
Regarding the safe harbor for
valuation differences of less than 10
percent, the Commission believes the 10
percent threshold is appropriate as it
provides certainty as to which disputes
must be resolved. The Commission
believes the efficiency of a bright line
rule, as opposed to the formulas and
discretion in the alternatives presented
by commenters, will better serve the
operational processes of SDs and MSPs
and the regulatory oversight of the
Commission.

38 Compare with ESMA Draft Technical
Standards, Article 4 RM, subsection 2, (stating that
‘‘counterparties shall, when concluding OTC
derivative contracts with each other have agreed
detailed procedures and processes in relation to
* * * resolution of disputes in a timely manner;
* * * resolution of disputes that are not resolved
within five business days, including third party
arbitration or a market polling mechanism.’’)

39 Compare with ESMA Draft Technical
Standards, Article 4 RM, subsection 2, (stating that
‘‘counterparties shall report to the competent
authority * * * any disputes between
counterparties relating to an OTC derivative
contract, its valuation or the exchange of collateral
for an amount or a value higher than EUR 15
million and outstanding for at least 15 business
days.’’)

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12. Reporting of Valuation Disputes to
the Commission
The proposed regulations required
SDs and MSPs to keep records of
valuation disputes and the time to
resolution of such disputes, but did not
require SDs or MSPs to report such
disputes to the Commission. However,
as noted by the New York City Bar
Committee on Futures and Derivatives
(NYCB), proposed § 23.504(e) required
valuation disputes among SDs and
MSPs outstanding for more than one
business day, or five business days for
disputes between an SD or MSP and a
non-SD, non-MSP counterparty to be
reported to the Commission.
In this regard, ISDA recommended
that the Commission require monthly
reporting of margin disputes
outstanding more than 15 days that
exceed the applicable tolerances, which
is consistent with current ODSG
commitments. MetLife recommended a
period of 90 days before reporting is
required.
As discussed above, the Commission
is modifying this provision to require
reporting within three business days,
and it has added a $20,000,000
threshold for reporting of disputes. The
Commission believes the less frequent
reporting provided by the threshold will
alleviate the concerns of the
commenters.39

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13. Recordkeeping Requirement for
Portfolio Reconciliation—§ 23.502(d)
The proposed regulations required
SDs and MSPs to make and retain a
record of each portfolio reconciliation,
including a record of each discrepancy
and the time to resolution of each
discrepancy.
ISDA objected to the recordkeeping
requirement for portfolio reconciliation,
arguing that it should consist only of
disputes, and not of the entire process.
Specifically, ISDA recommended that
records be kept of the date of the initial
dispute, the resolution of the dispute,
the date of resolution, and the net
portfolio valuations of the two parties.
Further, ISDA requested an explicit
statement that access to third party
reconciliation services’ records will
satisfy the obligation to permit
inspection of the records by supervisors.
Similarly, The Working Group
requested that the Commission clarify
that the records required to be kept in
relation to valuation dispute resolution
pertain only to discrepancies that
exceed the 10 percent buffer.
The Commission notes that its
recordkeeping rule for SDs and MSPs
includes a recordkeeping requirement
that SDs and MSPs make and keep a
record of each portfolio reconciliation,
including the number of portfolio
reconciliation discrepancies and the
number of swap valuation disputes
(including the time-to-resolution of each
valuation dispute and the age of
outstanding valuation disputes,
categorized by transaction and
counterparty).40 In the interests of
streamlining regulatory requirements,
the Commission is modifying
§ 23.502(d) to cross reference § 23.202
and delete the substantive requirements.
The Commission has also revised the
cross-reference to § 1.31 to a crossreference to the SD and MSP record
retention rule, § 23.203.
In response to comments of ISDA and
The Working Group, the Commission
believes that the level of detail included
in portfolio reconciliation records is left
to the reasonable discretion of SDs and
MSPs so long as the basic requirements
of the rule are met.
F. Portfolio Compression—§ 23.503
Section 4s(i) of the CEA directs the
Commission to prescribe regulations for
the timely and accurate processing and
netting of all swaps entered into by
swap dealers and major swap
participants. Portfolio compression is an
40 See 17 CFR 23.202(a)(3)(iii), Reporting,
Recordkeeping, and Daily Trading Records
Requirements for Swap Dealers and Major Swap
Participants, 77 FR 20128, 20201 (April 3, 2012).

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important, post-trade processing and
netting mechanism that can be an
effective and efficient tool for the timely
and accurate processing and netting of
swaps by market participants. Portfolio
compression is a mechanism whereby
substantially similar transactions among
two or more counterparties are
terminated and replaced with a smaller
number of transactions of decreased
notional value in an effort to reduce the
risk, cost, and inefficiency of
maintaining unnecessary transactions
on the counterparties’ books. Because
portfolio compression participants are
permitted to establish their own credit,
market, and cash payment risk
tolerances and to establish their own
mark-to-market values for the
transactions to be compressed, the
process does not alter the risk profiles
of the individual participants beyond a
level acceptable to the participant. The
usefulness of portfolio compression as a
risk management tool has been
acknowledged widely.
In 2008, the PWG identified frequent
portfolio compression of outstanding
trades as a key policy objective in the
effort to strengthen the OTC derivatives
market infrastructure.41 Similarly, the
2010 staff report outlining policy
perspectives on OTC derivatives
infrastructure issued by the FRBNY
identified trade compression as an
element of strong risk management and
recommended that market participants
engage in regular, market-wide portfolio
compression exercises.42
Based upon these considerations, the
Commission proposed § 23.503, which
imposed certain portfolio compression
requirements upon SDs and MSPs. The
Commission received numerous
comments to the portfolio compression
proposal and considered each in
formulating the final rules, as discussed
below.
1. Statutory Basis for Portfolio
Compression
The proposed portfolio compression
regulations were proposed pursuant to
section 4s(i) of the CEA, which directs
the Commission to prescribe regulations
for the timely and accurate
confirmation, processing, netting,
documentation, and valuation of all
swaps entered into by SDs and MSPs.
Commenting on the proposal, ISDA
stated that the portfolio compression
requirements lack an explicit statutory
41 See ‘‘Policy Objectives for the OTC Derivatives
Markets,’’ President’s Working Group on Financial
Markets (Nov. 14, 2008).
42 See Federal Reserve Bank of New York Staff
Report No. 424: ‘‘Policy Perspectives on OTC
Derivatives Market Infrastructure,’’ Jan. 2010
(revised Mar. 2010).

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basis in the Dodd-Frank Act, and should
be left to the judgment of market
participants. Likewise, The Working
Group stated that section 731 of the
Dodd-Frank Act does not require the
Commission to issue rules on portfolio
compression and believes the final rules
should not include portfolio
compression requirements.
In response to these comments,
section 4s(i) of the CEA clearly
authorizes the Commission to prescribe
standards for the netting of swaps. As
explained in the Confirmation NPRM,
portfolio compression is a post-trade
processing and netting mechanism
whereby substantially similar
transactions among two or more
counterparties are terminated and
replaced with a smaller number of
transactions of decreased notional
value.
2. Definition of ‘‘Multilateral Portfolio
Compression Exercise’’—§ 23.500(h)
The proposed regulations defined
‘‘multilateral portfolio compression
exercise’’ as an exercise in which
multiple swap counterparties wholly or
partially terminate some or all of the
swaps outstanding among those
counterparties and replace the swaps
with a smaller number of swaps whose
combined notional value is less than the
combined notional value of the original
swaps included in the exercise. The
replacement swaps may be with the
same or different counterparties.
With respect to this definition,
TriOptima commented that the
proposed definition of ‘‘multilateral
portfolio compression exercise’’ is too
narrow and recommends that the
Commission revise the definition to
read: ‘‘an exercise in which multiple
swap counterparties wholly terminate or
change the notional value of some or all
of the swaps submitted by the
counterparties for inclusion in the
portfolio compression and, depending
on the methodology employed, replace
the terminated swaps with other swaps
whose combined notional value (or
some other measures of risk) is less than
the combined notional value (or some
other measure of risk) of the terminated
swaps in the compression exercise.’’
ISDA recommended the same changes
as those recommended by TriOptima for
the same reasons.
Based on the explanations of
commenters, the Commission is
persuaded that the proposed definition
was unnecessarily narrow and the
Commission has accordingly modified
the definition of ‘‘multilateral portfolio
compression exercise’’ in the manner
recommended by commenters. In
addition, for the sake of consistency, the

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definition of ‘‘bilateral portfolio
compression exercise’’ has also been
modified in a consistent manner.
3. Mandatory Portfolio Compression—
§ 23.503
The proposed regulations required
SDs and MSPs to engage in bilateral and
multilateral portfolio compression
exercises with respect to all swaps in
which their counterparty is also an SD
or MSP. In contrast, the proposed
regulations required SDs and MSPs to
establish policies and procedures for
engaging in portfolio compression with
swap counterparties that are not SDs or
MSPs.
On this issue, The Working Group
argued that portfolio compression is
only beneficial in markets where there
is a high degree of transaction
standardization and a high volume of
redundant trades, and therefore
recommended that the Commission only
impose mandatory compression
exercises on markets where the ratio of
gross market value to notional size
(which is a rough estimation of the level
of redundant trades) shows that the
benefits of compression outweigh the
substantial cost of engaging in the
exercise. The Working Group also
recommended that the Commission not
impose mandatory compression in
markets where compression platforms
have not yet been designed, tested, and
approved by the Commission.
Markit pointed out that portfolio
compression was recently attempted in
the commodities and foreign exchange
asset classes, but was not pursued
further because the trial cycles had
limited success, and is concerned that
mandatory participation under the
proposed rules might lead to
compression for a range of uncleared
swaps where the potential benefits do
not justify the cost of the exercise,
particularly for the large number of
potential SDs and MSPs that currently
do not participate in compression
cycles. Costs identified by Markit
include changes to participant’s risk
systems and connectivity enhancements
that would allow for the booking and
processing of a large volume of swaps
(thousands) in as short a period as a
single day. Markit recommended an
alternative to the proposal in which the
Commission would establish thresholds
for determining whether a category of
non-cleared swaps should be subject to
any mandatory compression exercise
and the frequency of such exercises.
Markit believes such thresholds should
be related to the minimum number of
swaps, number of participants, number
of swaps per participant, amount of
ongoing trading activity, degree of

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standardization in the product, and the
notional amount of transactions that
must be compressed.
With respect to compression between
SDs and MSPs and non-SDs, non-MSPs,
Markit believes that there will be no
noteworthy benefit from requiring nondealer counterparties to participate in
portfolio compression exercises for
uncleared swaps, as such entities have
portfolios with a very small number of
offsetting transactions and often have
complicated arrangements with prime
brokers making compression more
difficult and costly.
Freddie Mac commented that
mandatory portfolio compression
should be limited to swaps that match
and offset cash flows exactly, and that
any compression requirement allow for
exceptions for end users relying on
swaps for hedging purposes or that
otherwise believe the termination of an
existing swap would have an adverse
effect on remaining trades.
Providing the view of a portfolio
compression vendor, TriOptima stated
that for many smaller institutions and
for larger institutions trading illiquid
swaps, the net to gross ratio of a
portfolio is sometimes close to 100
percent, meaning that all swaps in the
portfolio are in the same market-risk
direction. TriOptima argued that it
would not be productive for such
institutions to take part in multilateral
compression as many transactions
designated as hedges for accounting
purposes must be excluded from
compression, and either no transactions
could be compressed or the resulting
notional reduction would be minimal.
TriOptima therefore recommended that
the Commission remove any mandatory
compression requirement from the
proposed rule and instead focus on
creating incentives for institutions to
take part in portfolio compression.
TriOptima noted that most capital
requirements are based on net risk
positions and therefore recommended
that the Commission create capital or
other incentives to reduce gross risk
positions.
Based on the comments received, the
Commission has concluded that it may
be premature to require SDs and MSPs
to engage in mandatory bilateral and
multilateral compression exercises for
all asset classes at this time. Although
the Commission agrees with Markit’s
comment that compression
opportunities should be based on an
analysis of the market, including the
number of swaps, number of
participants, number of swaps per
participant, amount of ongoing trading
activity, degree of standardization in the
product, and the notional amount of

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55933

transactions that could be compressed,
it does not foresee that it will have the
resources to make such a determination
or to set thresholds for mandatory
compression. In addition, as discussed
more fully below, the Commission is
modifying the bilateral offset
requirement for swaps between SDs and
MSPs that are ‘‘fully offsetting.’’
Accordingly, the Commission has
modified the proposed rules to remove
the mandatory bilateral and multilateral
compression requirements and has
replaced them with a requirement that
SDs and MSPs establish policies and
procedures for periodically engaging in
portfolio compression exercises with
counterparties that are also SDs or MSPs
and for engaging in portfolio
compression with all other
counterparties upon request.43 In this
regard, the Commission anticipates that
in order to be in compliance with the
rule, an SD’s or MSP’s policies and
procedures would include procedures
for engaging in periodic evaluation of
compression opportunities, written
policies establishing when the SD or
MSP would consider a compression
opportunity to be materially beneficial,
and procedures for engaging in those
opportunities when such arise. These
policies and procedures would also be
required to address how the SD and
MSP would determine which swaps to
include and exclude from compression
exercises and what risk tolerances it
would accept.
The Commission has also modified
the rule to clarify that (1) non-SDs/MSPs
are not required to engage in portfolio
compression exercises with SDs and
MSPs, but (2) that SDs and MSPs must
engage in portfolio compression
exercises with non-SDs/MSPs upon
request.
As further support for the
modifications, the Commission notes
that in the proposed DCO rules, the
Commission proposed that DCOs must
offer multilateral compression, but the
final DCO rule provided that
participation in compression exercises
by clearing members and their
customers would be voluntary.44
43 Compare with ESMA Draft Technical
Standards, Article 3 RM, subsection 2, (stating that
‘‘counterparties with 500 or more OTC derivative
contracts outstanding which are not centrally
cleared shall have procedures to regularly, and at
least twice a year, analyse the possibility to conduct
a portfolio compression exercise in order to reduce
their counterparty credit risk and engage in such
portfolio compression exercise.’’)
44 See 17 CFR 39.13(h)(4), Derivatives Clearing
Organization General Provisions and Core
Principles, 76 FR 69334, 69383 (Nov. 8, 2011).

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4. Swaps Eligible for Compression—
§ 23.503
Proposed § 23.503 required SDs and
MSPs to include all swaps in their
compression exercises with other SDs
and MSPs and swaps with other
counterparties to the extent that the
swaps are able to be terminated through
a portfolio compression exercise.
With respect to this aspect of the
proposal, BlackRock recommended that
the Commission revise the proposed
compression rules to more fully
promote the compression of
substantially similar, but not fully
offsetting, swaps.
The Commission believes that the
concerns underlying BlackRock’s
comment is addressed by the changes to
the proposed rule as discussed above,
specifically the modification requiring
SDs and MSPs to engage in compression
with non-SDs and non-MSPs at the
request of such parties. The Commission
believes it is prudent to permit the
parties to agree on the method and
venue of compression, rather than
having the Commission prescribe the
method and venue.
5. Application of Portfolio Compression
to Non-SD/MSPs
In the Confirmation NPRM, the
Commission requested comment on
whether it should require SDs and MSPs
to engage in compression exercises with
counterparties that are not SDs or MSPs.
The Commission also requested
comment on whether financial entities
as defined in proposed § 23.500 should
be subject to the same compression
requirements as SDs and MSPs.
In response to this request for
comments, Markit stated that there will
be no noteworthy benefit from requiring
non-dealer counterparties to participate
in portfolio compression exercises for
uncleared swaps because such entities
have portfolios with a very small
number of offsetting transactions and
often have complicated arrangements
with prime brokers making compression
more difficult and costly.
ISDA also identified several issues
with the proposal to apply compression
requirements to non-SDs:
• Current portfolio compression
exercises only achieve successful results
by limiting exercises to a single assetclass and a relatively small and
homogeneous group of participants (i.e.,
the G14 dealers), which limits the
difficulty and range of attendant risks.
• Multilateral compression cycles are
typically managed with automated tools
to support tear up and new trade
creation that end-users usually do not
possess, and the costs of obtaining such
tools cannot be justified by the benefits.

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• The requirement for bilateral
netting of swaps not covered by
multilateral or cleared compression
processes will impose onerous tasks
with only limited benefit for end-users
who engage in trades that are typically
more bespoke.
ABC & CIEBA commented that benefit
plans should not be subject to the
proposed portfolio compression rule
because every swap of a benefit plan
serves a business purpose and benefit
plan swap portfolios contain no
redundant positions. ABC & CIEBA also
argued that benefit plans may have
multiple investment advisers with
individual mandates and portfolio
compression could result in losses if
market movements that had been
previously hedged are undone by
compression. ABC & CIEBA thus urged
the Commission to require SDs and
MSPs to obtain explicit consent of end
user counterparties prior to compression
of any swap.
AMG, Dominion, the FHLBs, and
Chatham echoed the concerns of ABC &
CIEBA, commenting that non-SDs and
non-MSPs (including financial entities)
should not be subject to mandatory or
involuntary portfolio compression due
to legitimate reasons for offsetting, but
beneficial swap positions, such as
hedging specific assets. Thus, AMG,
Dominion, and the FHLBs
recommended that the Commission
revise the proposed rules to require SDs
and MSPs to obtain the explicit consent
of its end user counterparties prior to
compression of any swap. BlackRock
recommended that the Commission
require SDs and MSPs to engage in
bilateral and multilateral compression
exercises with counterparties that are
not SDs or MSPs, if such parties chose
to do so.
MFA similarly recommended that
portfolio compression be an option for
end users, but not an obligation as
portfolio compression is only
appropriate for entities with portfolios
large enough to yield meaningful
benefits that outweigh the expense of a
compression exercise. MFA further
stated that end users should not be
required to engage in multilateral
portfolio compression for cleared swaps.
GFED believes that portfolio
compression is unnecessary for nondealer end users as volumes are too
small.
With respect to compression with
financial entities, the FHLBs
commented that financial entities
should not be subject to the same
compression requirements as SDs and
MSPs as the swap portfolios of such
entities do not, by definition, pose a
significant risk to the overall financial

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system, such requirements could have
adverse effects for such entities because
their tax and accounting treatment may
differ significantly from those of SDs,
and such requirements may discourage
financial entities from using swaps for
hedging or risk mitigation.
Freddie Mac believes that mandatory
portfolio compression should be limited
to swaps that match and offset cash
flows exactly, and that any compression
requirement allow for exceptions for
end users relying on swaps for hedging
purposes or that otherwise believe the
termination of an existing swap would
have an adverse effect on remaining
trades.
With respect to insurers, NAIC stated
that state insurance laws require
insurers to ‘‘tag’’ each swap position to
specific hedging, replication, or income
generation transactions, giving
insurance regulators complete
transparency into the swap position
carried by insurers. NAIC is concerned
that the proposed compression
requirements, despite the exception in
§ 23.503(c)(3)(i), may require SDs and
MSPs to terminate fully offsetting swaps
that include swaps held by insurers for
hedging of specific assets and liabilities,
hindering state regulators’ ability to
regulate insurers. NAIC requested that
the Commission modify the rule so that
any swap position of an insurer that is
specifically designated as a hedge as
required by state insurance statutory
accounting rules be allowed to remain
outstanding and not be subject to
portfolio compression rules.
MetLife also strongly opposed any
mandated compression of offsetting
swap positions. MetLife believes that
the safe harbor in the proposed rules for
exclusion of swaps ‘‘likely to increase
significantly the risk exposure’’ of a
party is not sufficiently broad to protect
a party’s essential hedging transactions.
MetLife recommended that MSPs and
other end users be permitted to opt out
of compression for transactions that are
bona fide hedges. Specifically, MetLife
stated that the compression
requirements may conflict with state
insurance laws governing allocation of
hedging transactions to specific assets
and liabilities. MetLife concurred with
other commenters in urging the
Commission to exclude insurance
companies from any mandatory
portfolio compression requirement.
On the other hand, Eris Exchange
stated that it has clearly heard that the
swap trading community welcomes the
Commission’s proposed compression
rule. Eris Exchange believes the end
user community is optimistic that
financial reform will lead to greater
position netting and the ability to more

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freely unwind aged swap trades without
having to go through a cumbersome
novation process involving substantial
operational burden and negotiated upfront payments.
Having considered these comments,
the Commission notes that, as discussed
above, the rule has been modified to
require SDs and MSPs to establish
policies and procedures for engaging in
portfolio compression with non-SDs and
non-MSPs when requested by such
counterparties. The Commission
believes this change addresses the
comments of non-SDs and non-MSPs
discussed above.
6. Application of Portfolio Compression
by Asset Class
Proposed § 23.503 applied uniformly
to all swaps, regardless of asset class.
The Commission requested comment
regarding whether the compression
requirement should be restricted to
particular asset classes.
ISDA commented that compression in
asset classes other than credit and
interest rates would be extremely costly
and the benefits would be limited. ISDA
stated that the industry will need to
develop practices for each additional
asset class because methods used in one
asset class are not portable to other asset
classes with distinct characteristics.
ISDA specifically recommended that the
following asset classes be excluded from
any compression requirements:
• Foreign exchange swaps, which
achieve compression through daily
trade aggregation in CLS and have short
tenors;
• Equity derivatives, because they are
broadly positional in nature, there is a
lack of standardization, and they are
broadly hedged; and
• Commodity derivatives, because
notional amounts are low and
compression may only be worthwhile
for oil and precious metals.
GFED also recommended that the
Commission exclude foreign exchange
swaps from the portfolio compression
requirements as most foreign exchange
swaps are short dated (i.e., three to six
months average, one month for options)
and the costs of implementation likely
outweigh the limited benefits.
As noted above, Markit stated that
portfolio compression was recently
attempted in the commodities and
foreign exchange asset classes, but was
not pursued further because the trial
cycles had limited success.
As discussed above, the Commission
has modified the rule to remove the
mandatory compression requirement
and replace it with a requirement that
SDs and MSPs establish policies and
procedures for the regular evaluation of

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compression opportunities with other
SDs and MSPs, when appropriate, and
for engaging in compression with nonSDs and non-MSPs upon request. The
Commission believes this change
addresses commenters’ concerns
regarding the inappropriate or
inefficient application of portfolio
compression to certain asset classes.
7. Bilateral Uncleared Swap Portfolio
Compression—§ 23.503(b)
Proposed § 23.503(b) required SDs
and MSPs to engage in bilateral
portfolio compression exercises at least
once every calendar year with their
swap counterparties that were also SDs
or MSPs, unless the SD or MSP
participated in a multilateral
compression exercise in which such
counterparties also participated.
With respect to this proposal, ISDA
commented that the move to clearing
will reduce the need for bilateral/
uncleared trade compression because
most fungible, liquid products in the
credit and rates markets will be in
DCOs.
The Commission believes that the
changes to the proposed rule discussed
above will address commenters’
concerns regarding the inefficient
application of portfolio compression to
uncleared swaps. Specifically, the rule
as adopted will not require SDs and
MSPs to engage in bilateral
compression, but only require that
registrants establish policies and
procedures for periodically engaging in
such compression where appropriate.
8. Termination of Fully-Offsetting
Bilateral Swaps—§ 23.503(a)
Proposed § 23.503(a) required SDs
and MSPs to terminate fully offsetting
swaps with other SDs or MSPs no later
than the close of business on the
business day following the day the fully
offsetting swap was executed.
Commenting on this proposal, The
Working Group stated that an SD or
MSP with a regulatory requirement for
functional separation may have
legitimate reasons for maintaining
offsetting long and short positions, thus
the Commission should not mandate
termination of fully-offsetting swaps,
but only require that registrants have
policies and procedures for termination
of such swaps in appropriate
circumstances. The Working Group also
argued that requiring registrants to run
and monitor daily systems for the
detection of completely offsetting swaps
where there are likely to be none is
unnecessarily burdensome. Finally, The
Working Group believes that the one
business day time period for terminating
fully-offsetting swaps is unnecessarily

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55935

burdensome and should be revised to
allow for one week.
ISDA believes the requirement for
registrants to terminate fully-offsetting
swaps between registrants to be
unnecessary because such swaps are not
sources of material risk. ISDA believes
compliance with the rule would be
extremely difficult and expensive to
implement as compliance will require
new processes to identify single
offsetting trades. In addition, ISDA
stated that perfectly offsetting swaps are
not common and recommends the
Commission clarify whether only
perfect offsets are required to be
terminated.
The Commission finds these
comments persuasive and is modifying
the rule to require only that SDs and
MSPs establish policies and procedures
to terminate fully offsetting swaps with
other SDs and MSPs in a timely fashion,
where appropriate. The Commission
believes this modification allows SDs
and MSPs to design policies and
procedures that permit the maintenance
of offsetting long and short positions for
legitimate business reasons.45 The
Commission has also determined to
remove the one-day termination
requirement as a cost-saving measure
and to replace it with the phrase ‘‘in a
timely fashion.’’
9. Compression of Cleared Swaps
The proposed regulation did not
differentiate between cleared swaps and
uncleared swaps.
In this respect, ISDA believes that no
compression requirement should attach
to cleared trades, but, in the alternative,
ISDA recommended the Commission
clarify that complying with a DCOs
compression requirements will satisfy
the compression requirements of the
proposed rule. Likewise, MFA stated
that end users should not be required to
engage in multilateral portfolio
compression for cleared swaps.
Having considered these comments,
and in light of the portfolio compression
requirements under the Commission’s
regulations for DCOs,46 the Commission
has concluded that it is unnecessary to
apply the requirements of this rule to
swaps that are cleared by a DCO and has
modified the rule accordingly. The
Commission notes that this change is
parallel to the portfolio reconciliation
45 Compare with ESMA Draft Technical
Standards, Article 3 RM, subsection 3, (stating that
‘‘counterparties shall terminate each of the fully
offset OTC derivative contracts not later than when
the compression exercise is finalized.’’)
46 See 17 CFR 39.13(h)(4), Derivatives Clearing
Organization General Provisions and Core
Principles, 76 FR 69334, 69383 (Nov. 8, 2011).

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rule, which also does not apply to
swaps cleared by a DCO.
10. Mandatory Multilateral Compression
Offered by a DCO or SRO—
§ 23.503(c)(2)
Proposed § 23.503(c)(2) required SDs
and MSPs to participate in all
multilateral portfolio compression
exercises offered by a DCO of which the
SD or MSP is a member or an SRO of
which the SD or MSP is a member.
Commenting on this aspect of the
proposal, both ISDA and TriOptima
stated that mandating compression
offered by a DCO or SRO will inhibit
competition among providers of
compression services. ISDA is
concerned that members of DCOs and
SROs may become bound to
compression services with inadequate
transparency, insufficient testing and
lack of price competition. ISDA
recommends that the Commission
permit registrants to select the
compression service provider, including
for DCO or SRO-mandated compression
exercises.
As discussed above, the Commission
has removed the mandatory
compression requirements from the rule
as adopted. Nonetheless, in response to
these comments, the Commission agrees
that the rule should not demonstrate a
preference for any type of compression
services provider and has accordingly
modified the rule to require SDs and
MSPs to evaluate multilateral
compression exercises initiated, offered,
or sponsored by any third party. This
change also comports with the decision
to change the final DCO rules to provide
for voluntary participation in
compression exercises.

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11. Risk Tolerances in Multilateral
Portfolio Compression—
§ 23.503(c)(3)(ii)
Proposed § 23.503(c)(3)(ii) permitted
SDs and MSPs to establish counterparty,
market, cash payment, and other risk
tolerances, and to exclude specific
potential counterparties for the
purposes of multilateral compression
exercises.
Commenting on this aspect of the
proposal, The Working Group
recommended that the Commission
grant market participants broad
discretion when setting ‘‘risk
tolerances’’ for multilateral compression
exercises, including:
• A broad array of risks for which
swaps may be excluded from the
exercise (e.g., regulatory risk, financial
statement risk);
• The ability to express preference for
preserving swaps with one counterparty

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over another for credit risk management
purposes; and
• The ability to require that only
identical swaps and not substantially
similar swaps can be compressed.
Having removed the mandatory
multilateral compression requirement
from the rule, the Commission has also
removed the portions of the rule related
to setting risk tolerances. However,
under the revised rule, SDs and MSPs
must establish policies and procedures
for engaging in multilateral compression
exercises, and the Commission expects
that these policies and procedures will
address how the SD and MSP would
determine which swaps to include and
exclude from compression exercises and
what risk tolerances it would accept.
The Commission believes that this
change addresses commenters’ concerns
regarding the discretion to determine
risk tolerances in multilateral
compression exercises.

specified for the exercise, and the
results of the exercise. ISDA commented
that the recordkeeping requirement for
portfolio compression is too prescriptive
in its detail. The Commission is
modifying the rule to require simply
that SDs and MSPs maintain complete
and accurate records of all compression
exercises. As a matter of good practice,
the Commission anticipates that market
participants will make and maintain all
necessary records of any swaps that are
netted down, new swaps entered into,
and any swaps that are submitted for
compression but not compressed. In
addition, the Commission observes that
the rule does not prohibit SDs and MSPs
from relying on third-party service
providers to achieve compliance with
the rule, although the responsibility for
compliance cannot be delegated.

12. Portfolio Compression Service
Provider Standards
The proposed regulations did not
prescribe standards for portfolio
compression service providers, and
Markit recommended that, due to the
complexity of multilateral compression
exercises, the Commission establish
standards for compression service
providers to ensure competency, timely
service, and sufficient resources. The
process for choosing compression
service providers should be fair and
open. Freddie Mac urged the
Commission to closely scrutinize the
necessity and propriety of the terms of
business demanded by prospective
service providers (including SDRs, SEFs
and DCOs) and disapprove overreaching
terms such as open-ended
indemnification, disclaimer of liability,
assertions of ownership over
transactional data, and other intellectual
property of service users.
Given that the rule as adopted no
longer contains a mandatory
compression requirement, the
Commission believes that these
comments regarding standards for
service providers and overreaching
terms are best addressed by competition
in the market for providers of
compression services.

In the Documentation NPRM and
Confirmation NPRM, the Commission
requested comment on the length of
time necessary for registrants to come
into compliance with the proposed
rules. As discussed further below, the
Commission also proposed a
compliance schedule, § 23.575, for swap
trading relationship documentation,
§ 23.504, in a separate release in
September 2011.

13. Recordkeeping Requirement for
Portfolio Compression—§ 23.503(e)
Propose § 23.503(e) required SDs and
MSPs to maintain records of each
bilateral and multilateral compression
exercise, including dates, the swaps
included in the exercise, the eligible
swaps excluded from the exercise and
the reason for such exclusion, the
counterparty and risk tolerances

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III. Effective Dates and Compliance
Dates

A. Comments Regarding Compliance
Dates
1. Documentation NPRM
With respect to § 23.504, The Working
Group recommended that the
Commission delay promulgating rules
on swap documentation until it has
finalized all required rules to be issued
under the Dodd-Frank Act and can fully
analyze the potential effect of
documentation rules on the swap
markets, or, in the alternative, adopt a
general framework with an extended
period of time for implementation to
allow market participants to design
appropriate documentation standards.
Further, if the Commission should
decide to make the proposed rules
applicable to existing transactions, then
The Working Group recommended that
the Commission provide a short term
safe-harbor for existing transactions and
give the market 36 months to come into
compliance. If the Commission should
decide not to make the proposed rules
applicable to existing transactions, then
The Working Group recommended that
the Commission give the market 12
months to come into compliance.
ISDA & SIFMA requested that the
Commission defer proposing an
implementation timeline until the

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Commission’s rules and the SEC’s rules
relating to trading documentation are
fully developed and the industry has
been given the opportunity to address
implementation issues with the
Commission at that time.
FSR believes that the renegotiation of
existing documentation would take
significantly longer than six months and
urged the Commission to recognize that
negotiation of new credit support
arrangements, including third-party
custody arrangements, will be
particularly time-consuming and thus
requested that the Commission provide
an appropriately long implementation
timeframe. The Coalition of Derivatives
End-Users proposed a period of not less
than two years for implementation for
end users because it is unclear how each
SD and MSP would seek to implement
changes to comply with swap
documentation rules for both existing
and new swaps. The Coalition believes
this period of time will allow for
discussions and negotiations across all
swap counterparty relationships.
IECA recommended that a long
implementation period be provided.
Otherwise, SDs will have an advantage
because they have more resources to
apply than end users and it is likely that
any standard amendment would come
from industry groups such as ISDA,
which primarily represents the interests
of SDs. CIEBA is also concerned that a
deadline for SDs and MSPs to bring
their documentation into compliance
would allow SDs and MSPs to present
buy-side participants with a newly
standardized set of documentation, and
would result in buy-side participants
having insufficient input into the
substance of the documentation. CIEBA
also noted that a number of its members
reported that it is not uncommon for
SDs to take up to a year to finalize an
ISDA agreement with a pension plan
fiduciary. If SDs were required to revise
all their swap agreements, CIEBA
believes that it could take years.
In contrast to the foregoing comments,
Michael Greenberger commented that
since many dealers already use
documentation that will comply with
the regulations, allowing a maximum of
thirty days to comply with the rules
following adoption should suffice.
In addition to the foregoing
comments, the Commission received
comments with respect to proposed
compliance schedules for a number of
proposed rules, including § 23.504.47 In
September 2011, the Commission
47 See Swap Transaction Compliance and
Implementation Schedule: Trading Documentation
and Margining Requirements under Section 4s of
the CEA, 76 FR 58176 (Sept. 20, 2011)
(Implementation Schedule NPRM).

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proposed four compliance schedules for
four separate provisions of the DoddFrank Act, including: (i) The clearing
requirement; (ii) the trade execution
requirement; (iii) trading documentation
under section 4s; and (iv) margining
requirements for uncleared swaps.48 In
its proposal, Swap Transaction
Compliance and Implementation
Schedule: Trading Documentation and
Margining Requirements under Section
4s of the CEA, (Implementation
Schedule NPRM), the Commission
stated that the proposed compliance
schedule for § 23.504 was designed to
afford affected market participants a
reasonable amount of time to bring their
transactions into compliance with the
requirements of the rule and to provide
relief in the form of additional time for
compliance. The schedule was intended
to facilitate the transition to the new
regulatory regime established by the
Dodd-Frank Act in an orderly manner
that does not unduly disrupt markets
and transactions. To this end, the
Commission proposed § 23.575, under
which an SD or MSP would be afforded
ninety (90), one hundred eighty (180), or
two hundred and seventy (270) days to
bring its swap trading relationship
documentation with its various
counterparties into compliance with the
requirements of § 23.504, depending on
the identity of each such counterparty.
In the proposal, market participants that
are financial entities, as defined in
section 2(h)(7)(C) of the CEA, were
grouped into the following four
categories:
• Category 1 Entities included SDs,
security-based swap dealers, MSPs,
major security-based swap participants,
and active funds (defined as any private
fund as defined in section 202(a) of the
Investment Advisers Act of 1940), that
is not a third-party subaccount and that
executes 20 or more swaps per month
based on a monthly average over the 12
months preceding this adopting release.
• Category 2 Entities included
commodity pools; private funds as
defined in section 202(a) of the
Investment Advisers Act of 1940 other
than active funds; employee benefit
48 The trading documentation and margining
requirements compliance schedules were proposed
in one release. See id. The clearing requirement and
trade execution requirement were proposed in
another release, Swap Transaction Compliance and
Implementation Schedule: Clearing and Trade
Execution Requirements under Section 2(h) of the
CEA, 76 FR 58186 (Sept. 20, 2011). The
Commission finalized the compliance schedule for
the clearing requirement on July 24, 2012. See Swap
Transaction Compliance and Implementation
Schedule: Clearing Requirement Under Section 2(h)
of the CEA, 77 FR 44441 (July 30, 2012). The
compliance schedules for margin for uncleared
swaps and the trade execution requirement will be
finalized separately.

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55937

plans identified in paragraphs (3) and
(32) of section 3 of the Employee
Retirement Income and Security Act of
1974; or persons predominantly engaged
in activities that are in the business of
banking, or in activities that are
financial in nature as defined in section
4(k) of the Bank Holding Company Act
of 1956, provided that the entity is not
a third-party subaccount.
• Category 3 Entities include Category
2 Entities whose positions are held as
third-party subaccounts.
• Category 4 Entities includes any
person not included in Categories 1, 2,
or 3.
Proposed § 23.575 required SDs and
MSPs to be in compliance with § 23.504
no later than 90 days after publication
of the final rule in the Federal Register
for swap transactions with a Category 1
Entity, no later than 180 days after
publication for swap transactions with a
Category 2 Entity, and no later than 270
days after publication for swap
transactions with a Category 3 Entity or
Category 4 Entity.
The Commission received
approximately 19 comments with
respect to the compliance phasing
proposal, each of which it considered in
finalizing the compliance dates for the
rule, as discussed below.
a. Definition of ‘‘Active Fund’’
The proposal defined ‘‘active fund’’ as
‘‘any private fund as defined in section
202(a) of the Investment Advisers Act of
1940, that is a not a third party
subaccount and that executes 20 or
more swaps per month based on a
monthly average over the 12 months
preceding * * *.’’
Commenting on this definition, the
Association of Institutional Investors
(AII) stated that basing the definition on
an average of 20 swap transactions per
month is arbitrary. AII believes that the
Commission should collect data under
swap transaction reporting rules and
then make a determination, but, in the
alternative, AII recommended that the
threshold be higher and that the
definition specify the type of swaps that
count towards the threshold. FIA/ISDA/
SIFMA and Vanguard also commented
that the average monthly threshold
should be raised, and recommended
that the threshold be raised to include
only those funds averaging more than
200 transactions per month.
MFA recommended that the
definition be eliminated because it is
over-inclusive, difficult to administer,
and unnecessarily divides the class of
buy-side market participants. Under
MFA’s view, all private funds should be
Category 2 Entities. If the Commission
does not delete the definition, MFA

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requested clarification regarding those
swaps that are to be included in the
calculation, e.g., novations,
amendments, partial tear-ups, etc.
On a different tack, FSR stated that
the definition of ‘‘active fund’’ is
unclear and needs further clarification
to distinguish between active fund and
‘‘third-party subaccount.’’ FSR
represented that its fund manager
members believe that most (if not all)
entities that would fall into the term
‘‘active fund’’ would also constitute
‘‘third-party subaccounts.’’
The American Council of Life Insurers
(ACLI) commented that the frequency of
trading is not an appropriate indicator
of experience or available resources for
determining which entities can comply
most quickly. Similarly CDE
recommended a minimum notional
amount monthly average threshold to
avoid capturing smaller end-users and
excluding hedges and inter-affiliate
swaps from the monthly average
threshold.
On the other hand, Better Markets and
Chris Barnard supported the proposal,
stating that average monthly trading
volume is the appropriate proxy for
determining an entity’s ability to
comply with the proposed
implementation schedule and is better
than notional volume.
The Alternative Investment
Management Association (AIMA) also
believes that the average number of
swaps executed during the previous 12
months is a good proxy for determining
what is an active fund, but
recommended that the definition should
include private funds regardless of
whether they are a third party
subaccount or not. Otherwise, private
funds that are not subaccounts will be
disadvantaged relative to those that are,
in terms of the cost of entering into
swaps during the course of the
implementation schedule. AIMA
considered alternatives to the definition
but believes that instituting an ‘‘assets
under management’’ threshold for the
definition of active fund may be
problematic, as notwithstanding such a
threshold, a manager may invest in
other types of financial instruments
such that they do not in fact have the
experience or resources to more quickly
comply with the regulations. AIMA also
believes that commodity pools that are
not private funds, but that execute 20 or
more swaps on average per month,
should be included in the definition.
Having considered the comments
received, the Commission believes that
the definition of ‘‘active fund’’
appropriately uses a transaction-based
trigger to distinguish between funds
more active in the swaps market and

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those that are less so. However, in
response to comments that an average of
20 transactions per month may be
overly inclusive and may cause some
smaller entities, less well-positioned for
compliance with shorter
implementation timeframes, to fall
within the definition. Accordingly, the
Commission has determined to raise the
threshold to 200 swap transactions on
average per month so as to ensure only
more active participants in the market
are included within the definition. The
Commission also agrees with
commenters that establishing an
appropriate minimum notional amount
applicable to all participants in the
swap market, or assets under
management standard, to be
impracticable.
However, the Commission does not
believe it is appropriate to create
exclusions for the types of swap
transactions within the definition given
the administrative burdens of
monitoring such distinctions for
purposes of the proposed
implementation schedule. In response
to commenters seeking clarification of
what types of swap transactions are to
be included in the monthly calculation,
the Commission notes that the proposed
implementation schedule, and the
compliance dates adopted in this
release, both refer to ‘‘swaps’’ and not
‘‘swap transactions.’’ ‘‘Swap
transaction’’ is defined in § 23.500 to
include assignments, novations,
amendments, and other events that
§ 23.501 requires to be documented by
confirmation. Therefore, in response to
commenter’s concerns, the Commission
confirms that the active fund threshold
of 200 swaps per month refers to
‘‘swaps’’ as defined in section 1a(47) of
the CEA and Commission regulations,
but would not include assignments,
novations, amendments, or like events
that occur with respect to existing
swaps.
b. Definition of ‘‘Third-party
Subaccount’’
The Implementation Schedule NPRM
defined ‘‘third-party subaccount’’ to
mean ‘‘a managed account that requires
the specific approval by the beneficial
owner of the account to execute
documentation necessary for executing,
confirming, margining or clearing
swaps.’’ Third-party subaccounts were
designated as Category 3 Entities,
whereas other funds were designated
Category 1 or Category 2 Entities.
With respect to this definition, AII
commented that the definition is too
narrow given the administrative work
required in managing an account,
regardless of the execution authority.

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Further, AII stated that execution
authority is not an industry standard,
and thus divides the universe of
separate accounts inappropriately.
Similarly, the Investment Company
Institute (ICI) stated that third party
subaccounts, whether subject to the
specific execution authority of the
beneficiary or not, require managers to
work closely with clients when entering
into trading agreements on the
customer’s behalf. As such, no
distinction should be made based on
specific execution authority or lack
thereof, and that all third party accounts
should be uniformly classified as
Category 3 Entities, allowing for a 270
day compliance period.
FIA/ISDA/SIFMA also recommended
that all accounts managed for third
parties, regardless of the execution
authority, should be in the Category 3
Entity implementation phase. FIA/
ISDA/SIFMA recommended that the
Commission adopt a definition of
‘‘third-party fund’’ that is any fund that
is not a private fund and is sub-advised
by a subadvisor that is independent of
and unaffiliated with the fund sponsor.
A ‘‘third-party subaccount’’ would be
defined as any account that is not a fund
and is managed by an asset manager,
irrespective of the level of delegation
granted by the account owner by the
account owner to the asset manager.
Based on the comments received, the
Commission is revising the definition of
Third-Party Subaccount to mean an
account that is managed by an
investment manager that (1) is
independent of and unaffiliated with
the account’s beneficial owner or
sponsor, and (2) is responsible for the
documentation necessary for the
account’s beneficial owner to document
swaps as required under section 4s(i) of
the CEA. In modifying this definition,
the Commission is taking into account
the point made by AII, FIA/ISDA/
SIFMA, and ICI that all investment
managers will need additional time to
comply with the trading documentation
requirements regardless of whether they
have explicit execution authority.
However, the definition retains the
nexus between the investment manager
and the documentation needed for
swaps under section 4s(i) of the CEA. In
other words, if the investment manager
has no responsibility for documenting
the swap trading relationships, then that
account would be required to come into
compliance with the documentation
requirements within 180 days. For those
accounts under the revised definition,
however, the Commission believes that
the 270-day deadline is more
appropriate. Given the general notice
that investment managers have had

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about the Dodd-Frank Act’s
documentation requirements for SDs
and MSPs since the enactment of the
statute in July, 2010, managers should
have been able to consider and plan the
infrastructure and resources that are
necessary for all of their accounts,
including Third-Party Subaccounts, to
comply with the documentation
requirements. Thus, the 180- and 270day deadlines should provide adequate
time to accommodate all managed
accounts.
c. Definitions of Categories of Entities
The Commission received several
comments with respect to the
definitions of the categories of entities
to which the proposed implementation
schedules applied.
Encana and EEI, National Rural
Electric Cooperative Association, and
Electric Power Supply Association
(Joint Associations) believe that the
definition of Category 4 Entity under the
proposed implementation schedules
should expressly include non-financial
end users.
The Coalition for Derivatives EndUsers argued that financial end-users
should be treated identically to nonfinancial end-users because they do not
pose systemic risk, and therefore,
should be given the most time to
comply with the requirements.
ICI requested clarification that a
market participant can determine
whether it is an MSP for purposes of the
proposed implementation schedules at
the same time that it is required to
review its status as an MSP under other
Commission and SEC rules.
CIEBA requested that in-house ERISA
funds should be in the group with the
longest compliance time, and not
Category 2 Entities, arguing that these
funds are not systemically risky, and
they typically rely upon third-party
managers for some portion of their fund
management. Splitting in-house and
external accounts (i.e., those accounts
meeting the Implementation Schedule
NPRM’s definition of third-party
subaccount and which are therefore
Category 3 Entities) of the same ERISA
plan will impact risk management given
different implementation schedules.
The distinction will also cause pension
funds to bear the costs of compliance
because they will need to comply prior
to their third party managers who would
be better positioned to provide insight
and services in this regard.
The Commission considered the
foregoing comments, and has
determined to modify the category
definitions in certain respects. In
response to Encana and the Joint
Associations, non-financial entities are

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clearly included amongst Category 4
Entities and SDs and MSPs are given
270 days to comply with the
documentation requirement with
respect to such entities.
With respect to issues raised by the
Coalition for Derivatives End-Users
regarding those financial entities
included in Category 2, the Commission
believes that those entities have been
correctly categorized based upon the
distinction between financial and nonfinancial entities under section 2(h)(7)
of the CEA. The Commission believes
that, just as Congress has required
financial entities to be subject to
required clearing due to their
importance to the financial system, SDs
and MSPs should be required to meet
the documentation requirements of
§ 23.504 with such entities prior to
being required to meet such
documentation requirements with nonfinancial entities. However, the
definition of Category 2 Entity is
modified by removing the reference to
ERISA plans. The Commission
recognizes the concerns raised by
CIEBA regarding splitting in-house and
external accounts (i.e., those accounts
meeting the definition of Third-Party
Subaccount and permitted 270 days) of
the same ERISA plan. In response to
these concerns, the Commission is
removing the reference to employee
benefit plans as defined in paragraphs
(3) and (32) of section 3 of the Employee
Retirement Income and Security Act of
1974. As a result, these ERISA plans
will be afforded the longest compliance
period (270 days).
In response to the comment from ICI,
the Commission confirms that a
potential MSP may be able to review its
obligation to register as an MSP at the
same time it is reviewing where it fits
under the compliance dates adopted in
this release depending on the nature
and scope of an MSP’s swaps activities.
The Commission notes that its rule
further defining MSP was published on
May 23, 2012, and its rule further
defining ‘‘swap’’ was published on
August 13, 2012, so potential MSPs will
necessarily have to review their
registration obligations ahead of
complying with the compliance dates
adopted herein. However, if an entity
discovers that it has crossed the
threshold established under the MSP
rules and is required to register during
the 90-day period for Category 1
Entities, the Commission would permit
that entity to petition for additional time
to come into compliance with the
§ 23.504.49
49 Similarly, the Commission would consider
allowing entities to petition for additional time to

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55939

d. Proposed Implementation Schedule
As outlined above, proposed § 23.575
required SDs and MSPs to be in
compliance with § 23.504 no later than
90 days after publication of the final
rule in the Federal Register for swap
transactions with a Category 1 Entity, no
later than 180 days after publication for
swap transactions with a Category 2
Entity, and no later than 270 days after
publication for swap transactions with a
Category 3 Entity or Category 4 Entity.
With respect to the proposed
schedule, FIA/ISDA/SIFMA believes
that the proposed implementation
schedule should be lengthened because
of the significant burden associated with
the documentation requirements. FIA/
ISDA/SIFMA argued that it would be
impossible to begin complying with all
of the documentation requirements of
§ 23.504 at the same time.
AII stated that the proposed
implementation schedule does not
provide enough time for institutional
investment advisors to comply given the
volume of document negotiations that
will need to occur concurrently, as well
as operational changes required by the
Commission and other regulators under
the Dodd-Frank Act. AII argued that
institutional investment advisers also
will face special challenges trying to
allocate block trades across multiple
categories of counterparty, and
managing multiple implementation
schedules. AII believes that tight
timeframes will create an imbalance in
negotiations with smaller counterparties
at risk of being ‘‘shut out of the market’’
if they do not accept terms of the dealer
community. AII therefore recommended
that all market participants should have
18 months to come into compliance
after the rules have been finalized.
Encana believes non-financial end
users should get more time to comply
with the regulations given less
familiarity with Commission regulations
and the need to develop and implement
policies and procedures.
CDE stated that it is unlikely that endusers and other entities relied on by
end-users will be able to meet the
requirements § 23.504 if the
requirements are imposed on all swaps
at the same time.
Chris Bernard generally agreed with
the proposed implementation schedule,
though he believes that documentation
relating to the swap valuation
provisions of § 23.504(b)(4) should be
prioritized within the compliance
schedule.
comply to the extent that they discover that they
have exceeded the de minimis threshold under the
swap dealer definition and are required to register
during the 90-day period for Category 1.

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The California Public Employees’
Retirement System, the Colorado PERA,
the Missouri State Employees’
Retirement System, the Teacher
Retirement System of Texas, and the
State of Wisconsin Investment Board
recommended a one year phase-in for
pension funds because the strict
procedures that exist to protect their
participants may hamper their ability to
more quickly make the required changes
to documents and procedures.
FSR commented that compliance
periods should be substantially longer,
with Category 2 lasting at least a year,
and not starting until a significantly
longer Category 1 has completed. As
smaller market participants face the risk
of accepting unsuitable terms or being
shut out of the market given the tight
timeframes and lack of resources,
additional time should be granted to
entities hedging in the ordinary course
of business.
ICI stated that implementation should
be longer, such as 18–24 months to
accommodate all of the changes that are
necessary in the market, arguing that too
short a deadline will disadvantage
smaller market participants who may be
shut out of the market. ICI also
recommended that the proposed
implementation schedules should only
begin after all related rules are finalized.
ACLI stated that 180 days for Category
2 Entities is insufficient for insurance
companies that will need to work with
state regulators on changes to
operations, to negotiate documents of
first impression, especially given the
scope of the documentation to be
negotiated or changed.
The Commission acknowledges the
concerns of commenters regarding
negotiation imbalances if the scope of
documentation to be changed is large,
but believes that, with the modifications
to the rules outlined above, most market
participants will have documentation
already in place that either meets the
requirements of the rule or could meet
such requirements with relatively
modest amendments. Thus, the
Commission believes that these changes
plus the staggered timeframes of the
compliance dates adopted in this release
adequately address the concerns of
commenters regarding the time and
effort necessary to complete the
necessary documentation.
2. Confirmation NPRM
With respect to §§ 23.501, 23.502, and
23.503 generally, GFED argued that the
Commission should not implement the
proposed rules prior to Treasury
determining which foreign exchange
products are subject to the proposed
rules to avoid unnecessary costs and

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burdens, while MFA believes that the
Commission should evaluate the notable
differences in experience and resources
of market participants related to posttrade processes prior to publishing final
rules. MFA believes that the
Commission’s goals would be best
served, and market disruption avoided,
by providing market participants with
additional time to design, test, and
implement processes required to
comply with the proposed rules.
Specifically with respect to § 23.501,
MarkitSERV believes that the rules
should be phased in based on a productby-product analysis of complexity and
average time to confirm similar
transactions, while Chatham believes
the confirmation requirements should
be phased-in over 6 to 12 months and
that non-SDs and non-MSPs should be
the last participants required to comply
with the rules. In addition, ISDA
provided the Commission with details
of the current percentage of transactions
electronically traded and confirmed,
voice traded and electronically
confirmed, voice traded and manually
confirmed, and electronically traded
and manually confirmed by eight large
dealers in the five major swap asset
classes (credit, rates, commodities,
foreign exchange, and equity
derivatives). ISDA provided the
Commission with a break-down of this
data showing time to confirmation by
asset class, and the differences between
electronic confirmation in dealer-todealer transactions versus transactions
with other counterparty types.
Specifically with respect to § 23.502,
Chatham recommended that the
Commission provide end-users with at
least six months to one year to comply
with the proposed reconciliation rules,
while the OCC stated that many SDs
will not be among the G–14 largest OTC
derivatives dealers and, given the
incremental progression that was
necessary for the G–14 OTC derivatives
dealers to develop the infrastructure
necessary to increase reconciliation
amongst themselves from weekly
reconciliation for portfolios with 5,000
or more trades in 2008 to the current
daily reconciliation for portfolios of 500
or more trades, the Commission must
provide sufficient time for all registrants
to develop the required infrastructure.
With respect to § 23.503, ISDA urged
the Commission to consider a long
phase-in period for any compression
requirement due to significant
administrative and logistical issues.
B. Compliance Dates
Having considered the comments
received, the Commission is adopting

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the effective and compliance dates as set
forth below.
1. Swap Trading Relationship
Documentation—§ 23.504
The effective date of § 23.504 will be
the date that is 60 days after publication
of the final rules in the Federal Register.
The Commission proposed a
compliance schedule, § 23.575, but has
determined not to finalize its schedule
in the form of a rule. Rather, compliance
periods are outlined below. With
respect to swap transactions with SDs,
security-based swap dealers, MSPs,
major security-based swap participants,
or any private fund, as defined in
section 202(a) of the Investment
Advisers Act of 1940, that is not a thirdparty subaccount (defined below) and
that executes 200 or more swaps per
month based on a monthly average over
the 12 months preceding this adopting
release (active funds), SDs and MSPs
must comply with § 23.504 by January
1, 2013.
With respect to swap transactions
with commodity pools; private funds as
defined in section 202(a) of the
Investment Advisers Act of 1940 other
than active funds; or persons
predominantly engaged in activities that
are in the business of banking, or in
activities that are financial in nature as
defined in section 4(k) of the Bank
Holding Company Act of 1956, provided
that the entity is not an account that is
managed by an investment manager that
(1) is independent of and unaffiliated
with the account’s beneficial owner or
sponsor, and (2) is responsible for the
documentation necessary for the
account’s beneficial owner to document
swaps as required under section 4s(i) of
the CEA (third-party subaccounts), SDs
and MSPs must comply with § 23.504
by April 1, 2013.
With respect to swap transactions
with any other counterparty, SDs and
MSPs must comply with § 23.504 by
July 1, 2013.
2. Swap Confirmation—§ 23.501
The effective date of §§ 23.500 and
23.501 will be the date that is 60 days
after publication of the final rules in the
Federal Register.
With respect to confirmation, the
Commission is establishing an
implementation schedule in the rule,
differentiated by swap asset class. For
credit swaps and interest rate swaps
(including cross-currency swaps), SDs
and MSPs will be required to confirm
swap transactions with other SDs and
MSPs as soon as technologically
practicable, but in any event by the end
of the second day after the day of
execution until February 28, 2014. After

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Federal Register / Vol. 77, No. 176 / Tuesday, September 11, 2012 / Rules and Regulations
February 28, 2014, SDs and MSPs must
comply with the requirements of
paragraph (a)(1).
For equity swaps, foreign exchange
swaps, and other commodity swaps,
SDs and MSPs will be required to
confirm swap transactions with other
SDs and MSPs as soon as
technologically practicable, but in any
event by the end of the third day after
the day of execution until August 31,
2013. For the period between September
1, 2013 and August 31, 2014, SDs and
MSPs will be required to confirm
equity, foreign exchange, and other
commodity swap transactions with
other SDs and MSPs as soon as
technologically practicable, but in any
event by the end of the second day after
the day of execution. After August 31,
2014, SDs and MSPs must comply with
the requirements of paragraph (a)(1).
For credit and interest rate swap
transactions (including cross-currency
swaps) with counterparties that are not
SDs or MSPs, SDs and MSPs will be
required to send an acknowledgement of
swap transactions as soon as
technologically practicable, but in any
event by the end of the first day after the
day of execution until February 28,
2014. After February 28, 2014, SDs and
MSPs must comply with the
requirements of paragraph (a)(2).
For equity, foreign exchange, and
other commodity swap transactions
with counterparties that are not SDs or
MSPs, SDs and MSPs will be required
to send an acknowledgement of swap
transactions as soon as technologically
practicable, but in any event by the end
of the second day after the day of
execution until August 31, 2013. For the
period between September 1, 2013 and
August 31, 2014, SDs and MSPs will be
required to send an acknowledgement of
equity, foreign exchange, and other
commodity swap transactions with
counterparties that are not SDs or MSPs
as soon as technologically practicable,
but in any event by the end of the first
day after the day of execution. After
August 31, 2014, SDs and MSPs must
comply with the requirements of
paragraph (a)(2).
For credit and interest rate swap
transactions (including cross-currency
swaps) with financial entities, SDs and
MSPs will be required to establish
policies and procedures reasonably
designed to ensure that they confirm
swap transactions as soon as
technologically practicable, but in any
event by the end of the second day after
the day of execution until February 28,
2014. After February 28, 2014, SDs and
MSPs must comply with the
requirements of paragraph (a)(3)(i).

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For equity, foreign exchange, and
other commodity swap transactions
with financial entities, SDs and MSPs
will be required to establish policies
and procedures reasonably designed to
ensure that they confirm swap
transactions as soon as technologically
practicable, but in any event by the end
of the third day after the day of
execution until August 31, 2013. For the
period between September 1, 2013 and
August 31, 2014, SDs and MSPs will be
required to establish policies and
procedures reasonably designed to
ensure that they confirm equity, foreign
exchange, and other commodity swap
transactions with financial entities as
soon as technologically practicable, but
in any event by the end of the second
day after the day of execution. After
August 31, 2014, SDs and MSPs must
comply with the requirements of
paragraph (a)(3)(i).
For credit and interest rate swap
transactions (including cross-currency
swaps) with counterparties that are not
SDs, MSPs, or financial entities, SDs
and MSPs will be required to establish
policies and procedures reasonably
designed to ensure that they confirm
swap transactions as soon as
technologically practicable, but in any
event by the end of the fifth day after
the day of execution until August 31,
2013. For the period between September
1, 2013 and August 31, 2014, SDs and
MSPs will be required to establish
policies and procedures reasonably
designed to ensure that they confirm
credit and interest rate swap
transactions with counterparties that are
not SDs, MSPs, or financial entities as
soon as technologically practicable, but
in any event by the end of the third day
after the day of execution. After August
31, 2014, SDs and MSPs must comply
with the requirements of paragraph
(a)(3)(ii).
For equity, foreign exchange, and
other commodity swap transactions
with counterparties that are not SDs,
MSPs, or financial entities, SDs and
MSPs will be required to establish
policies and procedures reasonably
designed to ensure that they confirm
swap transactions as soon as
technologically practicable, but in any
event by the end of the seventh day after
the day of execution until August 31,
2013. For the period between September
1, 2013 and August 31, 2014, SDs and
MSPs will be required to establish
policies and procedures reasonably
designed to ensure that they confirm
equity, foreign exchange, and other
commodity swap transactions with
counterparties that are not SDs, MSPs,
or financial entities as soon as
technologically practicable, but in any

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55941

event by the end of the fourth day after
the day of execution. After August 31,
2014, SDs and MSPs must comply with
the requirements of paragraph (a)(3)(ii).
Solely for purposes of the
implementation schedule applicable to
§ 23.501, swaps are divided into the
following asset classes:
Credit swap means any swap that is
primarily based on instruments of
indebtedness, including, without
limitation: Any swap primarily based on
one or more broad-based indices related
to instruments of indebtedness; and any
swap that is an index credit swap or
total return swap on one or more indices
of debt instruments.
Equity swap means any swap that is
primarily based on equity securities,
including, without limitation: Any swap
primarily based on one or more broadbased indices of equity securities; and
any total return swap on one or more
equity indices.
Foreign exchange swap has the
meaning set forth in section 1a(25) of
the CEA. It does not include swaps
primarily based on rates of exchange
between different currencies, changes in
such rates, or other aspects of such rates
(sometimes known as ‘‘cross-currency
swaps’’).
Interest rate swap means any swap
which is primarily based on one or more
interest rates, such as swaps of
payments determined by fixed and
floating interest rates; or any swap
which is primarily based on rates of
exchange between different currencies,
changes in such rates, or other aspects
of such rates (sometimes known as
‘‘cross-currency swaps’’).
Other commodity swap means any
swap not included in the credit, equity,
foreign exchange, or interest rate asset
classes, including, without limitation,
any swap for which the primary
underlying item is a physical
commodity or the price or any other
aspect of a physical commodity.
3. Portfolio Reconciliation & Portfolio
Compression
The effective date of §§ 23.502 and
23.503 will be the date that is 60 days
after publication of the final rules in the
Federal Register.
With respect to § 23.502 (Portfolio
Reconciliation) and § 23.503 (Portfolio
Compression), SDs and MSPs that are
currently regulated by a U.S. prudential
regulator or are registrants of the SEC
must comply with §§ 23.502 and 23.503
by the date that is 90 days after
publication of this final rule in the
Federal Register. SDs and MSPs that are
not currently regulated by a U.S.
prudential regulator and are not
registrants of the SEC must comply with

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§§ 23.502 and 23.503 by the date that is
180 days after publication of this final
rule in the Federal Register.
C. Compliance Date Extension for
Certain Business Conduct Standards
With Counterparties
ISDA members have requested that
the Commission align the compliance
dates for the provisions of subpart H of
part 23 that involve documentation 50
with the trading relationship
documentation rules in this release.
ISDA members have represented that
industry-led efforts are underway to
facilitate compliance with new DoddFrank Act documentation requirements
and an alignment of compliance dates
would allow the most efficient
transition to compliance with part 23’s
documentation requirements.51
The Commission has decided to defer
the compliance dates for certain
provisions of subpart H until January 1,
2013. Compliance with the following
provisions will be deferred until January
1, 2013: §§ 23.402; 23.410(c); 23.430;
23.431(a)–(c); 23.432; 23.434(a)(2), (b),
and (c); 23.440; and 23.450.52
Compliance with all other provisions
will continue to be required by October
15, 2012.

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IV. Cost Benefit Considerations
Section 15(a) of the CEA 53 requires
the Commission to consider the costs
and benefits of its actions before
promulgating a regulation under the
CEA or issuing certain orders. Section
15(a) further specifies 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; 54
(3) price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. The
50 Subpart H of Part 23 of the Commission’s
Regulations, Business Conduct Standards for Swap
Dealers and Major Swap Participants with
Counterparties, 77 FR 9734, 9824 (Feb. 17, 2012).
51 ISDA is partnering with Markit to launch a
technology-based solution enabling counterparties
to amend their OTC derivatives documentation
quickly and efficiently to comply with Dodd-Frank
regulatory requirements. See http://www2.isda.org/
dodd-frank-documentation-initiative/.
52 The Commission’s decision to defer
compliance does not reflect an endorsement of the
industry-led effort, nor does it imply that the
Commission has reviewed the documentation
protocol for compliance with Commission rules. All
market participants are subject to the new
compliance dates regardless of whether they
participate in the protocol.
53 7 U.S.C. 19(a).
54 Although by its terms section 15(a)(2)(B) of the
CEA applies to futures markets only, the
Commission finds this factor useful in analyzing
regulations pertaining to swap markets as well.

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Commission considers the costs and
benefits resulting from its discretionary
determinations with respect to the
Section 15(a) factors.
Under section 731 of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act),
Congress directed the Commission to
‘‘adopt rules governing documentation
standards for swap dealers and major
swap participants.’’ The statutory
provision in question, section 4(s)(i)(1)
of the CEA, laid out a broad and general
directive relating to ‘‘timely and
accurate confirmation, processing,
netting, documentation, and valuation
of all swaps.’’ In promulgating the final
rules subject to this release, the
Commission has taken its direction from
the statutory text, but is exercising its
discretion with regard to the specific
requirements set forth in the rules—
namely, to require SDs and MSPs to
meet certain confirmation deadlines for
their swap transactions with other SDs
and MSPs, to have policies and
procedures for confirming swap
transactions with financial entities and
non-financial entities within certain
time periods, to engage in regular
portfolio reconciliation and portfolio
compression, and to ensure that their
swaps are governed by appropriate
trading relationship documentation.
In exercising its discretion, the
Commission has taken into account a
series of voluntary industry initiatives,
including efforts to improve the
confirmation, reconciliation,
compression, documentation, and
valuation of swaps, as well as the
overarching goals of the Dodd-Frank
Act: reducing systemic risk, increasing
transparency, and promoting integrity
within the financial system. As
discussed below, these industry efforts
provide a useful reference point for
considering the Commission’s action.
In the context of the relevant statutory
provision and ongoing industry
initiatives, in the sections that follow,
the Commission discusses each
requirement individually in light of
cost-benefit issues raised by
commenters and suggested alternatives.
The Commission also summarizes and
considers costs and benefits collectively
for the set of confirmation, portfolio
reconciliation, and portfolio
compression rules, and separately for
the swap trading relationship
documentation rules.
A. Background
In the fall of 2008, an economic crisis
threatened to freeze U.S. and global
credit markets. The federal government
intervened to buttress the stability of the

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U.S. financial system.55 The crisis
revealed the vulnerability of the U.S.
financial system and economy to widespread systemic risk resulting from,
among other things, poor risk
management practices of financial firms
and the lack of supervisory oversight for
certain financial institutions as a
whole.56 More specifically, the crisis
and the attendant failure of a series of
large financial institutions demonstrated
the need for direct regulation of the OTC
derivatives markets.57
American International Group (AIG)
is an example of how the stability of a
large financial institution could be
undermined by certain failures in risk
management, internal controls with
respect to trading positions,
documentation, and valuation, AIG was
a regulated U.S. insurance company
nearly undone by its collateral posting
obligations under swaps entered into by
its subsidiary, AIG Financial Products
(AIGFP). AIGFP suffered enormous
losses from credit default swaps that it
issued on certain underlying securities,
which, because AIGFP’s performance on
such credit default swaps had been
guaranteed by its parent, caused credit
agencies to downgrade the credit rating
of the entire AIG corporation. The
downgrade triggered collateral calls and
induced a liquidity crisis at AIG, which
55 On October 3, 2008, President Bush signed the
Emergency Economic Stabilization Act of 2008,
which was principally designed to allow the U.S.
Treasury and other government agencies to take
action to restore liquidity and stability to the U.S.
financial system (e.g., the Troubled Asset Relief
Program—also known as TARP—under which the
U.S. Treasury was authorized to purchase up to
$700 billion of troubled assets that weighed down
the balance sheets of U.S. financial institutions).
See Pub. L. 110–343, 122 Stat. 3765 (2008).
56 See Financial Crisis Inquiry Commission, ‘‘The
Financial Crisis Inquiry Report: Final Report of the
National Commission on the Causes of the
Financial and Economic Crisis in the United
States,’’ Jan. 2011, at xxvii, available at http://www.
gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf
[hereinafter the FCIC Report].
57 See id. at 25 (concluding that ‘‘enactment of
* * * [the Commodity Futures Modernization Act
of 2000 (‘‘CFMA’’)] to ban the regulation by both
the federal and state governments of over-thecounter (OTC) derivatives was a key turning point
in the march toward the financial crisis.’’). See also
id. at 343 (‘‘Lehman, like other large OTC
derivatives dealers, experienced runs on its
derivatives operations that played a role in its
failure. Its massive derivatives positions greatly
complicated its bankruptcy, and the impact of its
bankruptcy through interconnections with
derivatives counterparties and other financial
institutions contributed significantly to the severity
and depth of the financial crisis.’’) and id. at 353
(‘‘AIG’s failure was possible because of the
sweeping deregulation of [OTC] derivatives, [* * *]
including capital and margin requirements that
would have lessened the likelihood of AIG’s failure.
The OTC derivatives market’s lack of transparency
and of effective price discovery exacerbated the
collateral disputes of AIG and Goldman Sachs and
similar disputes between other derivatives
counterparties.’’).

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resulted in over $85 billion of indirect
assistance from the Federal Reserve
Bank of New York to prevent AIG’s
default.58
The inability to value its portfolio
accurately and agree on valuations with
its counterparties posed a serious
problem for AIG during the financial
crisis.59 Swap valuation disputes were
common, because, among other things,
there was widespread market opacity for
many of the inputs needed to properly
value many swaps.60 As reported during
the fall of 2008, ‘‘the methods that A.I.G.
used to value its derivatives portfolio
began to come under fire from trading
partners.’’ 61 As explained by a
Congressional panel, ‘‘the threats within
[AIG’s] businesses emanated from
outsized exposure to the deteriorating
mortgage markets, owing to grossly
inadequate valuation and risk controls,
including insufficient capital buffers as
58 The Federal Reserve Bank of New York
explained its intervention as a means of preventing
contagion concerns resulting from an AIG default
from spreading financial losses to other firms. The
FCIC argued and Gretchen Morgenson reported that
the entire U.S. financial system might have been
threatened by such a large default. See FCIC Report
at 200–02 and 344–52 and Gretchen Morgenson,
‘‘Behind Insurer’s Crisis, Blind Eye to a Web of
Risk,’’ N.Y. Times, Sept. 27, 2008 [hereinafter
Morgenson Article]. Corrected version published
Sept. 30, 2008, available at http://www.nytimes.
com/2008/09/28/business/28melt.html?
pagewanted=all.
59 See Testimony Before the Financial Crisis
Inquiry Commission, including AIG/Goldman
Sachs Collateral Call Timeline, available at http://
fcic-static.law.stanford.edu/cdn_media/fcictestimony/2010-0701-AIG-Goldman-supportingdocs.pdf (timeline documenting valuation disputes
and collateral calls); Testimony of Joseph Cassano,
available at http://fcic-static.law.stanford.edu/cdn_
media/fcic-testimony/2010-0630-Cassano.pdf; and
AIG Statement Summary, available at http://fcicstatic.law.stanford.edu/cdn_media/fcic-testimony/
2010-0630-AIG-Statement-Summary.pdf.
60 The failure of the market to set a price for
mortgage-backed securities led to wide disparities
in the valuation of CDS referencing mortgagebacked securities (especially collateralized debt
obligations). ‘‘The illiquid market for some
structured credit products, auction rate securities,
and other products backed by opaque portfolios led
to major write-downs across the industry in 2008.
The resulting depletion of capital led to credit
downgrades, which in turn drove counterparty
collateral calls and sales of illiquid assets. This
further depleted capital balances. Widening CDS
spreads have become widely viewed as a leading
indicator of a bank’s financial health and viability.’’
PriceWaterhouseCoopers, ‘‘Lehman Brothers’
Bankruptcy: Lessons learned for the survivors,’’
Informational presentation for clients, August 2009,
at 12, available at http://www.pwc.com/en_JG/jg/
events/Lessons-learned-for-the-survivors.pdf. In
addition, such wide disparities led to large
collateral calls from dealers on AIG, hastening its
downfall. See CBS News, ‘‘Calling AIG? Internal
Docs Reveal Company Silent About Dozens Of
Collateral Calls,’’ Jun. 23, 2009, available at: http://
www.cbsnews.com/stories/2009/06/23/cbsnews_
investigates/main5106672.shtml.
61 See Morgenson Article.

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losses and collateral calls mounted’’
(emphasis added).62
The financial crisis also highlighted
the significance of substandard or
missing legal documentation. For
example, the Lehman Brothers Holding
Inc. (LBHI) bankruptcy offers another
stark lesson on how failures in risk
management, documentation, and
valuation can contribute to the ultimate
collapse of an entire financial
institution. During the days leading up
the LBHI’s bankruptcy, potential buyers
were stymied by the state of Lehman’s
books.63 As recognized by
PriceWaterhouseCoopers in a lessons
learned document put together after the
Lehman bankruptcy, effective risk
management requires the existence of
sound documentation, daily
reconciliation of portfolios, rigorously
tested valuation methodologies, and
sound collateralization practices.64
More broadly, the President’s
Working Group (PWG) on Financial
Policy noted shortcomings in the OTC
derivative markets as a whole during the
crisis. The PWG identified the need for
an improved integrated operational
structure supporting OTC derivatives,
specifically highlighting the need for an
enhanced ability to manage
counterparty risk through ‘‘netting and
collateral agreements by promoting
portfolio reconciliation and accurate
valuation of trades.’’ 65
Congress sought to address the
deficiencies in the regulatory system
that contributed to the financial crisis
through the enactment of the DoddFrank Act, which was signed by
President Obama on July 21, 2010.66
62 Congressional Oversight Panel, June Oversight
Report: The AIG Rescue, Its Impact on Markets, and
the Government’s Exit Strategy, June 10, 2010, at
24, available at http://cybercemetery.unt.edu/
archive/cop/20110402010341/cop.senate.gov/
documents/cop-061010-report.pdf.
63 See In re Lehman Brothers Holdings Inc., 08–
13555, and Giddens v. Barclays Capital Inc., 09–
01732, U.S. Bankruptcy Court, Southern District of
New York; see also Linda Sandler, ‘‘Lehman
Derivatives Records a ‘Mess,’ Barclays Executive
Says,’’ Bloomberg, Aug. 30, 2010, available at
http://www.bloomberg.com/news/2010-08-30/
lehman-derivatives-records-a-mess-barclaysexecutive-says.html (reporting on testimony
provided in previously cited Lehman bankruptcy
proceeding).
64 See PriceWaterhouseCoopers, ‘‘Lehman
Brothers’ Bankruptcy: Lessons learned for the
survivors,’’ Informational presentation for clients,
August 2009, at 12–24, available at http://www.pwc.
com/en_JG/jg/events/Lessons-learned-for-thesurvivors.pdf.
65 The President’s Working Group on Financial
Markets, ‘‘Policy Statements on Financial Market
Developments,’’ Mar. 2008, available at http://www.
treasury.gov/resource-center/fin-mkts/Documents/
pwgpolicystatemktturmoil_03122008.pdf.
66 Pub. L. 111–203, 124 Stat. 1376 (2010). The text
of the Dodd-Frank Act is available at http://www.
cftc.gov/ucm/groups/public/@swaps/documents/
file/hr4173_enrolledbill.pdf.

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Title VII of the Dodd-Frank Act
amended the CEA 67 to overhaul the
structure and oversight of the OTC
market that previously had been subject
to little or no oversight.68 One of the
cornerstones of this legislation is the
establishment of a new statutory
framework for comprehensive
regulation of financial institutions that
participate in the swaps market as SDs
or MSPs, which must register and are
subject to greater oversight and
regulation.69 This new framework for
SDs and MSPs seeks to reduce the
potential for the recurrence of the type
of financial and operational stresses that
contributed to the 2008 crisis.
Efforts to regulate the swaps market
are underway not only in the United
States but also abroad in the wake of the
2008 financial crisis. In 2009, leaders of
the Group of 20 (G–20)—whose
membership includes the European
Union (EU), the United States, and 18
other countries—agreed that: (i) OTC
derivatives contracts should be reported
to trade repositories; (ii) all
standardized OTC derivatives contracts
should be cleared through central
counterparties and traded on exchanges
or electronic trading platforms, where
appropriate, by the end of 2012; and (iii)
non-centrally cleared contracts should
be subject to higher capital
requirements. In line with the G–20
commitment, much progress has been
made to coordinate and harmonize
international reform efforts, but the pace
of reform varies among jurisdictions and
disparities in regulations remain due to
differences in cultures, legal and
political traditions, and financial
systems.70
67 7

U.S.C. 1, et seq.
to the adoption of Title VII, swaps and
security-based swaps were by and large
unregulated. The CFMA excluded financial OTC
swaps from regulation under the CEA, provided
that trading occurred only among ‘‘eligible contract
participants.’’ Swaps based on exempt
commodities—including energy and metals—could
be traded among eligible contract participants
without CFTC regulation, but certain CEA
provisions against fraud and manipulation
continued to apply to these markets. No statutory
exclusions were provided for swaps on agricultural
commodities by the CFMA, although they could be
traded under certain regulatory exemptions
provided by the CFTC prior to its enactment. Swaps
based on securities were subject to certain SEC
enforcement authorities, but the SEC was
prohibited from prophylactic regulation of such
swaps.
69 The provisions of the CEA relating to swaps
that were enacted by Title VII of the Dodd-Frank
Act are also referred to herein as ‘‘the Dodd-Frank
requirements.’’
70 Legislatures and regulators in a number of
foreign jurisdictions are undertaking significant
regulatory reforms over the swaps market and its
participants. See CFTC and SEC, Joint Report on
International Swap Regulation Required by Section
68 Prior

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Even before the passage of the DoddFrank Act, market participants and
regulators had been paying particular
attention to the post-trade processing of
swaps. For example, operational issues
associated with the OTC derivatives
market have been the focus of reports
and recommendations by the PWG.71 In
response to the financial crisis in 2008,
the PWG called on the industry to
improve trade matching and
confirmation and to promote portfolio
reconciliation.
Significantly, beginning in 2005, the
Federal Reserve Bank of New York
(FRBNY) undertook a targeted,
supervisory effort to enhance
operational efficiency and performance
in the OTC derivatives market, by
increasing automation in processing and
by promoting the timely confirmation of
trades. Known as the OTC Derivatives
Supervisors’ Group (ODSG), the FRBNY
led an effort with OTC derivatives
dealers’ primary supervisors, trade
associations, industry utilities, and
private vendors, through which market
participants (including buy-side
participants) regularly set goals and
commitments to bring infrastructure,
market design, and risk management
improvements to all OTC derivatives
asset classes. Over the years, the ODSG
expanded its focus from credit
derivatives to include interest rate
derivatives, equity derivatives, foreign
exchange derivatives, and commodity
derivatives. Along with this expanded
focus came increased engagement with
market participants on cross-asset class
issues. Specifically, the ODSG
encouraged the industry to commit itself
to a number of reforms, including
improved operational performance with
respect to the OTC derivatives
confirmation process, portfolio
reconciliation, and portfolio
compression. The regulations being
adopted by the Commission in this
adopting release build upon the ODSG’s
work.72 The specific operational
719(c) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Jan. 31, 2012, at 23,
available at http://www.cftc.gov/ucm/groups/
public/@swaps/documents/file/dfstudy_isr_
013112.pdf. For example, the European Parliament
adopted the substance of the European Market
Infrastructure Regulation (‘‘EMIR’’) on March 29,
2012. As discussed below, ESMA has proposed
regulations that are very similar to those being
adopted by the Commission in this release.
71 See, e.g., Press Release, ‘‘President’s Working
Group on Financial Markets, Progress Summary on
OTC Derivatives Operational Improvements’’ (Nov.
2008).
72 ‘‘No more Fed letter commitments expected,
says Dudley,’’ Risk Magazine, May 16, 2012,
available at http://www.risk.net/risk-magazine/
news/2174981/fed-letter-commitments-expecteddudley (William Dudley, president of the Federal
Reserve Bank of New York, stated ‘‘Now we’re

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performance enhancements upon which
each of the Commission’s rules included
in this adopting release expressly build,
the comments to the rule proposals
related to the costs and benefits of such
rules, and the Commission’s
consideration of the costs and benefits
of such rules are discussed below.
This final rule implements DoddFrank Act section 731, which is an
important component of the
comprehensive set of reforms passed by
Congress to protect the American public
and ‘‘promote the financial stability of
the United States’’ in the wake of a
financial crisis and the resulting
recession that was caused in part by the
lack of adequate regulation of financial
markets.73 The damage to the American
public has been tremendous. According
to the U.S. Department of the Treasury,
over $19 trillion in household wealth
and over 8.8 million jobs were lost
during the recession that began in late
2008.74 Between September 2008 and
May 2012 there have been
approximately 3.6 million completed
home foreclosures across the country.75
The U.S. Census Bureau estimates that
the number of households living below
the poverty level rose 2.6 percent from
2007 to 2010.76 The overarching
purpose and benefit of this final rule,
together with the other rules the
Commission is implementing under
Title VII of the Dodd-Frank Act is to
identify and fix the structural
weaknesses that contributed to the
financial crisis in an effort to avoid a
repeat of the same.
B. Swap Confirmation
The Government Accountability
Office (GAO) found that the rapid
expansion of the trading volume of
swaps, such as credit derivatives, since
moving to a new regime, where the OTC derivatives
market is being regulated for the first time. As we
do that, and the SEC and CFTC stand up in terms
of regulation, it’s completely appropriate for us to
stand down.’’).
73 Dodd-Frank Act, Preamble.
74 See U.S. Department of the Treasury, ‘‘The
Financial Crisis Response—In Charts,’’ April 2012,
available at http://www.treasury.gov/resourcecenter/data-chart-center/Documents/20120413_
FinancialCrisisResponse.pdf. See also
Congressional Budget Office, The Budge and
Economic Outlook: Fiscal Years 2012–2022, at 26
(Jan. 2012) (explaining gross domestic product
(GDP) has fallen dramatically and it is not expected
to return to normal levels until at least 2018. At that
time, the cumulative shortfall in GDP relative to
potential GDP is expected to reach $5.7 trillion).
75 See CoreLogic, ‘‘CoreLogic Reports 66,000
Completed Foreclosures Nationally,’’ May 2012,
available at http://www.corelogic.com/about-us/
news/corelogic-reports-66,000-completedforeclosures-nationally-in-april.aspx.
76 See U.S. Census Bureau, ‘‘Income, Poverty, and
Health Insurance Coverage in the United States:
2010,’’ at 14 (Sept. 2010), available at http://www.
census.gov/prod/2011pubs/p60-239.pdf.

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2002, caused stresses on the operational
infrastructure of market participants.
These stresses, in turn, caused the
participants’ back office systems to fail
to confirm the increased volume of
trades for a period of time.77 The GAO
found that the lack of automation in
trade processing and the purported
assignment of positions by transferring
parties to third parties without notice to
their counterparties were factors
contributing to this backlog. If
transactions, whether newly executed or
recently transferred to another party, are
left unconfirmed, there is no definitive
written record of the contract terms.
Thus, in the event of a dispute, the
terms of the agreement must be
reconstructed from other evidence, such
as email trails or recorded trader
conversations. This process is
cumbersome and may not be wholly
accurate. Moreover, if purported
transfers of swaps, in whole or in part,
are made without giving notice to the
remaining parties and obtaining their
consent, disputes may arise as to which
parties are entitled to the benefits and
subject to the burdens of the transaction.
As the work of the ODSG
demonstrates, the industry is capable of
swift movement to contemporaneous
execution and confirmation. A large
back-log of unexecuted confirmations in
the CDS market created by prolonged
negotiations and inadequate
confirmation procedures were the
subject of the first industry
commitments made by participating
dealers to ODSG.78 In October 2005, the
participating dealers committed to
reduce by 30 percent the number of
confirmations outstanding more than 30
days within four months. In March
2006, the dealers committed to reduce
the number of outstanding
confirmations by 70 percent by June 30,
2006. By September 2006, the industry
had reduced the number of all
outstanding CDS confirmations by 70
percent, and the number of CDS
confirmations outstanding more than 30
days by 85 percent. The industry
achieved these targets largely by moving
80 percent of total trade volume in CDS
to confirmation on electronic platforms,
eliminating backlogs in new trades.
By the end of 2011, the largest dealers
were electronically confirming over 95
77 U.S. Government Accountability Office,
‘‘Credit Derivatives: Confirmation Backlogs
Increased Dealers’ Operational Risks, But Were
Successfully Addressed After Joint Regulatory
Action,’’ GAO–07–716 (2007) at 3–4.
78 See October 4, 2005 industry commitment
letter to the Federal Reserve Bank of New York,
available at http://www.newyorkfed.org/
newsevents/news_archive/markets/2005/
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Federal Register / Vol. 77, No. 176 / Tuesday, September 11, 2012 / Rules and Regulations
percent of OTC credit derivative
transactions, and 90 percent were
confirmed on the same day as execution
(T+0). For the same period, the largest
dealers were electronically confirming
over 70 percent of OTC interest rate
derivatives (over 90 percent of trades
with each other), and over 80 percent
were confirmed T+0. The rate of
electronic confirmation of OTC
commodity derivatives was somewhat
lower—just over 50 percent, but over 90
percent for transactions between the
largest dealers.79 These statistics
provide some confidence that, over
time, timely confirmation rates will
continue to improve.
The primary benefit of timely and
accurate confirmation is that the parties
to a swap know what their deal is. In
other words, a confirmation definitively
memorializes all of the terms of the
swap transaction, which is critical for
all downstream operational and risk
management processes. If transactions,
whether newly executed or recently
transferred to another party, are left
unconfirmed, there is no definitive
written record of the contract terms.
Risk management processes dependent
on the trade terms (such as collateral
management, and payment and
settlement systems) may be inaccurate,
and, in the event of a dispute, the terms
of the agreement must be reconstructed
from other evidence, such as email trails
or recorded trader conversations.
Recognizing the laudable gains in
electronic confirmation processing by
the industry and the risk reduction in
the shortening of time periods between
execution and confirmation, the
Commission proposed a confirmation
rule that would have required SDs and
MSPs trading with each other to confirm
their swap transactions within 15
minutes if the swap transaction was
executed and processed electronically,
within 30 minutes if the swap
transaction was only processed
electronically, and within the same
calendar day if the swap transaction
could not be processed electronically.
Similarly, the Commission proposed
that SDs and MSPs have policies and
procedures for confirming swap
transactions with financial entities
within the same calendar day, and with
counterparties that are not SDs, MSPs,
or financial entities not later than the
next business day.
Several commenters recognized the
benefits of the Commission’s
confirmation proposal and wrote in
support of the approach. Chris Barnard
79 See G15 Industry Confirmation Data dated
April 4, 2012 provided by ISDA, available at
www.cftc.gov.

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wrote that the proposal would increase
transparency and promote legal
certainty for swaps. CME stated that it
supported the goals of improving the
post-trade processing of swaps and
ensuring timely and accurate
confirmation of such data among
counterparties. CME agreed with the
overall approach taken by the
Commission on this subject and with
the goal of promulgating confirmation
requirements that are effective, not
duplicative and cost and time efficient
to the industry. CME noted the costsavings to market participants of
confirming their swaps through DCOs,
which is explicitly permitted under the
swap confirmation rule.
On the other hand, multiple
commenters objected to the
Commission’s proposal on cost grounds.
Some read the proposal as detrimentally
mandating electronic confirmation.80
Other commenters argued that the short
time periods permitted for confirmation
would effectively require all terms of a
swap to be negotiated prior to
execution, increasing costs for the party
that is most sensitive to timing of
market conditions and increasing risk
by leading to needless disputes and
operational lapses.81 Still others argued
that financial entities should not be
subject to shorter confirmation
deadlines than non-financial entities.82
Finally, some commenters stated that
the rule would require changes in
current market practice and it was
unclear that the cost of additional
resources to meet the requirements of
the rule was outweighed by any
enhanced transparency or reduction in
systemic risk.83 No commenter provided
quantitative data on the comprehensive
80 Chatham argued that the Commission should
not mandate confirmation through an electronic
matching platform, because such a mandate could
preclude end-users from entering into swaps not yet
available on matching platforms and could increase
costs for end-users that do not engage in the volume
of swaps necessary to justify the additional costs of
connecting to electronic matching platforms. ABC
& CIEBA also argued that the proposed rule could
impose processes that require third-party service
providers or new technology.
81 The Working Group; ISDA; Chatham.
82 CIEBA stated that the rule would impose costly
increases in operational capacity for pension funds
and recommended that the Commission provide for
a ‘‘close of next business day’’ time limit for benefit
plans, along with a requirement that SDs and MSPs
provide an acknowledgement at the time of
execution as well as a draft acknowledgement prior
to execution. AMG argued that financial entities
should not be subject to shorter time periods for
confirmation because many may not have the
operational resources to meet the deadlines. MFA
stated that designation as a financial entity does not
necessarily correlate with a large swap portfolio or
being highly sophisticated, and thus the short time
period for confirmation in the proposed rules may
cause unwarranted economic disadvantages.
83 BGA; MetLife; MFA; GFED; the FHLBs; AMG.

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compliance costs of the rule as
proposed, but ISDA and The Working
Group enumerated costs related to
adopting electronic confirmation
procedures. ISDA stated that each asset
class uses different electronic
confirmation platforms, so a trader
conducting trades in multiple asset
classes would need to build the
infrastructure necessary to integrate
multiple platforms. Such expenditures
are routine for dealers, says ISDA, but
for smaller entities, the operational costs
may impede their ability to hedge risk.
The Working Group estimated that
electronic confirmation could cost an
SD or MSP in excess of $1,000,000
annually, citing that one third-party
confirmation service charges $6.00 per
trade. However, The Working Group
cited no source for the proposition that
potential SDs or MSPs currently execute
the more than 166,000 trades annually
that would be required to reach a
$1,000,000 annual confirmation cost at
$6.00 per trade.
The Commission carefully considered
each of these comments in formulating
the final rule and has responded to the
cost concerns of commenters where
doing so was in keeping with the benefit
of timely and accurate memorialization
of all the terms of a swap transaction
between an SD or MSP and its
counterparties. First, the final rule does
not apply to swap transactions that are
executed on a SEF or DCM or that are
submitted for clearing to a DCO by the
required confirmation deadline, so
market participants that mostly transact
in standardized swaps may not be
affected by the rule, or will have their
costs greatly reduced. This fact was
highlighted by both CME and ICE in
their comments to the proposed rule.
Second, the Commission notes that
the final rule affirmatively does not
mandate electronic confirmation.
Instead, the final rule sets an ultimate
deadline for confirmation of swap
transactions among SDs and MSPs,
while also requiring that if
technologically practicable, such swap
transactions be confirmed sooner. The
deadline of ‘‘the end of the first business
day following the day of execution’’ is
modified to allow for more time if
registrants are trading near the end of
the trading day or if such registrants are
in different time zones. With respect to
swap transactions with non-SDs and
non-MSPs, SDs and MSPs are only
required to have policies and
procedures in place that are reasonably
designed to ensure confirmation by the
end of the first business day following
the day of execution (modified for end
of day trading and time zone
differences) for financial entities, or by

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Federal Register / Vol. 77, No. 176 / Tuesday, September 11, 2012 / Rules and Regulations

the end of the second business day
following the day of execution for nonfinancial entities, rather than the next
business day as proposed. The
Commission would expect an SD’s or
MSP’s policies and procedures to
require sufficient pre-trade agreement
on repetitive terms such that non-SD,
non-MSP counterparties are able to
execute in a timely manner without
protracted pre-trade negotiations that
may prove costly for market participants
sensitive to execution timing. The
requirement for policies and procedures
(as opposed to hard deadlines)
recognizes that SDs and MSPs cannot
force their non-SD, non-MSP
counterparties to adopt particular
electronic confirmation processes, but
must accommodate the needs of their
counterparties while ensuring, to the
extent possible, that confirmation is
achieved within the rule’s time periods.
In addition, to further reduce the
burden of the rule on those market
participants that are least able to quickly
adapt to the rule’s requirements, the
Commission notes that compliance with
the rule is implemented on a staggered
basis. As discussed above under section
III.B.2, compliance is required first for
swaps in the credit and interest rate
asset class, and, within that asset class,
first for swaps among SDs, MSPs, and
financial entities with a longer
compliance period for swaps between
SDs or MSPs and non-financial entities.
Compliance is staggered similarly with
respect to all other swaps, but with
longer compliance periods.
The Commission understands that, for
certain asset classes, the low number of
transactions does not seem to justify
increased expenditure on faster
confirmations; however, the
Commission is committed to decreasing
the length of time between execution
and confirmation in order to improve
the efficiency of bilateral markets and
decrease overall systemic risk resulting
from outstanding unconfirmed trades
among many participants. The
Commission maintains that such
benefits are significant and important
regardless of asset class. Thus, the
Commission has applied the same
general timeframes to all asset classes,
but has extended the compliance
deadlines for commodity, equity, and
foreign exchange asset classes in order
to allow participants in those asset
classes sufficient time to integrate faster
confirmations without an immediate
and potentially overwhelming burden.
Finally, the Commission notes that
ESMA has proposed confirmation
requirements that are substantially
similar to those adopted by the

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Commission in this release.84 By closely
aligning confirmation requirements
through consultation with ESMA, the
Commission believes that SDs and
MSPs will benefit from a largely unitary
regulatory regime that does not require
separate compliance and operational
policies and procedures.

are intended to ‘‘create a consistent and
predictable process * * * that
eliminates present uncertainties and
delays.’’ 88
In light of these efforts the
Commission proposed § 23.502, which
required SDs and MSPs to reconcile
their swap portfolios with one another
and provide counterparties that are not
C. Portfolio Reconciliation
registered as SDs or MSPs with regular
Disputes related to confirming the
opportunities for portfolio
terms of a swap, as well as swap
reconciliation. Specifically, proposed
valuation disputes, have long been
§ 23.502 required SDs and MSPs to
recognized as a significant problem in
reconcile swap portfolios with other
the OTC derivatives market.85 Portfolio
SDs or MSPs with the following
reconciliation is considered an effective frequency: daily for portfolios consisting
means of identifying and resolving these of 300 or more swaps, at least weekly for
disputes. The Commission recognizes
portfolios consisting of 50 to 300 swaps,
that the industry has made significant
and at least quarterly for portfolios
progress in adopting the use of portfolio consisting of fewer than 50 swaps. For
reconciliation to decrease the number of portfolios with counterparties other
swap disputes.86 In December 2008, the than SDs or MSPs, the proposed
ODSG’s group of 14 major dealers
regulations required SDs and MSPs to
committed to execute daily portfolio
establish policies and procedures for
reconciliations for collateralized
reconciling swap portfolios: daily for
portfolios in excess of 500 trades
swap portfolios consisting of 500 or
between participating dealers by June of more swaps, weekly for portfolios
2009.87 As of May 2009, all participating consisting of more than 100 but fewer
dealers were satisfying this
than 500 swaps, and at least quarterly
commitment. In October 2009, the
for portfolios consisting of fewer than
ODSG committed to publishing a
100 swaps. In order for the marketplace
feasibility study on market-wide
to realize the full risk reduction benefits
portfolio reconciliation that would set
of portfolio reconciliation, the
forth how regular portfolio
Commission also proposed to expand
reconciliation could be extend beyond
portfolio reconciliation to all
the ODSG dealers to include smaller
transactions, whether collateralized or
banks, buy-side participants, and
uncollateralized. For the swap market to
derivative end users. Consistent with
operate efficiently and to reduce
this publication, the ODSG dealers
systemic risk, the Commission believes
expanded their portfolio reconciliation
that portfolio reconciliation should be a
commitment in March 2010 to include
proactive process that delivers a
monthly reconciliation of collateralized consolidated view of counterparty
portfolios in excess of 1,000 trades with exposure down to the transaction level.
any counterparty. Most recently, the
By identifying and managing
industry has been preparing a new
mismatches in key economic terms and
‘‘Convention on the Investigation of
valuation for individual transactions
Disputed Margin Calls’’ and a new
across an entire portfolio, the
‘‘Formal Market Polling Procedure’’ that Commission proposal sought to require
a process in which overall risk can be
84 See ESMA Draft Technical Standards, Article 1
identified and reduced.
RM, subsection 2 (stating that uncleared OTC
Agreement between SDs, MSPs, and
derivatives ‘‘shall be confirmed, where available via
their counterparties on the proper daily
electronic means, as soon as possible and at the
latest by the end of the same business day.’’), and
valuation of the swaps in their swap
ESMA Draft Technical Standards, Article 1 RM,
portfolio also is essential for the
subsection 3 (stating that uncleared OTC derivatives
Commission’s margin proposal. Under
‘‘shall be confirmed as soon as possible and at the
proposed rule § 23.151, non-bank SDs
latest by the end of the second business day
following the date of execution’’).
and MSPs must document the process
85 See ISDA Collateral Committee, ‘‘Commentary
by which they will arrive at a valuation
to the Outline of the 2009 ISDA Protocol for
for each swap for the purpose of
Resolution of Disputed Collateral Calls,’’ June 2,
89
2009 (stating ‘‘Disputed margin calls have increased collecting initial and variation margin.
significantly since late 2007, and especially during
2008 have been the driver of large (sometimes > $1
billion) un-collateralized exposures between
professional firms.’’).
86 The Commission also recognizes and
encourages the industry practice of immediately
transferring undisputed collateral amounts.
87 See June 2, 2009 summary of industry
commitments, available at http://www.isda.org/c_
and_a/pdf/060209table.pdf.

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88 See ‘‘ISDA 2010 Convention on the
Investigation of Disputed Margin Calls’’ and ‘‘ISDA
2010 Formal Market Polling Procedure.’’
89 See Margin Requirements for Uncleared Swaps
for Swap Dealers and Major Swap Participants, 76
FR 23732, 23744 (April 28, 2011). Bank SDs and
MSPs will also be required to document the process
by which they will arrive at a valuation for each
swap for the purpose of collecting margin under the

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All non-bank SDs and MSPs must
collect variation margin from their nonbank SD, MSP, and financial entity
counterparties for uncleared swaps on a
daily basis. Variation margin requires a
daily valuation for each swap. For
swaps between non-bank SDs and MSPs
and non-financial entities, no margin is
required to be exchanged under
Commission regulation, but the nonbank SDs and MSPs must calculate a
hypothetical variation margin
requirement for each uncleared swap for
risk management purposes under
proposed § 23.154(b)(6).
Several commenters articulated the
benefits of portfolio reconciliation and
supported the Commission’s proposal.
TriOptima supported the regular
reconciliation of all portfolios as a
process that will identify issues that can
minimize counterparty credit exposure
and operational risk. Chris Barnard also
supported the rule, stating that the rule
should increase transparency, promote
market integrity and reduce risk by
establishing procedures that will
promote legal certainty concerning swap
transactions, assist with the early
resolution of valuation disputes, reduce
operational risk, and increase
operational efficiency.
Conversely, multiple commenters
objected to proposed § 23.502 on cost
grounds. Some commenters argued that
the rule would require significant
investment in new infrastructure and
some argued that the rule would have
few benefits for SDs and MSPs that
trade in shorter dated swaps.90 Others
asserted that portfolio reconciliation at
the transactional level was only
necessary if there are portfolio level
discrepancies that result in margin
disputes, and argued that routine
reconciliation at the proposed frequency
was unnecessarily costly.91 Some
argued that the swap portfolios of nonSDs, non-MSPs do not pose significant
risk to the financial system and the rule
may increase the costs of swaps for such
entities.92 Still others argued that the
Commission must provide sufficient
time for all registrants to develop the
infrastructure required to meet the
frequency of reconciliation required by
the rule.
In relation to the one business day
valuation dispute resolution
requirement, many commenters stated
that parties to a good-faith dispute
margin rules proposed by the OCC, the Federal
Reserve Board, and the FDIC. See Margin and
Capital Requirements for Covered Swap Entities, 76
FR 27564, 27589 (May 11, 2011).
90 GFED.
91 MFA; ISDA; The Working Group; MarkitSERV;
AMG.
92 Dominion; FHLBs; Chatham.

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should have a commercially reasonable
timeframe in which to consult in order
to find an appropriate resolution of the
dispute. These commenters supported
ISDA’s 2011 Convention on Portfolio
Reconciliation and the Investigation of
Disputed Margin Calls and the 2011
Formal Market Polling Procedure,
developed pursuant to industry
commitments to the ODSG, which ISDA
believes will be widely adopted by OTC
derivatives market participants, and
believed these industry efforts should
play a more significant role in shaping
the proposed reconciliation rules.93
Other commenters argued that SDs and
MSPs should not have to expend
resources to resolve valuation disputes
exceeding the proposed 10 percent
threshold if they conclude that the
discrepancy is not material in their
particular circumstances.94
The Commission carefully considered
each of the foregoing comments in
formulating the final rule.
It should be noted that the
Confirmation NPRM stated that the
Commission anticipated that SDs and
MSPs will be able to efficiently
reconcile their internal records with
their counterparties by reference to data
in SDRs. The Commission received no
comments disputing this assertion, and
one commenter noted that SDRs would
be in the best position to detect and
manage discrepancies in the material
terms of a swap transaction both
efficiently and effectively.95 The
Commission has thus determined to
adopt the portion of the rule that
requires SDs and MSPs to reconcile the
material terms of each swap in their
swap portfolios in addition to
reconciling the valuation of each swap
but, at the urging of commenters, has
reduced the required frequency of
reconciliation to match the frequency of
reconciliation currently undertaken by
the largest prospective SDs.96 The final
rules require SDs and MSPs to reconcile
portfolios with other SDs and MSPs at
the following frequencies: daily for
portfolios comprising 500 or more
swaps; weekly for portfolios comprising
93 ISDA;

The Working Group; FHLBs; AMG.
The Working Group; MFA; ISDA.
95 FHLBs.
96 In December 2008, the ODSG’s group of 14
major dealers committed to execute daily portfolio
reconciliations for collateralized portfolios in
excess of 500 trades between participating dealers
by June of 2009. See June 2, 2009 summary of
industry commitments, available at http://www.
isda.org/c_and_a/pdf/060209table.pdf. As of May
2009, all participating dealers were satisfying this
commitment. The ODSG dealers expanded their
portfolio reconciliation commitment in March 2010
to include monthly reconciliation of collateralized
portfolios in excess of 1,000 trades with any
counterparty.
94 Chatham;

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51 to 499 swaps; and quarterly for
portfolios comprising one to 50 swaps.
The Commission believes that the
frequency of reconciliation of material
terms and valuations of each swap
required by the rule as modified will
ensure the risk-reducing benefits of
reconciliation by presenting a
consolidated view of counterparty
exposure down to the transaction level,
and that these benefits are especially
noteworthy when considered in light of
the efficiencies possible through use of
SDR data in the reconciliation process.
Having considered comments that the
frequency of reconciliation with nonSD, non-MSP counterparties required by
the rule was unnecessary to achieve the
benefits of portfolio reconciliation
outlined above, the Commission is also
reducing the frequency of reconciliation
required for non-registrant
counterparties and is modifying the
final rule to require reconciliation with
such counterparties quarterly for swap
portfolios of more than 100 swaps, and
annually for all other swap portfolios.
This level was recommended by
commenters, including The Working
Group.
With respect to the proposed rule’s
one business day deadline for valuation
dispute resolution among SDs and
MSPs, the Commission observes that
daily valuation is critical for the
appropriate operation of the
Commission’s proposed rules on
margin, which is itself essential for the
mitigation of risk posed by swaps.
Issues related to swap valuations are
woven through a number of
Commission rule proposals. For
instance, § 23.504(e), as adopted in this
release, requires SDs and MSPs to report
valuation disputes with SD or MSP
counterparties in excess of $20,000,000
and lasting longer than three business
days to the Commission, while under
§ 23.504(b)(4) SDs and MSPs are
required to agree on valuation
methodologies with their
counterparties.
However, the Commission recognizes
that valuation dispute resolution may be
labor intensive and therefore costly. For
this reason, the Commission modified
the rule to provide for a five-day
resolution process. In addition to this
change, the Commission notes that, the
costs of valuation dispute resolution are
mitigated by the operation of several
other parts of the new regulatory regime
for swaps. First, the reconciliation
requirements, and thus the valuation
dispute resolution requirement, does
not apply to cleared swaps, because
DCOs establish settlement prices for
each cleared swap every business day.
It is likely that a large part of the swap

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portfolios of SDs and MSPs will consist
of cleared swaps 97 to which the
reconciliation requirements will not
apply; valuation disputes will therefore
only arise in bilateral, uncleared
portfolios. Second, the reconciliation
requirements of § 23.503 are expected to
avoid disputes from arising in the first
instance through the regular comparison
of material terms and valuations. Third,
the Commission expects that
§ 23.504(b)(4), by requiring agreement
with each counterparty on the methods
and inputs for valuation of each swap,
will assist SDs and MSPs to resolve
valuation disputes within five business
days.
SDs and MSPs need not resolve every
valuation dispute, but only those where
the difference in valuation is 10 percent
or more. The Commission believes the
10 percent threshold is appropriate as it
provides certainty as to which disputes
must be resolved. The Commission
believes the efficiency of a bright line
rule, as opposed to the formulas and
discretion in the alternatives suggested
by commenters, will better serve the
operational processes of SDs and MSPs
and the regulatory oversight of the
Commission. Thus, to maintain the risk
mitigation benefits of the rule outlined
above, the Commission has determined
to retain the requirement that swap
valuation disputes among SDs and
MSPs be resolved within five business
days.
As a further cost reduction measure,
the Commission notes that it has
extended the compliance dates for those
SDs and MSPs that have not been
previously regulated by a prudential
regulator, and thus are least likely to
have the infrastructure in place to begin
regular reconciliation with their
counterparties. As stated in section
III.B.3 above, SDs and MSPs that have
been previously regulated need not
comply with the rule for three months
after publication of the final rule in the
Federal Register. SDs and MSPs that
have not been previously regulated need
not comply for six months after
publication.
Finally, the Commission notes that
ESMA has proposed portfolio
reconciliation requirements that are
substantially similar to those adopted by
97 ‘‘It is expected that the standardized, plain
vanilla, high volume swaps contracts—which
according to the Treasury Department are about 90
percent of the $600 trillion swaps market—will be
subject to mandatory clearing.’’ 156 Cong. Rec.
S5921 (daily ed. Jul. 15, 2010) (statement of Sen.
Lincoln). The Tabb group estimates that 60–80
percent of the swaps market measured by notional
amount will be cleared within five years of the time
that the Dodd-Frank Act is implemented. See Tabb
Group, ‘‘Technology and Financial Reform: Data,
Derivatives and Decision Making.’’

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the Commission in this release.98 By
closely aligning portfolio reconciliation
requirements through consultation with
ESMA, the Commission believes that
SDs and MSPs will benefit from a
largely unitary regulatory regime that
does not require separate compliance
and operational policies and
procedures.
D. Portfolio Compression
Portfolio compression is a mechanism
whereby substantially similar
transactions among two or more
counterparties are terminated and
replaced with a smaller number of
transactions of decreased notional value
in an effort to reduce the risk, cost, and
inefficiency of maintaining unnecessary
transactions on the counterparties’
books. In many cases, these redundant
or economically-equivalent positions
serve no useful business purpose, but
can create unnecessary risk,99 as well as
operational and capital inefficiencies.
The usefulness of portfolio
compression as a risk management tool
has been acknowledged widely. In 2008,
the PWG identified frequent portfolio
compression of outstanding trades as a
key policy objective in the effort to
strengthen the OTC derivatives market
infrastructure.100 Similarly, the 2010
staff report outlining policy perspectives
on OTC derivatives infrastructure issued
by the FRBNY identified trade
compression as an element of strong risk
management and recommended that
market participants engage in regular,
market-wide portfolio compression
exercises.101
The value of portfolio compression
also is illustrated by existing market
participation in compression exercises.
In March 2010, the Depository Trust and
Clearing Corporation (DTCC) explicitly
attributed the reduction in the gross
notional value of the credit derivatives
98 See ESMA Draft Technical Standards, Article 2
RM, subsection 4, (stating that ‘‘In order to identify
at an early stage, any discrepancy in a material term
of the OTC derivative contract, including its
valuation, the portfolio reconciliation shall be
performed: * * * each business day when the
counterparties have 500 or more OTC derivative
contracts outstanding with each other; * * * once
per month for a portfolio of fewer than 300 OTC
derivative contracts outstanding with a
counterparty; * * * once per week for a portfolio
between 300 and 499 OTC derivative contracts
outstanding with a counterparty.’’).
99 Federal Reserve Bank of New York Staff Report
No. 424: ‘‘Policy Perspectives on OTC Derivatives
Market Infrastructure,’’ Jan. 2010 (revised Mar.
2010).
100 ‘‘Policy Objectives for the OTC Derivatives
Markets,’’ President’s Working Group on Financial
Markets (Nov. 14, 2008).
101 Federal Reserve Bank of New York Staff
Report No. 424: ‘‘Policy Perspectives on OTC
Derivatives Market Infrastructure,’’ Jan. 2010
(revised Mar. 2010).

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in its warehouse to industry supported
portfolio compression.102 TriOptima,
which offers the TriReduce portfolio
compression service, estimates that it
terminated $106.3 trillion gross notional
of interest rate swaps and $66.9 trillion
gross notional of credit swaps between
2003 and 2010.103 Similarly, Creditex
and Markit, which offer portfolio
compression exercises in single name
credit default swaps, enabled
participating institutions to eliminate
$4.5 trillion in notional between late
2008 through 2009.104
In light of the recognized benefits of
portfolio compression in reducing the
risk, cost, and inefficiency of
maintaining unnecessary transactions,
the Commission proposed § 23.503,
which required SDs and MSPs to
participate in multilateral compression
exercises that are offered by those DCOs
or self-regulatory organizations of which
the SD or MSP is a member, or as
required by Commission regulation or
order. The Commission also proposed
that SDs and MSPs be required to
terminate bilaterally all fully offsetting
swaps between them by the close of
business on the business day following
the day the parties entered into the
offsetting swap transaction and to
engage annually in bilateral portfolio
compression exercises with
counterparties that are also SDs and
MSPs to the extent that they have not
participated in a multilateral
compression exercise. Proposed
§ 23.503 did not require portfolio
compression exercises for swaps
outstanding between an SD or MSP and
counterparties that are neither SDs nor
MSPs. Instead, SDs and MSPs were
required to establish written policies
and procedures for periodically
terminating all fully offsetting swaps
and periodically engaging in
compression exercises with such
counterparties.
Several commenters supported the
Commission’s proposal and outlined the
benefits of the approach. For instance,
102 DTCC Press Release, ‘‘DTCC Trade
Information Warehouse Completes Record Year
Processing OTC Credit Derivatives’’ (Mar. 11, 2010).
Notably, beginning in August 2008, ISDA
encouraged compression exercises for credit default
swaps by selecting the service provider and
defining the terms of service.
103 See www.trioptima.com. Between 2007 and
2008, TriOptima reduced $54.7 trillion gross
notional of interest rate swaps and $49.1 trillion
gross notional of credit swaps. In March of 2010,
the staff of the Federal Reserve Bank of New York
estimated that since 2008 nearly $50 trillion gross
notional of credit default swap positions has been
eliminated through portfolio compression. Federal
Reserve Bank of New York Staff Report No. 424:
‘‘Policy Perspectives on OTC Derivatives Market
Infrastructure,’’ Jan. 2010 (revised Mar. 2010).
104 See www.isdacdsmarketplace.com.

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Blackrock wrote in support of the
Commission’s proposal and encouraged
the Commission to expand the proposal
in order to achieve what Blackrock
believes to be the essential benefits of
compression. In addition, Eris Exchange
wrote in support of compression and
noted that it should lead to greater
position netting and the ability to more
freely unwind aged swap trades without
having to go through a cumbersome
novation process involving substantial
operational burden and negotiated upfront payments.
On the other hand, multiple
commenters objected to proposed
§ 23.503 on cost grounds. Some
commenters argued that resourceintensive compression exercises should
not be required in asset classes where
there is not a high degree of transaction
standardization and a high volume of
redundant trades because the benefits
would not outweigh the costs.105
Similarly, many commenters argued
that non-SD counterparties should not
be included in any mandatory
compression because such entities have
portfolios with a very small number of
offsetting transactions (i.e., almost all
swaps are in the same market direction)
and the cost of the exercise is not
justified by the small benefit derived.106
Other commenters noted that it is not
cost effective to establish and run daily
systems to monitor for fully offsetting
swaps where there are likely to be
none.107 On another tack, some
commenters argued against requiring
participation in compression exercises
offered by DCOs and SROs to avoid lack
of competition and higher costs.
The Commission carefully reviewed
the comments received with respect to
proposed § 23.503 and considered each
in formulating the final rule. Partly in
response to the comments received
regarding the costs imposed by the
proposed rule, the Commission has
revised the rule to reduce the cost
burden on market participants. First, the
Commission has determined to exclude
swaps cleared by a DCO from the rule.
As noted above, each DCO is required
to establish portfolio compression
procedures, but participation in such
compression exercises by clearing
members is voluntary. Accordingly, the
revisions to § 23.503 are consistent with
the revised DCO final rules with respect
to cleared swaps. Second, the
Commission was persuaded that the
benefits of the rule could be maintained
105 ISDA;

The Working Group; Markit.
Markit; ISDA; ABC & CIEBA;
AMG; Chatham; Dominion; FHLBs; Freddie Mac;
MetLife; MFA; NAIC; GFED.
107 The Working Group.
106 TriOptima;

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without requiring SDs and MSPs to
incur the costs of mandatory
compression. Thus, as discussed in
more detail above, the Commission is
electing to adopt the alternative
suggested by commenters and is
modifying the rule to replace the
mandatory compression requirement
with a requirement that SDs and MSPs
establish policies and procedures for
periodically engaging in portfolio
compression exercises with
counterparties that are also SDs or MSPs
and for engaging in portfolio
compression with all other
counterparties upon request. The
Commission is qualifying the
requirement that SDs and MSPs
terminate fully offsetting swaps by
requiring instead that SDs and MSPs
establish policies and procedures for
terminating fully offsetting swaps in a
timely fashion, but allowing SDs and
MSPs to determine where it is
appropriate to do so. The Commission
believes that these modifications retain
the benefits of portfolio compression
while reducing the compliance costs to
SDs and MSPs and costs that otherwise
may have been incurred by other market
participants.
Finally, the Commission notes that
ESMA has proposed portfolio
compression requirements that are
substantially similar to those adopted by
the Commission in this release.108 By
closely aligning portfolio compression
requirements through consultation with
ESMA, the Commission believes that
SDs and MSPs will benefit from a
largely unitary regulatory regime that
does not require separate compliance
and operational policies and
procedures.
E. Swap Trading Relationship
Documentation
The OTC derivatives markets
traditionally have been characterized by
privately negotiated transactions
entered into by two counterparties, in
which each party assumes and manages
the credit risk of the other. While OTC
derivatives are traded by a diverse set of
market participants, such as banks,
hedge funds, pension funds, and other
institutional investors, as well as
corporate, governmental, and other endusers, a relatively few number of dealers
are, by far, the most significantly active
108 See ESMA Draft Technical Standards, Article
3 RM, subsection 2, (stating that ‘‘counterparties
with 500 or more OTC derivative contracts
outstanding which are not centrally cleared shall
have procedures to regularly, and at least twice a
year, analyse the possibility to conduct a portfolio
compression exercise in order to reduce their
counterparty credit risk and engage in such
portfolio compression exercise.’’).

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55949

participants. As such, the default of a
dealer may result in significant losses
for the counterparties of that dealer,
either from the counterparty exposure to
the defaulting dealer or from the cost of
replacing the defaulted trades in times
of market stress.109
OTC derivatives market participants
typically have relied on the use of
industry standard legal documentation,
including master netting agreements,
definitions, schedules, and
confirmations, to document their swap
trading relationships. This industry
standard documentation, such as the
widely used ISDA Master Agreement
and related definitions, schedules, and
confirmations specific to particular asset
classes, offers a framework for
documenting the transactions between
counterparties for OTC derivatives
products.110 The standard
documentation is designed to set forth
the legal, trading, and credit
relationship between the parties and to
facilitate cross-product netting of
transactions in the event that parties
have to close-out their position with one
another.
One important method of addressing
the credit risk that arises from OTC
derivatives transactions is the use of
bilateral close-out netting. Parties seek
to achieve enforceable bilateral netting
by documenting all of their transactions
under master netting agreements.111
Following the occurrence of a default by
one of the counterparties (such as
bankruptcy or insolvency), the
exposures from individual transactions
between the two parties are netted and
consolidated into a single net ‘‘lump
sum’’ obligation. A party’s overall
exposure is therefore limited to this net
sum. That exposure then may be offset
by the available collateral previously
provided being applied against the net
exposure. As such, it is critical that the
netting provisions between the parties
are documented and legally enforceable
and that the collateral may be used to
meet the net exposure. In recognition of
the risk-reducing benefits of close-out
netting, many jurisdictions provide
favorable treatment of netting
109 See Financial Stability Board, ‘‘Implementing
OTC Derivatives Market Reforms: Report of the OTC
Derivatives Working Group,’’ (Oct. 10, 2010),
available at http://www.financialstabilityboard.org/
publications/r_101025.pdf.
110 The International Swaps and Derivatives
Association (ISDA) is a trade association for the
OTC derivatives industry (http://www.isda.org).
111 Enforceable bilateral netting arrangements are
a common commercial practice and are an
important part of risk management and
minimization of capital costs.

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arrangements in bankruptcy,112 and
favorable capital and accounting
treatment to parties that have
enforceable netting agreements in
place.113
There is also a risk that inadequate
documentation of open swap
transactions could result in collateral
and legal disputes, thereby exposing
counterparties to significant
counterparty credit risk. By way of
contrast, adequate documentation
between counterparties offers a
framework for establishing the trading
relationship between the parties.
To ensure the risk-reducing benefits
of adequate swap trading relationship
documentation, the Commission
proposed § 23.504. Proposed § 23.504
required SDs and MSPs to establish,
maintain, and enforce written policies
and procedures reasonably designed to
ensure that each SD and MSP and its
counterparties have agreed in writing to
all of the terms governing their swap
trading relationship and have executed
all agreements required by proposed
§ 23.504. These included agreement on
terms related to payment obligations,
netting of payments, events of default or
other termination events, netting of
obligations upon termination, transfer of
rights and obligations, governing law,
valuation, and dispute resolution
procedures, as well as credit support
arrangements, including margin and
segregation. Agreement on valuation
methodologies pursuant to
§ 23.504(b)(4) is discussed separately
below. In addition, proposed § 23.504
required each SD and MSP to have an
independent internal or external auditor
examine annually at least 5 percent of
the swap trading relationship
documentation created during the year
to ensure compliance with Commission
regulations and the SD’s or MSP’s
policies and procedures established
pursuant to § 23.504.
Several commenters supported the
rule. One stated that clear and thorough
standards for documentation are
essential to avoid the situation that
became apparent when AIG and
Lehman Brothers failed: A hopelessly
tangled web of poorly documented
transactions, with the effort to sort it all
out emerging as a separate threat to the
financial system.114 Others supported
112 See e.g., 11 U.S.C. 561 (protecting contractual
right to terminate, liquidate, accelerate, or offset
under a master netting agreement and across
contracts).
113 See 12 CFR part 3, Appendix C; 12 CFR part
208, Appendix F; 12 CFR part 225, Appendix G;
and 12 CFR part 325, Appendix D (banking
regulations regarding qualifying master netting
agreements).
114 Better Markets.

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the goal of the rule to ensure that the
parties to a trade have in fact agreed on
its economic and legal terms prior to or
contemporaneously with entering into a
swap, and are communicating and
maintaining appropriate records
memorializing that agreement.115
However, many commenters also
objected to the proposed rule on cost
grounds.
Several commenters strongly urged
the Commission not to make § 23.504
retroactively applicable to existing
swaps because the need to make
amendments to existing documentation
would be time consuming and costly.116
Having considered these comments, the
Commission is adopting the alternative
presented by commenters and is
modifying § 23.504 to make clear that
the rule does not apply to swaps
executed prior to the date on which SDs
and MSPs are required to be in
compliance with § 23.504. The
Commission notes, however, that the
rule does not prohibit SDs and MSPs
from agreeing with their counterparties
to amend existing swap trading
relationship documentation to bring
such documentation into compliance
with § 23.504 (or any other Commission
regulation) and ensure that netting
arrangements will apply to swaps
executed prior to and after promulgation
of § 23.504. The ability to combine
netting sets in this manner may reduce
costs of collateralization for many SDs
and MSPs.
Several commenters were concerned
that proposed § 23.504 may require
market participants to incur the burden
and expense of negotiating master
agreements even if a stand-alone
agreement or ‘‘long-form’’ confirmation
that incorporates terms of a standard
master agreement by reference would
sufficiently address legal risks.117 The
Commission notes, however, that
nothing in the rule prohibits
incorporation by reference so long as the
terms so incorporated are in written
form, and therefore confirms that so
long as a ‘‘long-form’’ confirmation
includes all terms of the trading
relationship and is executed prior to or
contemporaneously with entering into a
swap transaction, such would be in
compliance with § 23.504.
A number of comments reflected a
concern regarding the requirement that
SDs and MSPs audit no less than 5
percent of their trading relationship
documentation annually, arguing that
115 ISDA

& SIFMA.
Working Group; ISDA & SIFMA; FSR;
MFA; FHLBs; The Coalition for Derivative EndUsers.
117 OCC; IECA.
116 The

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the requirement is burdensome and
recommending that the Commission
adopt an alternative, principles-based
approach requiring SDs and MSPs to
conduct audits sufficient to identify
material weaknesses in their
documentation policies and procedures.
The Commission was persuaded that the
audit requirement need not prescribe
the percentage of agreements to be
audited to maintain the benefits of the
rule, and has modified the rule in
accordance with the recommendations
of commenters.
In addition, several commenters
recommended that valuation dispute
reporting under § 23.504(e) should be
subject to a materiality standard to
avoid an overly-burdensome reporting
requirement that will result in
substantial informational noise. The
Commission agreed with these
commenters and reduced the burden of
the reporting requirement by revising
the proposed rule to add a $20,000,000
threshold on the reporting of valuation
disputes.
Finally, the Commission recognizes
that requiring implementation of the
documentation requirements of § 23.504
immediately or within a very
compressed timeframe creates certain
costs for industry participants.
Consequently, reducing these costs—
enumerated below—by extending the
compliance schedule represents a
benefit.
First, to meet timelines some firms
will need to contract additional staff or
hire vendors to handle some necessary
tasks or projects. Additional staff hired
or vendors contracted in order to meet
more pressing timelines represent an
additional cost for market participants.
Moreover, as pointed out by
commenters, a tightly compressed
timeframe raises the likelihood that
more firms will be competing to procure
services at the same time; this could put
firms that conduct fewer swaps at a
competitive disadvantage in obtaining
those services, making it more difficult
for them to meet required timelines.118
In addition, it could enable service
providers to command a pricing
premium when compared to times of
‘‘normal’’ or lesser competition for
similar services. That premium
represents an additional cost when
compared to a longer compliance
timeline.
Second, if entities are not able to
comply with the documentation
requirements by a certain date, they may
avoid transacting swaps requiring
compliance until such a time as they are
able to comply. In this event, liquidity
118 See

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that otherwise would result from those
foregone swaps would be reduced,
making the swaps more expensive for
market participants taking the other
side. Moreover, firms compelled to
withdraw from the market pending
compliance with required
documentation measures will either
leave certain positions un-hedged—
potentially increasing the firm’s own
default risk, and therefore the risk to
their counterparties and the public.
Alternatively, firms compelled to
withdraw from the market for a period
of time could attempt to approximate
their foregone swap hedges using other,
likely more expensive, instruments.
Further, to the extent the withdrawing
entities are market makers, they will
forsake the revenue potential that
otherwise would exist for the period of
their market absence.
Third, firms may have to implement
technological solutions, sign contracts,
and establish new operational
procedures before industry standards
have emerged that address new
problems effectively. To the extent that
this occurs, it is likely to create costs.
Firms may have to incur additional
costs later to modify their technology
platforms and operational procedures
further, and to renegotiate contracts—
direct costs that a more protracted
implementation schedule would have
avoided.119 Moreover, costs created by
the adoption of standards that fail to
address certain problems, or attributable
to undesired competitive dynamics
resulting from such standards, may be
longstanding.
The Commission, informed by its
consideration of comments and
alternatives, discussed in the sections
above and below, believes that the
approach contained in this adopting
release is reasonable and appropriate in
light of the tradeoffs described above.
The compliance dates discussed above
give the Commission the opportunity to
provide additional time to entities in
ways that generally align with: (1) Their
resources and expertise, and therefore
their ability to comply more quickly;
and (2) their level of activity in the swap
markets, and therefore the possible
impact of their swap activities on the
stability of the financial system. Entities
with the most expertise in, and systems
capable to transact, swaps also are likely
to be those whose transactions represent
a significant portion of all transactions
in the swap markets. They are more
likely to be able to comply quickly, and
the benefits of requiring them to do so
are greater than would be the case for
less active entities. On the other hand,
119 See

e.g., ACLI letter.

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entities with less system capability and
in-house swap expertise may need more
time to comply with documentation
requirements, but it is also likely that
their activities represent a smaller
proportion of the overall market, and
therefore are less likely to create or
exacerbate shocks to the financial
system.120 The Commission believes
that SDs, security-based swap dealers,
MSPs, major security-based swap
participants, and active funds (as
defined above) are entities likely
possessing more advanced systems and
expertise, and whose swap activities
constitute a significant portion of
overall swap market transactions. On
the other hand, other market
participants may be less likely to have
highly developed infrastructure and
likely have swap activities that
constitute a less significant proportion
of the market. Therefore, the
Commission has determined to stagger
the compliance dates for § 23.504,
providing 90, 180, or 270 days for SDs
and MSPs to bring their swap trading
relationship documentation into
compliance with the rules, depending
on the identity of the counterparty as
discussed more fully in section III.B.1
above.
F. Swap Valuation Methodologies
Swap valuation disputes have long
been recognized as a significant problem
in the OTC derivatives market.121 The
ability to determine definitively the
value of a swap at any given time lies
at the center of many of the OTC
derivatives market reforms contained in
the Dodd-Frank Act and is a cornerstone
of risk management. Swap valuation is
also crucial for determining capital and
margin requirements applicable to SDs
120 OCC data demonstrates that among insured US
commercial banks, ‘‘the five banks with the most
derivatives activity hold 96 percent of all
derivatives, while the largest 25 banks account for
nearly 100 percent of all contracts.’’ The report is
limited to insured US commercial banks, and also
includes derivatives that are not swaps. However,
swap contracts are included among the derivatives
in the report, constituting approximately 63 percent
of the total notional value of all derivatives. These
statistics suggest that a relatively small number of
banks hold the majority of swap positions that
could create or contribute to distress in the
financial system. Data is insufficient, however, to
generalize the conclusions to non-banking
institutions. See ‘‘OCC’s Quarterly Report on Bank
Trading and Derivatives Activities: Fourth Quarter
2011’’ p. 11. http://www.occ.treas.gov/topics/
capital-markets/financial-markets/trading/
derivatives/dq411.pdf.
121 See ISDA Collateral Committee, ‘‘Commentary
to the Outline of the 2009 ISDA Protocol for
Resolution of Disputed Collateral Calls,’’ June 2,
2009 (stating ‘‘Disputed margin calls have increased
significantly since late 2007, and especially during
2008 have been the driver of large (sometimes > $1
billion) un-collateralized exposures between
professional firms.’’).

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55951

and MSPs and therefore plays a primary
role in risk mitigation for uncleared
swaps.
The Commission recognizes that swap
valuation is not always an easy task. In
some instances, there is widespread
agreement on valuation methodologies
and the source of formula inputs for
frequently traded swaps. Many of these
swaps have been accepted for clearing
for a number of years (i.e., commonly
traded interest rate swaps and CDS).
However, parties often dispute
valuations of thinly traded swaps where
there is not widespread agreement on
valuation methodologies or the source
for formula inputs. Many of these swaps
are thinly traded either because of their
limited use as risk management tools or
because they are simply too customized
to have comparable counterparts in the
market. As many of these swaps are
valued by dealers internally by
‘‘marking-to-model,’’ their
counterparties may dispute the inputs
and methodologies used in the model.
As uncleared swaps are bilateral,
privately negotiated contracts, on-going
swap valuation for purposes of initial
and variation margin calculation and
swap terminations or novations, has
also been largely a process of on-going
negotiation between the parties. The
inability to agree on the value of a swap
became especially acute during the
2007–2009 financial crisis when there
was widespread failure of the market
inputs needed to value many swaps.122
In light of these concerns, the
Commission proposed § 23.504(b)(4),
which required SDs and MSPs to
include in their swap trading
relationship documentation an
agreement with their counterparties on
the methods, procedures, rules, and
inputs for determining the value of each
swap at any time from execution to the
termination, maturity, or expiration of
such swap. The Commission believes
that by requiring agreement between
counterparties on the methods and
inputs for valuation of each swap,
§ 23.504(b)(4) will assist SDs and MSPs
and their counterparties to arrive at
valuations necessary for margining and
internal risk management, and to
resolve valuation disputes in a timely
manner, thereby reducing risk.
122 The failure of the market to set a price for
mortgage-backed securities led to wide disparities
in the valuation of CDS referencing mortgagebacked securities (especially collateralized debt
obligations). Such wide disparities led to large
collateral calls from dealers on AIG, hastening its
downfall. See CBS News, ‘‘Calling AIG? Internal
Docs Reveal Company Silent About Dozens Of
Collateral Calls,’’ Jun. 23, 2009, available at:
http://www.cbsnews.com/stories/2009/06/23/
cbsnews_investigates/main5106672.shtml.

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Commenters supported the valuation
proposal in light of the benefits to risk
management and adequate
collateralization.123 Indeed, some
commenters argued that the
Commission should have been more
prescriptive in its approach to
valuation.
Multiple commenters, however,
objected to § 23.504(b)(4) on cost
grounds. Specifically, commenters
stated that the rule will significantly
increase the pre-execution swap
negotiation burden on SDs, MSPs, and
their counterparties without an
offsetting benefit.124 Some commenters
also objected that the rule may
discourage the development of more
refined, dynamic swap valuation
models that are more accurate, and
therefore more efficient, than less
sophisticated or vanilla models.125
Other commenters offered alternatives
to requiring SDs and MSPs to agree on
valuation methodologies with their
counterparties. Many recommended that
the Commission focus its rules on the
valuation dispute resolution process,
rather than valuation methodologies.126
One recommended that the rule include
an explicit authorization for parties to
use the services of independent third
parties to provide any or all of the
elements required to agree upon the
valuation of swaps, and not include any
preferable inputs or pricing sources for
the valuation of swaps.127 Another
recommended that the rule be deleted
and replaced with a requirement that
SDs and MSPs provide information to
substantiate their valuations upon the
request of a counterparty.128
As discussed above, the Commission
is substantially modifying the rule in
response to concerns raised and
alternatives suggested by commenters.
Many of the changes being made in the
rule adopted by this release address the
cost concerns and alternatives outlined
above. First, the rule has been focused
on the valuation needed to meet the
margin requirements under section 4s(e)
of the CEA and the Commission’s
regulations under part 23, and to meet
the risk management requirements
under section 4s(j) of the Act and the
Commission’s regulations under part 23.
123 Better Markets; Michael Greenberger; Chris
Barnard.
124 The Working Group; ISDA & SIFMA; FSR;
Markit; Freddie Mac; COPE; MFA; FHLBs; CIEBA;
EEI; Coalition of Derivatives End-Users. Several of
these commenters stated that such pre-execution
negotiations could take months to complete, if
possible at all.
125 OCC; Hess.
126 The Working Group; Morgan Stanley; MFA;
IECA; FHLBs; CIEBA; MetLife.
127 Markit.
128 Coalition of Derivatives End-Users.

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The Commission believes that this
change, by focusing the use of the
agreed-upon valuation methodologies,
will ease pre-execution negotiation and
improve internal risk management
processes. In addition, the Commission
responded to concerns from market
participants who feared they would
have to agree on precise models, by
clarifying that they had to agree on a
process, which includes things such as
methods, procedures, rules and inputs.
Parties are free to agree on a model,
agree to use one party’s confidential
proprietary model, rely on third-party
vendors, or a host of other possibilities.
Second, the rule has been modified
such that SDs and MSPs need not agree
on swap valuation methodologies with
counterparties that are not SDs, MSPs,
or financial entities, unless such
counterparties request such agreements.
The Commission believes that this
change will alleviate the pre-execution
negotiation burden on SDs, MSPs, and
their non-financial entity counterparties
by limiting such negotiations to
counterparties that are more likely to
use sophisticated valuation
methodologies akin to those in use by
the SD or MSP itself.
Third, in response to commenters that
objected that the rule may discourage
the development of more refined,
dynamic swap valuation models that are
more accurate, and therefore more
efficient, than less sophisticated or
vanilla models, the Commission is
modifying the rule to explicitly permit
parties to agree on changes or
procedures to modify their valuation
agreements at any time. This change
allows counterparties to determine an
efficient means of changing the
agreement for each contract to allow for
evolution of valuation methodologies
while maintaining the benefits of
agreed-upon valuation methodologies.
Fourth, in response to commenters’
concerns regarding the protection of
proprietary information used in
valuation, the Commission is modifying
the rules to make explicit that SDs and
MSPs are not required to disclose to the
counterparty confidential, proprietary
information about any model it may use
to value a swap. The Commission
believes this clarification will alleviate
concerns that proprietary information
would have to be disclosed as a result
of the valuation agreement process.
Finally, the rule has been modified to
allow for use of a valuation dispute
resolution process in place of the
proposed requirement that the
documentation include alternative
methods for determining the value of a
swap in the event of the unavailability
or failure of any input required to value

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the swap. The Commission believes this
change lessens the negotiation and
operational burden on SDs and MSPs.
The Commission believes that the
changes outlined above substantially
reduce the burden of the rule on SDs,
MSPs, and their counterparties without
sacrificing the benefits of the rule. The
rule will serve to assist SDs and MSPs
and their counterparties in arriving at
valuations necessary for margining and
internal risk management, and in
resolving valuation disputes in a timely
manner, thereby reducing risk.
G. Summary of Cost and Benefit
Considerations: Confirmation, Portfolio
Reconciliation, and Portfolio
Compression
In the Confirmation NPRM, the
Commission specifically requested
comment on its consideration of costs
and benefits. The Commission received
a number of comments in addition to
those discussed above.
ISDA commented that registrants will
incur substantial initial one-time costs
to develop, test, and implement new
procedures and technology that are
required in order to be compliant with
the proposed rules. With regard to
confirmation costs, ISDA asserted that
market participants will have to invest
in electronic platforms for confirmation
for each asset class in order to meet the
expedited timeframes for confirmation,
which may be prohibitively expensive,
particularly for non-SDs and non-MSPs.
However, ISDA did not provide any
quantitative data in support of this
assertion despite multiple requests from
Commission staff.129
ISDA also argued that given the
marked improvement in post-trade
processing, as well as continued
industry efforts and commitments to
enhance post-trade processing in a
targeted, efficient and safe manner, it is
unclear whether the incremental
benefits of the Commission’s proposed
standards applicable to all swap
confirmations will outweigh the
significant compliance costs that the
confirmation requirements will entail.
To comply with the portfolio
reconciliation requirement promptly,
ISDA believes firms that do not
currently use an electronic platform or
vendor service will need to expend
significant time and resources, and even
those firms that do use electronic
platforms or vendor services to
reconcile their portfolios will need to
make significant adjustments to comply
with the reconciliation requirement.
ISDA believes that initial compliance
129 See cftc.gov for information regarding staff
meetings with ISDA pertaining to these final rules.

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with the proposed rules will cost each
entity approximately $5–10 million and
annual portfolio reconciliation expenses
for a party with a large portfolio may
rival and perhaps even exceed this
upfront cost.
The Working Group requested that the
Commission address any requirement
for electronic matching of all or certain
types of swaps in a separate rulemaking
that includes a careful study of the
potential costs imposed by such a rule.
The Working Group estimated, based on
the $6.00 per trade fee of the ICE
eConfirm service, that implementation
of an electronic matching requirement
would cost each registrant in excess of
$1,000,000 annually. In addition, The
Working Group asserted that there
would be additional opportunity costs
associated with no longer being able to
enter into customized transactions.
The Working Group requested that the
Commission evaluate the proposed rules
in light of its various recordkeeping and
reporting proposals, as such may cause
firms to incur tremendous
administrative obligations to record
changes to their swap portfolios, their
accounting records, treasury
arrangements and capital allocations, as
well as incurring reporting obligations
to SDRs on a swap-by-swap basis. The
Working Group also presented a report
prepared by NERA estimating that
compliance with the proposed rules for
some entities in this category would
entail annual incremental costs of
$1,400,000.130
The FHLBs cautioned that SD
compliance with the proposed rules
could adversely impact end users in a
number of ways, including (i) SD
unwillingness to offer swaps important
to end user risk management if the SD
cannot comply with the rules in an
economic manner; (ii) passing on of SD
compliance costs to end user
counterparties, discouraging some end
users from using cost-effective risk
management tools and raising overall
system risk; and (iii) introduction of
legal uncertainty as to the enforceability
130 NERA, Cost-Benefit Analysis of the CFTC’s
Proposed Swap Dealer Definition Prepared for the
Working Group of Commercial Energy Firms,
December 20, 2011. In the late-filed comment
supplement, NERA estimates these costs for entities
‘‘engaged in production, physical distribution or
marketing of natural gas, power, or oil that also
engage in active trading of energy derivatives’’—
termed ‘‘nonfinancial energy companies’’ in the
report. The figure cited includes costs to comply
with the proposed confirmation, portfolio
reconciliation, and portfolio compression
requirements and is based on the survey response
of only one member of The Working Group.
Elsewhere in the same report, NERA estimates the
costs of compliance with the confirmation
requirements alone at $235,000 for initial set-up
and annual operating costs of $307,000.

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of swaps that fail to meet the
confirmation deadlines of the proposed
rules. The FHLBs also argued that
certain swap documentation requires
review by legal staff and the short
deadline for confirmation would require
pre-execution review by legal staff, even
for swaps that are discussed but never
actually executed, entailing costly and
unnecessary legal expenditures.
As discussed in the above sections,
the Commission has modified many
aspects of the proposed rules in order to
mitigate the burden placed on market
participants as identified by
commenters while still achieving the
important policy goals outlined above.
The Commission has:
• Provided for a phased
implementation plan, providing longer
periods for compliance with the rule for
those entities for which the rules will be
most burdensome, with particularly
long phasing of confirmation
deadlines; 131
• Expanded the definition of
‘‘multilateral portfolio compression
exercise’’ which increases flexibility of
the rule;
• Removed the 15 and 30 minute
acknowledgement and confirmation
deadlines for swap transactions that are
‘‘processed electronically’’;
• Required draft trade
acknowledgements only to be delivered
upon request of a counterparty prior to
execution;
• Adjusted confirmation deadlines for
time zone differences and end of day
trading, providing relief from more
stringent deadlines;
• Provided a safe harbor from
confirmation requirements for swaps
executed on a SEF or DCM, or cleared
by a DCO;
• Clarified which swap transactions
require confirmation;
• Reduced the frequency of required
portfolio reconciliation with non-SDs
and MSPs;
• Changed the valuation dispute
resolution requirement from ‘‘one
business day’’ to ‘‘policies and
procedures reasonably designed to
ensure that valuation disputes are
resolved within five business days;’’
• Required portfolio compression
with non-SDs and non-MSPs only upon
request of the non-SD or non-MSP
counterparty;
• Changed the mandatory portfolio
compression requirement among SDs
and MSPs to a requirement for policies
and procedures for engaging in regular
portfolio compression, where
appropriate;
131 This alternative was suggested by both ISDA
and The Working Group, and the Commission has
adopted it for these final rules.

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• Required fully-offsetting swaps to
be terminated in a timely fashion (rather
than within one business day) and only
where appropriate; and
• Clarified that the compression rule
does not apply to cleared swaps;
compression of cleared swaps will be in
accordance with the rules of the DCO.
Through these changes, the
Commission anticipates that many of
the concerns raised by commenters
regarding the costs of the rules will be
mitigated.
Confirmation. The Commission
anticipates that there will be a
significant adjustment for market
participants to move to the faster
timeframes required by the confirmation
rules, particularly in those asset classes
where the majority of transactions are
manually confirmed. SDs and MSPs will
have to design, compose, and
implement policies and procedures
reasonably designed to meet the
confirmation timeframes; SDs and MSPs
must also compile and maintain any
applicable records. Participants may
invest in electronic platforms for
confirmation for each asset class in
order to meet the expedited timeframes
for confirmation. The Commission
notes, however, that such investment is
not necessarily required by the rules as
market participants are able to confirm
in any manner that meets the rule’s
deadline of the first business day after
the day of execution (or two-business
day timeframe, for swap transactions
with non-financial non-registrants).
With regard to confirmation, the
historical context reveals that market
participants, including all major swap
dealers, have been working on achieving
timely confirmation across all asset
classes for the past 5–7 years.
Consequently, additional costs related
to confirmation technology for these
entities would be minimal for those SDs
and MSPs already achieving timely
confirmation of their swap transactions.
In addition, costs will be further
minimized through a significant phasein period. For example, SDs and MSPs
will have up to two years to achieve
compliance with the rules.
Moreover, the Commission has sought
to gather additional information about
the costs of confirmation services from
both ISDA and major third party service
providers of confirmation services.
Commission staff meetings with third
party service providers have revealed
that per trade or event confirmations
can cost anywhere from $3 to $10 per
transaction. It should be noted,
however, that confirmation fee
schedules can be complex and
dependent on a host of idiosyncratic
factors.

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The Commission notes The Working
Group’s estimate of approximately
$1,000,000 per entity to implement an
electronic matching requirement, but
observes that the deletion of the phrase
‘‘processed electronically’’ from the
rules should make clear to market
participants that there is no requirement
to confirm electronically. However, this
estimate may be useful for individual
entities to use as a reference figure for
investment in electronic platforms.132
The Commission is unable to provide
more specific quantification of the costs
of confirmation given the unique
characteristics of the swap portfolios of
SDs, MSPs, and their counterparties, as
well as the parties’ discretion in
choosing how to comply with the
confirmation timeframe.
As noted above, the Commission does
not believe the rules requiring SDs and
MSPs to have policies and procedures to
achieve confirmation with their nonregistrant counterparties should pose an
unreasonable burden on end users. The
Commission extended the confirmation
deadline for non-financial, nonregistrant counterparties to two business
days after execution, lessening the rush
to review and approve
acknowledgements and/or
confirmations while maintaining a
relatively quick turn-around for these
market participants. In addition, the
Commission anticipates that the
changed provisions regarding draft
acknowledgements and compression—
which give the non-SD or MSP
counterparty the option as opposed to
obligation—should ensure that such
entities are protected from unfair
practices without overburdening the
operations of these entities.
The benefits associated with quicker
confirmation, as noted in sections III.C
and IV.B of this release, include
improvement of post-execution
operational and risk management
processes, including the correct
calculation of cash flows and discharge
of settlement obligations as well as
accurate measurement of counterparty
credit exposure. Timely confirmation
also allows any discrepancies,
exceptions, and/or rejections of terms to
be identified and resolved more quickly,
lessening the risk of a dispute that could
disrupt orderly market operations. In
general, the rules regarding expedited
confirmation should improve the
efficient and orderly operations of
132 The Commission also notes the estimates
provided by NERA, but observes that NERA did not
provide sufficient information for the Commission
to determine which portion of such estimates
assumed implementation of an electronic matching
requirement. Thus the Commission could not
independently verify the estimates.

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bilateral markets through more effective
risk management and dispute
resolution. The extended compliance
timeframes should allow for a smooth
transition to the new rules as market
participants prepare not only to meet
these standards, but others imposed by
new regulations under the Dodd-Frank
Act.
Reconciliation. In response to ISDA’s
concern that the reconciliation rules
would require significant investment in
electronic platforms for reconciliation,
especially for those entities with large
portfolios, the Commission reiterates its
view that the advent of SDRs will
eventually ease some of those costs by
providing a central data location for
most (if not all) the material terms that
are required to be reconciled.
Importantly, the Commission has not
determined which processes for
reconciliation are the most appropriate,
which means that each market
participant can choose the method for
reconciliation that best fits its own
internal structure and cost-benefit
analysis, provided such method
comports with the Commission’s
requirements. In addition, the changes
listed above—including the reduced
frequency of reconciliation for portfolios
between SDs or MSPs and their non-SD
or non-MSP counterparties—should
ease the burden of reconciling
portfolios. While the Commission has
been unable to independently verify the
$5–10 million estimate for portfolio
reconciliation provided by ISDA, the
Commission expects that the changes
herein as well as the increased use of
SDRs will lessen the estimated cost
considerably.
In the Confirmation NPRM, the
Commission asserted that the costs of
the proposed rules would be minimized
by the fact that most SDs and MSPs
reconcile their swap portfolios as part of
a prudent operational processing regime
that many, if not most, SDs and MSPs
already undertake as part of their
ordinary course of business. In response
to these assertions, at least one
commenter agreed that a large number
of SDs and MSPs already regularly
reconcile their portfolios with each
other and with other entities and that
the increased frequency and inclusion
of smaller portfolios as proposed should
prove no obstacle to such entities.133
Consequently, additional costs of the
Commission’s final rule would be
minimal for those SDs and MSPs
already engaged in regular portfolio
reconciliation. In addition, the
Commission’s decision to extend the
valuation dispute resolution
133 TriOptima

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requirement from one day responds to
concerns from market participants about
cost.
Given the widespread benefits of
portfolio reconciliation, including
increased risk management and fewer
disputes to resolve, the Commission
believes its final rules regarding
reconciliation are appropriate
notwithstanding the increased costs for
some participants. The Commission
recognizes that certain costs will still
arise despite the changes the
Commission has made. Such costs
include (i) Increased costs to include all
material terms rather than some subset
of terms; (ii) the additional resources to
design, compose, and implement the
required policies and procedures; (iii)
the additional resources needed to
comply with the dispute resolution
timeframes; and (iv) the compilation
and maintenance of applicable records.
These costs, however, are by nature
specific to each entity’s internal
operations; absent specific cost
estimates from commenters (which were
not provided), the Commission cannot
accurately provide estimations
regarding the resources needed to
comply. As stated above and in the
NPRM, portfolio reconciliation is
widely recognized as an effective means
of identifying and resolving disputes
regarding terms, valuation, and
collateral. Reconciliation is beneficial
not only to the parties involved but also
to the markets as a whole. By
identifying and managing disputed key
economic terms or valuation for each
transaction across a portfolio, overall
risk can be diminished. Registrants will
be able to identify and correct problems
in their post-execution processes
(including confirmation) in order to
reduce the number of disputes and
improve the integrity and efficiency of
their internal processes. Expanding the
universe of participants subject to
reconciliation, therefore, can help to
reduce the risk bilateral markets may
pose to the broader financial system.
Compression. Finally, the
Commission believes its final rules
regarding portfolio compression
dramatically reduce costs as compared
to the proposed rule; however, the
Commission recognizes that costs will
necessarily increase from the current
state of the market. Participants will
necessarily have to design, compose,
and implement policies and procedures
to regularly evaluate compression
opportunities with their counterparties
as well as those opportunities offered by
third parties. However, given the large
risk management benefits available from
the regular compression of offsetting
trades—benefits including reduced risk

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and enhanced operational efficiency—
the Commission believes the final rules
are appropriate to ensure the fair and
orderly operation of bilateral derivatives
markets.
In terms of quantification of the costs
of compression, the Commission notes
that in its Confirmation NPRM, it stated
that there are a number of third-party
vendors that provide compression, and
some of these providers charge fees
based on results achieved (such as
number of swaps compressed). No
commenter refuted this statement or
provided alternative information
regarding quantification.
H. Section 15(a) Considerations:
Confirmation, Portfolio Reconciliation,
and Portfolio Compression
1. Protection of Market Participants and
the Public
The final rules relating to
confirmation, portfolio reconciliation,
and portfolio compression protect
market participants by improving
operational efficiency and mitigating
legal risk. In turn, the reduction of risk
in bilateral markets can reduce risk
across the interconnected financial
system, protecting the public from
costly market disruptions.
Timely confirmation protects market
participants by providing certainty as to
obligations between SDs, MSPs, and
their counterparties while allowing a
more efficient processing of disputed
terms that may become apparent during
the confirmation process. Disputes
regarding terms and conditions, when
left unresolved, can expose market
participants to significant counterparty
credit risk. By diminishing the number
of these disputes that occur and by
decreasing the length of time in which
they are resolved, the Commission
believes these rules protect participants
from such unnecessary risk.

sroberts on DSK5SPTVN1PROD with RULES

2. Efficiency, Competitiveness, and
Financial Integrity of Derivatives
Markets
The final rules improve the efficiency
of the market by decreasing the amount
of time trades remain outstanding,
improving the processes by which
trades are confirmed, and requiring
participants to eliminate unnecessary
trades. Trades that remain unconfirmed
for extended periods of time create
inefficient backlogs that inhibit the
orderliness of the market. Proper
confirmation, compression, and
reconciliation policies improve
transparency in the market and increase
efficiency by promoting the exchange of
important market information.
Requirements regarding confirmations

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and draft acknowledgements, as
discussed above, provide non-financial
entities with information necessary for
confirming promptly. In addition, such
draft acknowledgements may serve
counterparties insofar as they might
compare and assess counterparties,
which should improve competition
among SDs and MSPs.
3. Price Discovery
The timeliness of confirmations, as
required under these rules, should
ensure that all terms including prices of
transactions are agreed upon quickly
and efficiently. This linking of price
terms with all other swap terms should
improve the information provided to the
public and regulators through SDRs and
other means, thereby improving the
overall price discovery process. Periodic
reconciliation and compression also aid
in ensuring that unnecessary and/or
offsetting trades are netted and that,
should disputes arise, those disputes are
promptly and effectively resolved. In
this way, the pricing information
communicated regarding trades
conducted under these rules should be
accurate and timely, improving the
price discovery function of bilateral
derivatives markets.
4. Sound Risk Management
As described throughout this release,
the rules promulgated herein are
designed to mitigate the risk in bilateral
derivatives markets by ensuring the
timely and accurate confirmation of
trades, reconciliation of portfolios, and
compression of portfolios. The final
rules require actions, policies, and
procedures on the part of SDs and MSPs
to diminish operational risk, legal risk,
and counterparty credit risk. The
Commission believes these
requirements will encourage sound risk
management on the part of SDs and
MSPs; given the systemically important
nature of these entities, sound risk
management by SDs and MSPs should
improve the risk management of the
financial system as a whole, lessening
the risks associated with a major market
crisis.
5. Other Public Interest Considerations
The Commission has not identified
other public interest considerations as a
result of these rules.
I. Summary of Cost and Benefit
Considerations: Swap Trading
Relationship Documentation
The Commission requested comment
on its consideration of costs and
benefits under section 15(a) of the CEA.
The Commission received a number of

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55955

responsive comments in addition to
those discussed above.
The Working Group stated that the
Commission should articulate the
public policy benefit of the proposed
rule and present analysis that
demonstrates such benefit exceeds the
cost imposed on market participants
and the Commission. IECA stated that
the proposed regulations would impose
administrative and regulatory costs in
excess of any benefit gained. The
Coalition for Derivatives End Users was
concerned that the valuation provision
will increase costs without a
proportionate benefit. Markit stated that
the proposed rule will make the process
of transaction documentation very
expensive and time consuming, and will
lead to extremely technical and verbose
swap documentation, noting that the
need to negotiate such terms may
impede effective trading. Markit thus
believes the costs outweigh the benefits,
and urges the Commission to impose
more realistic requirements regarding
valuation methodologies.
IECA believes the Commission’s costbenefit analysis did not consider the
legal review and management time
expense for end users, which could be
significant for small entities. IECA
focuses on the Commission’s estimates
under the Paperwork Reduction Act,
and challenges the Commission’s use of
$125 per hour for legal fees. IECA
believes that $500 an hour is more
appropriate for legal fees. IECA also
believes that the Commission’s estimate
of an average of 10 hours per
counterparty to negotiate the new
documentation under § 23.504(b) is low,
as the time needed must include not
only negotiation, but also time for
determining price points and inputs,
decision-making time, and senior
management time.
The Working Group believes the
Commission’s implementation costs
substantially underestimate the
potential impact because: (i) Margin
requirements have yet to be proposed
and negotiation of credit support
arrangements currently can take
months; (ii) market participants are
unlikely to agree to standardized
valuation methodologies; (iii) the
Commission does not specifically
discuss the potentially substantial costs
associated with the audit requirement
under § 23.504(e); 134 and (iv) the
134 The Working Group presented a report
prepared by NERA estimating that compliance with
the audit requirements in these and other proposed
rules for some nonfinancial energy companies
would entail annual incremental costs of $224,000.
NERA, Cost-Benefit Analysis of the CFTC’s
Proposed Swap Dealer Definition Prepared for the

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proposed rules would significantly alter
the process by which parties enter into
swaps, and such costs have not been
considered.
As discussed in the above sections,
the Commission has modified many
provisions of the final rules in response
to comments received and in order to
mitigate the burden imposed on market
participants while accomplishing the
goals as laid out in the NPRM. The
Commission has:
• Provided for a phased
implementation plan, providing longer
periods for compliance with the rule for
those entities for which the rules will be
most burdensome;
• Clarified that the rules will be
applicable only to swaps that are
entered into after the rules become
effective, and therefore not requiring
retroactive application to existing
swaps;
• Clarified that the rules do not apply
to swaps executed on a SEF or DCM and
cleared by a DCO, subject to certain
minimum requirements;
• Imposed no additional
requirements regarding documentation
of events of default, termination events,
or payment obligations;
• Permitted parties to agree on either
alternative methods for determining the
value of a swap or a valuation dispute
resolution process;
• Reduced recordkeeping
requirements under § 23.504(b)(6);
• Removed the 5 percent annual
documentation audit requirement in
favor of a more general audit standard;
and
• Modified the swap valuation
dispute reporting requirement to reduce
the number of disputes that must be
reported to the Commission, the SEC,
and any applicable prudential regulator,
and replaced the one-day reporting
requirement with a three-day
requirement for SDs and MSPs.
The Commission believes that these
changes will reduce or eliminate many
of the burden concerns raised by
commenters.
Still, the Commission anticipates that
significant costs will be incurred as a
result of these documentation rules.
Although the rules do not apply
Working Group of Commercial Energy Firms,
December 20, 2011. In the late-filed comment
supplement, NERA estimates these costs for entities
‘‘engaged in production, physical distribution or
marketing of natural gas, power, or oil that also
engage in active trading of energy derivatives’’—
termed ‘‘nonfinancial energy companies’’ in the
report. The figure cited includes costs to maintain
a risk management program, quarterly audits of the
program, and annual audits of swap trading
relationship documentation, the first two of which
are required under a separate rulemaking
previously adopted by the Commission.

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retroactively—that is, concerns
regarding the need to re-negotiate
already agreed-upon contracts are null—
there will be costs going forward for
market participants. Registrants will
have to (i) Negotiate and document all
terms of each trading relationship; (ii)
design, compose, and implement
policies and procedures reasonably
designed to ensure the execution of
swap trading relationship
documentation, including valuation
documentation; (iii) obtain
documentation from counterparties who
are claiming the end user exception to
clearing; (iv) periodically audit
documentation; and (v) keep records
and/or make reports as required under
§§ 23.504(d)–(e) and 23.505(b).
In its Documentation NPRM, the
Commission considered the costs of its
proposal and noted that memorializing
the specific terms of the swap trading
relationship and swap transactions
between counterparties is prudent
business practice and, in fact, many
market participants already use
standardized documentation.
Accordingly, it is believed that many, if
not most, SDs and MSPs currently
execute and maintain trading
relationship documentation of the type
required by proposed § 23.504 in the
ordinary course of their businesses,
including documentation that contains
several of the terms that would be
required by the proposed rules. Thus,
the hour and dollar burdens associated
with the swap trading relationship
documentation requirements may be
limited to amending existing
documentation to expressly include any
additional terms required by the
proposed rules.
The Commission also explained its
belief that, to the extent any substantial
amendments or additions to existing
documentation would be needed, such
revisions would likely apply to multiple
counterparties, thereby reducing the per
counterparty burden imposed upon SDs
and MSPs. In addition, in its proposal,
the Commission anticipated that
standardized swap trading relationship
documentation will develop quickly
and progressively within the industry,
dramatically reducing the cost to
individual participants.
Indeed, the Commission is aware of
industry-led efforts already underway to
bring trading relationship
documentation into compliance with
new Dodd-Frank Act requirements.135
135 ISDA is partnering with Markit to launch a
technology-based solution enabling counterparties
to amend their OTC derivatives documentation
quickly and efficiently to comply with Dodd-Frank
regulatory requirements. See http://www2.isda.org/
dodd-frank-documentation-initiative/.

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These types of initiatives are likely to
lower overall costs to market
participants.
The Commission further expects the
per hour and dollar burdens to be
incurred predominantly in the first year
or two after the effective date of the final
regulations. Once an SD or MSP has
changed its pre-existing documentation
with each of its counterparties to
comply with the proposed rules, there
likely will be little need to further
modify such documentation on an
ongoing basis.
In terms of quantification, the
Commission recognizes IECA’s
comments indicating that the primary
costs of the documentation and
valuation rules will be legal costs. In
terms of a per hour fee, the Commission
has previously cited Bureau of Labor
Statistics findings that the mean hourly
wage of an employee under occupation
code 23–1011, ‘‘Lawyers,’’ that is
employed by the ‘‘Securities and
Commodity Contracts Intermediation
and Brokerage Industry’’ is $82.22.136
The Commission has adjusted this
amount upward to $100 per hour
because SDs and MSPs include large
financial institutions whose employees’
salaries may exceed the mean wage
provided. To account for the possibility
that the services of outside counsel may
be required to satisfy the requirements
associated with negotiating, drafting,
and maintaining the required trading
relationship documentation, the
Commission used an average salary of
$125 per hour. In response to comments
that the hourly rate should be increased
further, the Commission notes that any
determination to use outside counsel is
at the discretion of the registrant.
Accordingly, the per-hour estimate for
legal costs associated with these rules is
$125–500 per hour. In terms of the
number of hours required to amend
documentation, whether the
requirement be ten hours or
substantially more, the Commission
notes that industry-wide efforts could
reduce this amount significantly.
The Commission also notes the NERA
report regarding the costs of an annual
audit. Given the alternative audit
requirement finalized in these rules, the
Commission expects that the audit costs
would be reduced, perhaps
significantly.
In conclusion, the Commission
believes the final rules for
documentation of swap trading
relationships are appropriate to ensure
the efficient and orderly operation of
bilateral derivatives markets and to
136 http.www.bls.gov/oes/2099/mayowe23.
1011.htm.

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reduce the legal, operational,
counterparty credit, and market risk that
can arise from undocumented terms.
The final rules promote an appropriate
level of standardization; while the
Commission does not believe the rules
prohibit customized terms, the manner
in which they are documented (i.e.
written, pre-arranged terms that must
include certain types of agreements as
applicable) will become standardized.
SDs, MSPs, and their counterparties
alike will have certainty regarding what
their documentation must include,
though the actual terms are still readily
negotiable. The Commission agrees with
the Financial Stability Oversight Board
OTC Derivatives Working Group that
increased documentation
standardization should improve the
market in a number of ways, including
(i) Facilitating automated processing of
transactions; (ii) increasing the
fungibility of contracts, which enables
greater market liquidity; (iii) improving
valuation and risk management; (iv)
increasing the reliability of price
information; (v) reducing the number of
problems in matching trades; and (vi)
facilitating reporting to SDRs.

the Commission believes the final rules
improve the efficiency of markets.
Increased standardization should allow
for increased competition among SDs
and MSPs, whose counterparties will be
better able to compare between swap
trading relationships to determine
which relationships with which dealers
best suit their needs. The transparency
and certainty provided by proper
documentation, in addition to the
diminished risk of predatory trading
practices, should improve the integrity
of bilateral derivatives markets. Overall,
then, the Commission considers the
final rules to have a net positive impact
on the efficiency, competitiveness, and
financial integrity of derivatives
markets.

J. Section 15(a) Considerations: Swap
Trading Relationship Documentation

Proper documentation of trading
relationships and transactions is
essential to sound risk management;
simply put, if a dealer is unaware or
unsure of agreed-upon terms and
policies, it cannot be managing risk as
efficiently as possible. The final rules,
because they require full documentation
of all facets of the relationship between
counterparties, mitigate (i) The legal risk
inherent in poorly documented or oral
contracts; (ii) the counterparty credit
risk that stems from improper
documentation of credit terms and the
counterparty credit risk that could occur
based on false or misleading
representations by either counterparty;
and (iii) the operational risk that arises
when internal operations personnel and
systems do not have full or identical
information regarding a particular
transaction or counterparty.
The final valuation rules also provide
support for sound risk management
practices because they strive to ensure
that two counterparties are not
disputing the value of a transaction
where margin or other cash flows are
being exchanged. Limiting the risk that
unresolved disputes can create in the
marketplace as a whole—again
considering the role valuation disputes
played in the 2008 financial crisis—
should allow systemic risk management
as well as improving the risk
management processes of individual
market participants.

sroberts on DSK5SPTVN1PROD with RULES

1. Protection of Market Participants and
the Public
The final documentation rules will
protect market participants by ensuring
that every trading relationship and
every transaction is properly
documented. Full and transparent
documentation diminishes the risk of
unfair practices like valuing a swap to
advantage one party at the expense of
the other. As such, documentation
protects particularly those parties most
susceptible to being taken advantage of,
such as non-financial entities. In
addition, the legal and credit certainty
provided by proper documentation
provides protection to both sides of a
relationship by ensuring a clear
understanding of options and
obligations, particularly in case of
dispute or market crisis.
The provisions in the final rules
related to valuation also provide
protection to market participants from
costly disputes over the collateralization
of a swap; such disputes exacerbated the
financial crisis as proper
collateralization for risk management
purposes could not be determined.
2. Efficiency, Competitiveness, and
Financial Integrity of Derivatives
Markets
As proper documentation encourages
orderly operations and diminishes risk,

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3. Price Discovery
To the extent the final rules improve
the process of valuing swap transactions
between counterparties, they should
also increase the reliability of pricing
information; this increase in pricing
reliability should improve the price
discovery function of bilateral markets.
4. Sound Risk Management

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5. Other Public Interest Considerations
The Commission has not identified
other public interest considerations as a
result of these rules.
V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(RFA) 137 requires that agencies consider
whether the rules they propose will
have a significant economic impact on
a substantial number of small entities
and, if so, provide a regulatory
flexibility analysis respecting the
impact. The Commission has already
established certain definitions of ‘‘small
entities’’ to be used in evaluating the
impact of its rules on such small entities
in accordance with the RFA.138 SDs and
MSPs are new categories of registrant.
Accordingly, the Commission noted in
the proposals that it had not previously
addressed the question of whether such
persons were, in fact, small entities for
purposes of the RFA.
In this regard, the Commission
explained that it previously had
determined that FCMs should not be
considered to be small entities for
purposes of the RFA, based, in part,
upon FCMs’ obligation to meet the
minimum financial requirements
established by the Commission to
enhance the protection of customers’
segregated funds and protect the
financial condition of FCMs generally.
Like FCMs, SDs will be subject to
minimum capital and margin
requirements, and are expected to
comprise the largest global financial
firms—and the Commission is required
to exempt from designation as an SD
entities that engage in a de minimis
level of swaps dealing in connection
with transactions with or on behalf of
customers. Accordingly, for purposes of
the RFA for the proposals and future
rulemakings, the Commission proposed
that SDs not be considered ‘‘small
entities’’ for essentially the same
reasons that it had previously
determined FCMs not to be small
entities.
The Commission further explained
that it had also previously determined
that large traders are not ‘‘small
entities’’ for RFA purposes, with the
Commission considering the size of a
trader’s position to be the only
appropriate test for the purpose of large
trader reporting. The Commission then
noted that MSPs maintain substantial
positions in swaps, creating substantial
counterparty exposure that could have
serious adverse effects on the financial
137 5

U.S.C. 601 et seq.
FR 18618 (Apr. 30, 1982).

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stability of the United States banking
system or financial markets.
Accordingly, for purposes of the RFA
for the proposals and future
rulemakings, the Commission proposed
that MSPs not be considered ‘‘small
entities’’ for essentially the same
reasons that it previously had
determined large traders not to be small
entities.
The Commission concluded its RFA
analysis applicable to SDs and MSPs as
follows: ‘‘The Commission is carrying
out Congressional mandates by
proposing these rules. The Commission
is incorporating registration of SDs and
MSPs into the existing registration
structure applicable to other registrants.
In so doing, the Commission has
attempted to accomplish registration of
SDs and MSPs in the manner that is
least disruptive to ongoing business and
most efficient and expeditious,
consistent with the public interest, and
accordingly believes that these
registration rules will not present a
significant economic burden on any
entity subject thereto.’’
The Commission did not receive any
comments on its analysis of the
application of the RFA to SDs and
MSPs. Moreover, during the time period
since the rule proposals were published
in the Federal Register, the Commission
has issued final rules in which it
determined that the registration and
regulation of SDs and MSPs would not
have a significant economic impact on
a substantial number of small
entities.139 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
will not have a significant economic
impact on a substantial number of small
entities.
B. Paperwork Reduction Act

sroberts on DSK5SPTVN1PROD with RULES

The Commission may not conduct or
sponsor, and a registrant is not required
to respond to, a collection of
information unless it displays a
currently valid Office of Management
and Budget (OMB) control number. The
Commission’s adoption of §§ 23.500
through 23.505 (Swap Confirmation,
Portfolio Reconciliation, Portfolio
Compression, Swap Trading
Relationship Documentation, and End
User Exception Documentation)
139 See, e.g., Registration of Swap Dealers and
Major Swap Participants, 77 FR 2613 (Jan. 19,
2012); Swap Dealer and Major Swap Participant
Recordkeeping, Reporting, and Duties Rules;
Futures Commission Merchant and Introducing
Broker Conflicts of Interest Rules; and Chief
Compliance Officer Rules for Swap Dealers, Major
Swap Participants, and Futures Commission
Merchants, 77 FR 20128 (Apr. 3, 2012).

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imposes new information collection
requirements on registrants within the
meaning of the Paperwork Reduction
Act.140
Accordingly, the Commission
requested and OMB assigned control
numbers for the required collections of
information. The Commission has
submitted this notice of final
rulemaking along with supporting
documentation for OMB’s review in
accordance with 44 U.S.C. 3507(d) and
5 CFR 1320.11. The title for these
collections of information are ‘‘Swap
Trading Relationship Documentation
Requirements for Swap Dealers and
Major Swap Participants, OMB control
number 3038–0088,’’ ‘‘Confirmation,
Portfolio Reconciliation, and Portfolio
Compression Requirements for Swap
Dealers and Major Swap Participants,
OMB control number 3038–0068,’’ and
‘‘Orderly Liquidation Termination
Provision in Swap Trading Relationship
Documentation for Swap Dealers and
Major Swap Participants, OMB control
number 3038–0083.’’ 141 Many of the
responses to this new collection of
information are mandatory.
The Commission protects proprietary
information according to the Freedom of
Information Act and 17 CFR part 145,
‘‘Commission Records and
Information.’’ In addition, Section
8(a)(1) of the CEA strictly prohibits the
Commission, unless specifically
authorized by the Act, from making
public ‘‘data and information that
would separately disclose the business
transactions or market positions of any
person and trade secrets or names of
customers.’’ The Commission also is
required to protect certain information
contained in a government system of
records according to the Privacy Act of
1974, 5 U.S.C. 552a.
The regulations require each
respondent to furnish certain
information to the Commission and to
maintain certain records. The
Commission invited the public and
other Federal agencies to comment on
any aspect of the information collection
requirements discussed in the
Documentation NPRM, the
Confirmation NPRM, and the Orderly
Liquidation NPRM. Pursuant to 44
U.S.C. 3506(c)(2)(B), the Commission
solicited comments in order to: (i)
Evaluate whether the proposed
collections of information were
necessary for the proper performance of
140 44

U.S.C. 3501 et seq.
collections include certain collections
required under the Business Conduct Standards
with Counterparties rulemaking, as stated in that
rulemaking. See Business Conduct Standards for
Swap Dealers and Major Swap Participants with
Counterparties, 77 FR 9734 (Feb. 17, 2012).
141 These

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the functions of the Commission,
including whether the information will
have practical utility; (ii) evaluate the
accuracy of the Commission’s estimates
of the burden of the proposed
collections of information; (iii)
determine whether there are ways to
enhance the quality, utility, and clarity
of the information to be collected; and
(iv) minimize the burden of the
collections of information on those who
are to respond, including through the
use of automated collection techniques
or other forms of information
technology.
It is not currently known how many
SDs and MSPs will become subject to
these rules, and this will not be known
to the Commission until the registration
requirements for these entities become
effective. In its rule proposals, the
Commission took ‘‘a conservative
approach’’ to calculating the burden
hours of this information collection by
estimating that as many as 300 SDs and
MSPs would register.142 Since
publication of the proposals in late 2010
and early 2011, the Commission has met
with industry participants and trade
groups, discussed extensively the
universe of potential registrants with
NFA, and reviewed public information
about SDs active in the market and
certain trade groups. Over time, and as
the Commission has gathered more
information on the swaps market and its
participants, the estimate of the number
of SDs and MSPs has decreased. In its
FY 2012 budget drafted in February
2011, the Commission estimated that
140 SDs might register with the
Commission.143 After recently receiving
additional specific information from
NFA on the regulatory program it is
developing for SDs and MSPs,144
however, the Commission believes that
approximately 125 SDs and MSPs,
including only a handful of MSPs, will
register. While the Commission
originally estimated there might be
approximately 300 SDs and MSPs,
based on new estimates provided by
NFA, the Commission now estimates
142 See 75 FR at 81528; 76 FR at 6713; 76 FR at
6723.
143 CFTC, President’s Budget and Performance
Plan Fiscal Year 2010, p. 13–14 (Feb. 2011),
available at http://www.cftc.gov/ucm/groups/
public/@newsroom/documents/file/cftcbudget
2012.pdf. The estimated 140 SDs includes
‘‘[a]pproximately 80 global and regional banks
currently known to offer swaps in the United
States;’’ ‘‘[a]pproximately 40 non-bank swap dealers
currently offering commodity and other swaps;’’
and ‘‘[a]pproximately 20 new potential market
makers that wish to become swap dealers.’’ Id.
144 Letter from Thomas W. Sexton, Senior Vice
President and General Counsel, NFA to Gary
Barnett, Director, Division of Swap Dealer and
Intermediary Oversight, CFTC (Oct. 20, 2011) (NFA
Cost Estimates Letter).

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Federal Register / Vol. 77, No. 176 / Tuesday, September 11, 2012 / Rules and Regulations
that there will be a combined number of
125 SDs and MSPs that will be subject
to new information collection
requirements under these rules.145
For purposes of the PRA, the term
‘‘burden’’ means the ‘‘time, effort, or
financial resources expended by persons
to generate, maintain, or provide
information to or for a Federal Agency.’’
For most of the provisions set forth in
the NPRMs, the Commission estimated
the cost burden of the proposed
regulations based upon an average
salary for Financial Managers of $100
per hour. In addition, for certain
provisions in the Documentation NPRM,
the Commission estimated the cost
burden of the proposed regulations
based upon an average salary for
Lawyers of $125 per hour. In response
to these estimates, The Working Group
commented that, inclusive of benefit
costs and allocated overhead, the perhour average salary estimate for
compliance and risk management
personnel should be significantly higher
than $120. FIA and SIFMA stated that
some of the compliance policies
required by the proposed regulations
will be drafted by both in-house lawyers
and outside counsel, so the blended
hourly rate should be roughly $400.
The Commission notes that its wage
estimates were based on recent Bureau
of Labor Statistics findings, including
the mean hourly wage of an employee
under occupation code 23–1011,
‘‘Lawyers,’’ that is employed by the
‘‘Securities and Commodity Contracts
Intermediation and Brokerage Industry,’’
which is $82.22. The mean hourly wage
of an employee under occupation code
11–3031, ‘‘Financial Managers,’’ (which
includes operations managers) in the
same industry is $74.41.146 Taking these
data, the Commission then increased its
hourly wage estimates in recognition of
the fact that some registrants may be
large financial institutions whose
employees’ salaries may exceed the
mean wage. The Commission also
observes that SIFMA’s ‘‘Report on
Management & Professional Earnings in
the Securities Industry—2010’’
estimates the average wage of a
compliance attorney and a compliance
staffer in the U.S. at only $46.31 per
hour.
The Commission recognizes that some
registrants may hire outside counsel
with expertise in the various regulatory
areas covered by the regulations
discussed herein. While the
145 NFA

Letter (Oct. 20, 2011) (estimating that
there will be 125 SDs and MSPs required to register
with NFA).
146 See http://www.bls.gov/oes/2099/mayowe23.
1011.htm and http://www.bls.gov/oes/current/
oes113031.htm.

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Commission is uncertain about the
billing rates that registrants may pay for
outside counsel, the Commission
believes that such counsel may bill at a
rate of several hundred dollars per hour.
Outside counsel may be able to leverage
its expertise to reduce substantially the
number of hours needed to fulfill a
requested assignment, but a registrant
that uses outside counsel may incur
higher costs than a registrant that does
not use outside counsel. Any
determination to use outside counsel is
at the discretion of the registrant.
Having considered the comments
received and having reviewed the
available data, the Commission has
determined that $100 per hour for
Financial Managers, and $125 for
Lawyers, remain reasonable estimates of
the per-hour average salary for purposes
of its PRA analysis. The Commission
also notes that this determination is
consistent with the Commission’s
estimate for the hourly wage for CCOs
under the recently adopted final rules
establishing certain internal business
conduct standards for SDs and MSPs.147
The Commission received comments
related to the PRA in response to its
notices of proposed rulemaking.
Notably, none of these commenters
suggested specific revised calculations
with regard to the Commission’s burden
estimate.
IECA commented that if all
confirmations must be in writing, the
additional employee time cost for each
market participant would be substantial
and is not included in the annual cost
analysis. IECA also commented that the
estimate of 10 hours per counterparty to
negotiate new documentation is too low.
Because the rule requires transactionby-transaction valuation methodologies
that will need to be newly negotiated for
many transactions, IECA believes the
Commission should calculate an
aggregate amount based on the number
of transactions. Also, the time needed
must include not only negotiation, but
also time for determining pricing points
and inputs, executive decision-maker
time, and also senior management and
board time for reviewing forms and
material modifications. Time will also
be needed to reevaluate the ISDA
documentation if the Commission does
not state that such are acceptable.
The Working Group requested that the
Commission evaluate the proposed rules
in light of its various recordkeeping and
147 See Swap Dealer and Major Swap Participant
Recordkeeping, Reporting, and Duties Rules;
Futures Commission Merchant and Introducing
Broker Conflicts of Interest Rules; and Chief
Compliance Officer Rules for Swap Dealers, Major
Swap Participants, and Futures Commission
Merchants, 77 FR 20128, 20196 (Apr. 3, 2012).

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reporting proposals, as such may cause
firms to incur tremendous
administrative obligations to record
changes to its swap portfolio, its
accounting records, treasury
arrangements and capital allocations
(including loss of cash flow hedging
treatment under hedge accounting
rules), as well as incurring reporting
obligations to swap data repositories on
a swap-by-swap basis.
The Commission has considered the
comments received concerning the PRArelated burden estimates set forth in the
notices of proposed rulemaking.
However, because none of the
commenters suggested specific revised
calculations on the estimates, the only
change that the Commission is making
to its estimation of annual burdens
associated with the rules is the change
to reflect the new estimate of the
number of SDs and MSPs.
With respect to the rules proposed in
the Documentation NPRM, the
Commission now estimates the initial
burden to be 6,168 hours per year, at an
initial annual cost of $684,300, for each
SD and MSP, and the initial aggregate
burden cost for all registrants is
$85,537,500.148 With respect to the rules
proposed in the Confirmation NPRM,
the Commission now estimates the
burden to be 1,282.5 hours, at an annual
cost of $128,250 for each SD and MSP,
and the aggregate burden cost for all
registrants is 160,312.5 burden hours
and $16,031,250. With respect to the
rules set forth in the Orderly
Liquidation NPRM, the Commission
now estimates the initial burden to be
270 hours per year, at an initial annual
cost of $27,000 for each SD and MSP,
and the initial aggregate burden cost for
all registrants is 33,750 burden hours
and $3,375,000.149
In total, the Commission estimates
that the rules set forth in this Adopting
Release will impose a burden of 7,720.5
hours per year, at an initial annual cost
of $839,550, for each SD and MSP, and
148 As noted in the Documentation NPRM, the
Commission has characterized the annual costs as
initial annual costs, since the Commission
anticipates that the cost burdens will be reduced
dramatically over time as the agreements and other
records required by the proposed regulations
become increasingly standardized within the
industry. 76 FR at 6722.
149 See id. (discussing the characterization of the
annual costs as initial annual costs). The
Commission notes that the substantive
requirements under the Orderly Liquidation rule
have been reduced significantly. While the proposal
required the parties to negotiate and agree on
documentation provisions, the final rules requires
only a simple notice. The Commission has elected
not to alter its PRA burden estimate, but observes
that such estimates are likely to overstate the actual
burden significantly.

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the aggregate burden cost for all
registrants is $104,943,750.
In addition to the burden hours
discussed above, the Commission
anticipates that SDs and MSPs may
incur certain start-up costs in
connection with the proposed
recordkeeping obligations. Such costs
would include the expenditures related
to developing and installing new
technology and systems, or
reprogramming or updating existing
recordkeeping technology and systems,
to enable the SD or MSP to collect,
capture, process, maintain, and reproduce any newly required records.
The Commission received no comments
with respect to the estimated number of
burden hours for these start-up costs, or
with respect to the programming wage
estimate of $60 per hour. Accordingly,
the Commission estimates that the startup costs would require 40 burden hours
for the rules proposed in the
Documentation NPRM and 40 hours for
the rules proposed in the Confirmation
NPRM.150 Thus, the estimated start-up
burden associated with the required
technological improvements would be
$4,800 [$60 × 80 hours per affected
registrant] or $600,000 in the
aggregate.151
List of Subjects in 17 CFR Part 23
Antitrust, Commodity futures,
Conduct standards, Conflict of Interests,
Major swap participants, Reporting and
recordkeeping, Swap dealers, Swaps.
For the reasons stated in this release,
the Commission amends 17 CFR part 23
as follows:
PART 23—SWAP DEALERS AND
MAJOR SWAP PARTICIPANTS
1. The authority citation for part 23
continues to read as follows:

■

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

2. Subpart I (consisting of §§ 23.500,
23.501, 23.502, 23.503, 23.504, and
23.505) is added to read as follows:

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■

150 The Commission does not anticipate that SDs
and MSPs will incur any start-up costs in
connection with the proposed recordkeeping
obligations in the rules proposed in the Orderly
Liquidation NPRM, other than those previously
noted and accounted for in the Documentation
NPRM and Confirmation NPRM.
151 According to recent Bureau of Labor Statistics
findings, 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.
See http://www.bls.gov/oes/current/oes113031.htm.
Because SDs and MSPs 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.

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(4) A person predominantly engaged
in activities that are in the business of
banking, or in activities that are
financial in nature as defined in Section
4(k) of the Bank Holding Company Act
of 1956; and
(5) A security-based swap dealer or a
major security-based swap participant.
(f) Fully offsetting swaps means swaps
of
equivalent terms where no net cash
Subpart I—Swap Documentation
flow would be owed to either
§ 23.500 Definitions.
counterparty after the offset of payment
obligations thereunder.
For purposes of this subpart I, the
(g) Material terms means all terms of
following terms shall be defined as
a swap required to be reported in
provided.
(a) Acknowledgment means a written
accordance with part 45 of this chapter.
or electronic record of all of the terms
(h) Multilateral portfolio compression
of a swap signed and sent by one
exercise means an exercise in which
counterparty to the other.
multiple swap counterparties wholly
(b) Bilateral portfolio compression
terminate or change the notional value
exercise means an exercise in which two of some or all of the swaps submitted by
swap counterparties wholly terminate or the counterparties for inclusion in the
change the notional value of some or all portfolio compression exercise and,
of the swaps submitted by the
depending on the methodology
counterparties for inclusion in the
employed, replace the terminated swaps
portfolio compression exercise and,
with other swaps whose combined
depending on the methodology
notional value (or some other measure
employed, replace the terminated swaps of risk) is less than the combined
with other swaps whose combined
notional value (or some other measure
notional value (or some other measure
of risk) of the terminated swaps in the
of risk) is less than the combined
compression exercise.
notional value (or some other measure
(i) Portfolio reconciliation means any
of risk) of the terminated swaps in the
process by which the two parties to one
exercise.
or more swaps:
(c) Confirmation means the
(1) Exchange the terms of all swaps in
consummation (electronically or
the swap portfolio between the
otherwise) of legally binding
counterparties;
documentation (electronic or otherwise)
(2) Exchange each counterparty’s
that memorializes the agreement of the
valuation of each swap in the swap
counterparties to all of the terms of a
portfolio between the counterparties as
swap transaction. A confirmation must
of the close of business on the
be in writing (whether electronic or
immediately preceding business day;
otherwise) and must legally supersede
and
any previous agreement (electronically
(3) Resolve any discrepancy in
or otherwise). A confirmation is created
material
terms and valuations.
when an acknowledgment is manually,
(j) Prudential regulator has the
electronically, or by some other legally
meaning given to the term in section
equivalent means, signed by the
1a(39) of the Commodity Exchange Act
receiving counterparty.
and includes the Board of Governors of
(d) Execution means, with respect to
a swap transaction, an agreement by the the Federal Reserve System, the Office
of the Comptroller of the Currency, the
counterparties (whether orally, in
Federal Deposit Insurance Corporation,
writing, electronically, or otherwise) to
the Farm Credit Association, and the
the terms of the swap transaction that
Federal Housing Finance Agency, as
legally binds the counterparties to such
applicable to the swap dealer or major
terms under applicable law.
swap participant.
(e) Financial entity means a
(k) Swap portfolio means all swaps
counterparty that is not a swap dealer or
a major swap participant and that is one currently in effect between a particular
swap dealer or major swap participant
of the following:
and a particular counterparty.
(1) A commodity pool as defined in
(l) Swap transaction means any event
Section 1a(5) of the Act;
that results in a new swap or in a change
(2) A private fund as defined in
to the terms of a swap, including
Section 202(a) of the Investment
execution, termination, assignment,
Advisors Act of 1940;
novation, exchange, transfer,
(3) An employee benefit plan as
amendment, conveyance, or
defined in paragraphs (3) and (32) of
extinguishing of rights or obligations of
section 3 of the Employee Retirement
a swap.
Income and Security Act of 1974;
Subpart I—Swap Documentation
Sec.
23.500 Definitions.
23.501 Swap confirmation.
23.502 Portfolio reconciliation.
23.503 Portfolio compression.
23.504 Swap trading relationship
documentation.
23.505 End user exception documentation.

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(m) Valuation means the current
market value or net present value of a
swap.

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§ 23.501

Swap confirmation.

(a) Confirmation. Subject to the
compliance schedule in paragraph (c) of
this section:
(1) Each swap dealer and major swap
participant entering into a swap
transaction with a counterparty that is a
swap dealer or major swap participant
shall execute a confirmation for the
swap transaction as soon as
technologically practicable, but in any
event by the end of first business day
following the day of execution.
(2) Each swap dealer and major swap
participant entering into a swap
transaction with a counterparty that is
not a swap dealer or a major swap
participant shall send an
acknowledgment of such swap
transaction as soon as technologically
practicable, but in any event by the end
of the first business day following the
day of execution.
(3) (i) Each swap dealer and major
swap participant shall establish,
maintain, and follow written policies
and procedures reasonably designed to
ensure that it executes a confirmation
for each swap transaction that it enters
into with a counterparty that is a
financial entity as soon as
technologically practicable, but in any
event by the end of the first business
day following the day of execution.
(ii) Each swap dealer and major swap
participant shall establish, maintain,
and follow written policies and
procedures reasonably designed to
ensure that it executes a confirmation
for each swap transaction that it enters
into with a counterparty that is not a
swap dealer, major swap participant, or
a financial entity not later than the end
of the second business day following the
day of execution.
(iii) Such procedures shall include a
requirement that, upon a request by a
prospective counterparty prior to
execution of any such swap, the swap
dealer or major swap participant furnish
to the prospective counterparty prior to
execution a draft acknowledgment
specifying all terms of the swap
transaction other than the applicable
pricing and other relevant terms that are
to be expressly agreed at execution.
(4) Swaps executed on a swap
execution facility, designated contract
market, or submitted for clearing by a
derivatives clearing organization.
(i) Any swap transaction executed on
a swap execution facility or designated
contract market shall be deemed to
satisfy the requirements of this section,
provided that the rules of the swap

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execution facility or designated contract
market establish that confirmation of all
terms of the transaction shall take place
at the same time as execution.
(ii) Any swap transaction submitted
for clearing by a derivatives clearing
organization shall be deemed to satisfy
the requirements of this section,
provided that:
(A) The swap transaction is submitted
for clearing as soon as technologically
practicable, but in any event no later
than the times established for
confirmation under paragraphs (a)(1) or
(3) of this section, and
(B) Confirmation of all terms of the
transaction takes place at the same time
as the swap transaction is accepted for
clearing pursuant to the rules of the
derivatives clearing organization.
(iii) If a swap dealer or major swap
participant receives notice that a swap
transaction has not been confirmed by a
swap execution facility or a designated
contract market, or accepted for clearing
by a derivatives clearing organization,
the swap dealer or major swap
participant shall execute a confirmation
for such swap transaction as soon as
technologically practicable, but in any
event no later than the times established
for confirmation under paragraphs (a)(1)
or (3) of this section as if such swap
transaction were executed at the time
the swap dealer or major swap
participant receives such notice.
(5) For purposes of this section:
(i) ‘‘Day of execution’’ means the
calendar day of the party to the swap
transaction that ends latest, provided
that if a swap transaction is—
(A) Entered into after 4:00 p.m. in the
place of a party; or
(B) Entered into on a day that is not
a business day in the place of a party,
then such swap transaction shall be
deemed to have been entered into by
that party on the immediately
succeeding business day of that party,
and the day of execution shall be
determined with reference to such
business day; and
(ii) ‘‘Business day’’ means any day
other than a Saturday, Sunday, or legal
holiday.
(b) Recordkeeping. (1) Each swap
dealer and major swap participant shall
make and retain a record of:
(i) The date and time of transmission
to, or receipt from, a counterparty of any
acknowledgment; and
(ii) The date and time of transmission
to, or receipt from, a counterparty of any
confirmation.
(2) All records required to be
maintained pursuant to this section
shall be maintained in accordance with
§ 23.203 and shall be made available
promptly upon request to any

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55961

representative of the Commission or any
applicable prudential regulator, or with
regard to swaps defined in section
1a(47)(A)(v), to any representative of the
Commission, the Securities and
Exchange Commission, or any
applicable prudential regulator.
(c) Compliance schedule. The
requirements of paragraph (a) of this
section are subject to the following
compliance schedule:
(1) For purposes of paragraph (a)(1) of
this section, each swap dealer and major
swap participant entering into a swap
transaction that is or involves a credit
swap or interest rate swap with a
counterparty that is a swap dealer or
major swap participant shall execute a
confirmation for the swap transaction as
soon as technologically practicable, but
in any event by:
(i) The end of the second business day
following the day of execution for the
period from the effective date of this
section to February 28, 2014; and
(ii) The end of the first business day
following the day of execution from and
after March 1, 2014.
(2) For purposes of paragraph (a)(1) of
this section, each swap dealer and major
swap participant entering into a swap
transaction that is or involves an equity
swap, foreign exchange swap, or other
commodity swap with a counterparty
that is a swap dealer or major swap
participant shall execute a confirmation
for the swap transaction as soon as
technologically practicable, but in any
event by:
(i) The end of the third business day
following the day of execution for the
period from the effective date of this
section to August 31, 2013;
(ii) The end of the second business
day following the day of execution for
the period from September 1, 2013 to
August 31, 2014; and
(iii) The end of the first business day
following the day of execution from and
after September 1, 2014.
(3) For purposes of paragraph (a)(2) of
this section, each swap dealer and major
swap participant entering into a swap
transaction that is or involves a credit
swap or interest rate swap with a
counterparty that is not a swap dealer or
a major swap participant shall send an
acknowledgment of such swap
transaction as soon as technologically
practicable, but in any event by:
(i) The end of the second business day
following the day of execution for the
period from the effective date of this
section to February 28, 2014; and
(ii) The end of the first business day
following the day of execution from and
after March 1, 2014.
(4) For purposes of paragraph (a)(2) of
this section, each swap dealer and major

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swap participant entering into a swap
transaction that is or involves an equity
swap, foreign exchange swap, or other
commodity swap with a counterparty
that is not a swap dealer or a major
swap participant shall send an
acknowledgment of such swap
transaction as soon as technologically
practicable, but in any event by:
(i) The end of the third business day
following the day of execution for the
period from the effective date of this
section to August 31, 2013;
(ii) The end of the second business
day following the day of execution for
the period from September 1, 2013 to
August 31, 2014; and
(iii) The end of the first business day
following the day of execution from and
after September 1, 2014.
(5) For purposes of paragraph (a)(3)(i)
of this section, each swap dealer and
major swap participant shall establish,
maintain, and follow written policies
and procedures reasonably designed to
ensure that it executes a confirmation
for each swap transaction that is or
involves a credit swap or interest rate
swap that it enters into with a
counterparty that is a financial entity as
soon as technologically practicable, but
in any event by:
(i) The end of the second business day
following the day of execution for the
period from the effective date of this
section to February 28, 2014; and
(ii) The end of the first business day
following the day of execution from and
after March 1, 2014.
(6) For purposes of paragraph (a)(3)(i)
of this section, each swap dealer and
major swap participant shall establish,
maintain, and follow written policies
and procedures reasonably designed to
ensure that it executes a confirmation
for each swap transaction that is or
involves an equity swap, foreign
exchange swap, or other commodity
swap that it enters into with a
counterparty that is a financial entity as
soon as technologically practicable, but
in any event by:
(i) The end of the third business day
following the day of execution for the
period from the effective date of this
section to August 31, 2013;
(ii) The end of the second business
day following the day of execution for
the period from September 1, 2013 to
August 31, 2014; and
(iii) The end of the first business day
following the day of execution from and
after September 1, 2014.
(7) For purposes of paragraph (a)(3)(ii)
of this section, each swap dealer and
major swap participant shall establish,
maintain, and follow written policies
and procedures reasonably designed to
ensure that it executes a confirmation

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for each swap transaction that is or
involves a credit swap or interest rate
swap that it enters into with a
counterparty that is not a swap dealer,
major swap participant, or a financial
entity not later than:
(i) The end of the fifth business day
following the day of execution for the
period from the effective date of this
section to August 31, 2013;
(ii) The end of the third business day
following the day of execution for the
period from September 1, 2013 to
August 31, 2014; and
(iii) The end of the second business
day following the day of execution from
and after September 1, 2014.
(8) For purposes of paragraph (a)(3)(ii)
of this section, each swap dealer and
major swap participant shall establish,
maintain, and follow written policies
and procedures reasonably designed to
ensure that it executes a confirmation
for each swap transaction that is or
involves an equity swap, foreign
exchange swap, or other commodity
swap that it enters into with a
counterparty that is not a swap dealer,
major swap participant, or a financial
entity not later than:
(i) The end of the seventh business
day following the day of execution for
the period from the effective date of this
section to August 31, 2013;
(ii) The end of the fourth business day
following the day of execution for the
period from September 1, 2013 to
August 31, 2014; and
(iii) The end of the second business
following the day of execution from and
after September 1, 2014.
(9) For purposes of paragraph (c) of
this section:
(i) ‘‘Credit swap’’ means any swap
that is primarily based on instruments
of indebtedness, including, without
limitation: Any swap primarily based on
one or more broad-based indices related
to instruments of indebtedness; and any
swap that is an index credit swap or
total return swap on one or more indices
of debt instruments;
(ii) ‘‘Equity swap’’ means any swap
that is primarily based on equity
securities, including, without limitation:
Any swap primarily based on one or
more broad-based indices of equity
securities; and any total return swap on
one or more equity indices;
(iii) ‘‘Foreign exchange swap’’ has the
meaning set forth in section 1a(25) of
the CEA. It does not include swaps
primarily based on rates of exchange
between different currencies, changes in
such rates, or other aspects of such rates
(sometimes known as ‘‘cross-currency
swaps’’);
(iv) ‘‘Interest rate swap’’ means any
swap which is primarily based on one

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or more interest rates, such as swaps of
payments determined by fixed and
floating interest rates; or any swap
which is primarily based on rates of
exchange between different currencies,
changes in such rates, or other aspects
of such rates (sometimes known as
‘‘cross-currency swaps’’); and
(v) ‘‘Other commodity swap’’ means
any swap not included in the credit,
equity, foreign exchange, or interest rate
asset classes, including, without
limitation, any swap for which the
primary underlying item is a physical
commodity or the price or any other
aspect of a physical commodity.
§ 23.502

Portfolio reconciliation.

(a) Swaps with swap dealers or major
swap participants. Each swap dealer
and major swap participant shall engage
in portfolio reconciliation as follows for
all swaps in which its counterparty is
also a swap dealer or major swap
participant.
(1) Each swap dealer or major swap
participant shall agree in writing with
each of its counterparties on the terms
of the portfolio reconciliation.
(2) The portfolio reconciliation may
be performed on a bilateral basis by the
counterparties or by a qualified third
party.
(3) The portfolio reconciliation shall
be performed no less frequently than:
(i) Once each business day for each
swap portfolio that includes 500 or
more swaps;
(ii) Once each week for each swap
portfolio that includes more than 50 but
fewer than 500 swaps on any business
day during any week; and
(iii) Once each calendar quarter for
each swap portfolio that includes no
more than 50 swaps at any time during
the calendar quarter.
(4) Each swap dealer and major swap
participant shall resolve immediately
any discrepancy in a material term of a
swap identified as part of a portfolio
reconciliation or otherwise.
(5) Each swap dealer and major swap
participant shall establish, maintain,
and follow written policies and
procedures reasonably designed to
resolve any discrepancy in a valuation
identified as part of a portfolio
reconciliation or otherwise as soon as
possible, but in any event within five
business days, provided that the swap
dealer and major swap participant
establishes, maintains, and follows
written policies and procedures
reasonably designed to identify how the
swap dealer or major swap participant
will comply with any variation margin
requirements under section 4s(e) of the
Act and regulations under this part
pending resolution of the discrepancy in

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valuation. A difference between the
lower valuation and the higher
valuation of less than 10 percent of the
higher valuation need not be deemed a
discrepancy.
(b) Swaps with entities other than
swap dealers or major swap
participants. Each swap dealer and
major swap participant shall establish,
maintain, and follow written policies
and procedures reasonably designed to
ensure that it engages in portfolio
reconciliation as follows for all swaps in
which its counterparty is neither a swap
dealer nor a major swap participant.
(1) Each swap dealer or major swap
participant shall agree in writing with
each of its counterparties on the terms
of the portfolio reconciliation, including
agreement on the selection of any thirdparty service provider.
(2) The portfolio reconciliation may
be performed on a bilateral basis by the
counterparties or by one or more third
parties selected by the counterparties in
accordance with paragraph (b)(1) of this
section.
(3) The required policies and
procedures shall provide that portfolio
reconciliation will be performed no less
frequently than:
(i) Once each calendar quarter for
each swap portfolio that includes more
than 100 swaps at any time during the
calendar quarter; and
(ii) Once annually for each swap
portfolio that includes no more than 100
swaps at any time during the calendar
year.
(4) Each swap dealer or major swap
participant shall establish, maintain,
and follow written procedures
reasonably designed to resolve any
discrepancies in the material terms or
valuation of each swap identified as part
of a portfolio reconciliation or otherwise
with a counterparty that is neither a
swap dealer nor major swap participant
in a timely fashion. A difference
between the lower valuation and the
higher valuation of less than 10 percent
of the higher valuation need not be
deemed a discrepancy.
(c) Reporting. Each swap dealer and
major swap participant shall promptly
notify the Commission and any
applicable prudential regulator, or with
regard to swaps defined in section
1a(47)(A)(v) of the Act, the Commission,
the Securities and Exchange
Commission, and any applicable
prudential regulator, of any swap
valuation dispute in excess of
$20,000,000 (or its equivalent in any
other currency) if not resolved within:
(1) Three (3) business days, if the
dispute is with a counterparty that is a
swap dealer or major swap participant;
or

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(2) Five (5) business days, if the
dispute is with a counterparty that is
not a swap dealer or major swap
participant.
(d) Reconciliation of cleared swaps.
Nothing in this section shall apply to a
swap that is cleared by a derivatives
clearing organization.
(e) Recordkeeping. A record of each
swap portfolio reconciliation consistent
with § 23.202(a)(3)(iii) shall be
maintained in accordance with § 23.203.
§ 23.503

Portfolio compression.

(a) Portfolio compression with swap
dealers and major swap participants.
(1) Bilateral offset. Each swap dealer
and major swap participant shall
establish, maintain, and follow written
policies and procedures for terminating
each fully offsetting swap between a
swap dealer or major swap participant
and another swap dealer or major swap
participant in a timely fashion, when
appropriate.
(2) Bilateral compression. Each swap
dealer and major swap participant shall
establish, maintain, and follow written
policies and procedures for periodically
engaging in bilateral portfolio
compression exercises, when
appropriate, with each counterparty that
is also a swap dealer or major swap
participant.
(3) Multilateral compression. Each
swap dealer and major swap participant
shall establish, maintain, and follow
written policies and procedures for
periodically engaging in multilateral
portfolio compression exercises, when
appropriate, with each counterparty that
is also a swap dealer or major swap
participant. Such policies and
procedures shall include:
(i) Policies and procedures for
participation in all multilateral portfolio
compression exercises required by
Commission regulation or order; and
(ii) Evaluation of multilateral portfolio
compression exercises that are initiated,
offered, or sponsored by any third party.
(b) Portfolio compression with
counterparties other than swap dealers
and major swap participants. Each swap
dealer and major swap participant shall
establish, maintain, and follow written
policies and procedures for periodically
terminating fully offsetting swaps and
for engaging in portfolio compression
exercises with respect to swaps in
which its counterparty is an entity other
than a swap dealer or major swap
participant, to the extent requested by
any such counterparty.
(c) Portfolio compression of cleared
swaps. Nothing in this section shall
apply to a swap that is cleared by a
derivatives clearing organization.

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(d) Recordkeeping. (1) Each swap
dealer and major swap participant shall
make and maintain a complete and
accurate record of each bilateral offset
and each bilateral or multilateral
portfolio compression exercise in which
it participates.
(2) All records required to be
maintained pursuant to this section
shall be maintained in accordance with
§ 23.203 and shall be made available
promptly upon request to any
representative of the Commission or any
applicable prudential regulator, or with
regard to swaps defined in section
1a(47)(A)(v) of the Act, to any
representative of the Commission, the
Securities and Exchange Commission,
or any applicable prudential regulator.
§ 23.504 Swap trading relationship
documentation.

(a) (1) Applicability. The requirements
of this section shall not apply to:
(i) Swaps executed prior to the date
on which a swap dealer or major swap
participant is required to be in
compliance with this section;
(ii) Swaps executed on a board of
trade designated as a contract market
under section 5 of the Act or to swaps
executed anonymously on a swap
execution facility under section 5h of
the Act, provided that such swaps are
cleared by a derivatives clearing
organization and all terms of the swaps
conform to the rules of the derivatives
clearing organization and § 39.12(b)(6)
of this chapter; and
(iii) Swaps cleared by a derivatives
clearing organization.
(2) Policies and procedures. Each
swap dealer and major swap participant
shall establish, maintain, and follow
written policies and procedures
reasonably designed to ensure that the
swap dealer or major swap participant
executes written swap trading
relationship documentation with its
counterparty that complies with the
requirements of this section. The
policies and procedures shall be
approved in writing by senior
management of the swap dealer and
major swap participant, and a record of
the approval shall be retained. Other
than confirmations of swap transactions
under § 23.501, the swap trading
relationship documentation shall be
executed prior to or contemporaneously
with entering into a swap transaction
with any counterparty.
(b) Swap trading relationship
documentation. (1) The swap trading
relationship documentation shall be in
writing and shall include all terms
governing the trading relationship
between the swap dealer or major swap
participant and its counterparty,

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including, without limitation, terms
addressing payment obligations, netting
of payments, events of default or other
termination events, calculation and
netting of obligations upon termination,
transfer of rights and obligations,
governing law, valuation, and dispute
resolution.
(2) The swap trading relationship
documentation shall include all
confirmations of swap transactions
under § 23.501.
(3) The swap trading relationship
documentation shall include credit
support arrangements, which shall
contain, in accordance with applicable
requirements under Commission
regulations or regulations adopted by
prudential regulators and without
limitation, the following:
(i) Initial and variation margin
requirements, if any;
(ii) Types of assets that may be used
as margin and asset valuation haircuts,
if any;
(iii) Investment and rehypothecation
terms for assets used as margin for
uncleared swaps, if any; and
(iv) Custodial arrangements for
margin assets, including whether
margin assets are to be segregated with
an independent third party, in
accordance with § 23.701(e), if any.
(4) (i) The swap trading relationship
documentation between swap dealers,
between major swap participants,
between a swap dealer and major swap
participant, between a swap dealer or
major swap participant and a financial
entity, and, if requested by any other
counterparty, between a swap dealer or
major swap participant and such
counterparty, shall include written
documentation in which the parties
agree on the process, which may
include any agreed upon methods,
procedures, rules, and inputs, for
determining the value of each swap at
any time from execution to the
termination, maturity, or expiration of
such swap for the purposes of
complying with the margin
requirements under section 4s(e) of the
Act and regulations under this part, and
the risk management requirements
under section 4s(j) of the Act and
regulations under this part. To the
maximum extent practicable, the
valuation of each swap shall be based
on recently-executed transactions,
valuations provided by independent
third parties, or other objective criteria.
(ii) Such documentation shall include
either:
(A) Alternative methods for
determining the value of the swap for
the purposes of complying with this
paragraph in the event of the
unavailability or other failure of any

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input required to value the swap for
such purposes; or
(B) A valuation dispute resolution
process by which the value of the swap
shall be determined for the purposes of
complying with this paragraph (b)(4).
(iii) A swap dealer or major swap
participant is not required to disclose to
the counterparty confidential,
proprietary information about any
model it may use to value a swap.
(iv) The parties may agree on changes
or procedures for modifying or
amending the documentation required
by this paragraph at any time.
(5) The swap trading relationship
documentation of a swap dealer or
major swap participant shall include the
following:
(i) A statement of whether the swap
dealer or major swap participant is an
insured depository institution (as
defined in 12 U.S.C. 1813) or a financial
company (as defined in section
201(a)(11) of the Dodd-Frank Act, 12
U.S.C. 5381(a)(11));
(ii) A statement of whether the
counterparty is an insured depository
institution or financial company;
(iii) A statement that in the event
either the swap dealer or major swap
participant or its counterparty is a
covered financial company (as defined
in section 201(a)(8) of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act, 12 U.S.C. 5381(a)(8)) or
an insured depository institution for
which the Federal Deposit Insurance
Corporation (FDIC) has been appointed
as a receiver (the ‘‘covered party’’),
certain limitations under Title II of the
Dodd-Frank Act or the Federal Deposit
Insurance Act may apply to the right of
the non-covered party to terminate,
liquidate, or net any swap by reason of
the appointment of the FDIC as receiver,
notwithstanding the agreement of the
parties in the swap trading relationship
documentation, and that the FDIC may
have certain rights to transfer swaps of
the covered party under section
210(c)(9)(A) of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act, 12 U.S.C. 5390(c)(9)(A), or 12
U.S.C. 1821(e)(9)(A); and
(iv) An agreement between the swap
dealer or major swap participant and its
counterparty to provide notice if either
it or its counterparty becomes or ceases
to be an insured depository institution
or a financial company.
(6) The swap trading relationship
documentation of each swap dealer and
major swap participant shall contain a
notice that, upon acceptance of a swap
by a derivatives clearing organization:
(i) The original swap is extinguished;

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(ii) The original swap is replaced by
equal and opposite swaps with the
derivatives clearing organization; and
(iii) All terms of the swap shall
conform to the product specifications of
the cleared swap established under the
derivatives clearing organization’s rules.
(c) Audit of swap trading relationship
documentation. Each swap dealer and
major swap participant shall have an
independent internal or external auditor
conduct periodic audits sufficient to
identify any material weakness in its
documentation policies and procedures
required by this section and
Commission regulations. A record of the
results of each audit shall be retained.
(d) Recordkeeping. Each swap dealer
and major swap participant shall
maintain all documents required to be
created pursuant to this section in
accordance with § 23.203 and shall
make them available promptly upon
request to any representative of the
Commission or any applicable
prudential regulator, or with regard to
swaps defined in section 1a(47)(A)(v) of
the Act, to any representative of the
Commission, the Securities and
Exchange Commission, or any
applicable prudential regulator.
§ 23.505 End user exception
documentation.

(a) For swaps excepted from a
mandatory clearing requirement. Each
swap dealer and major swap participant
shall obtain documentation sufficient to
provide a reasonable basis on which to
believe that its counterparty meets the
statutory conditions required for an
exception from a mandatory clearing
requirement, as defined in section 2h(7)
of the Act and § 39.6 of this chapter.
Such documentation shall include:
(1) The identity of the counterparty;
(2) That the counterparty has elected
not to clear a particular swap under
section 2h(7) of the Act and § 39.6 of
this chapter;
(3) That the counterparty is a nonfinancial entity, as defined in section
2h(7)(C) of the Act;
(4) That the counterparty is hedging
or mitigating a commercial risk; and
(5) That the counterparty generally
meets its financial obligations
associated with non-cleared swaps.
Provided, that a swap dealer or major
swap participant need not obtain
documentation of paragraphs (a)(3), (4),
or (5) of this section if it obtains
documentation that its counterparty has
reported the information listed in
§ 39.6(b)(3) in accordance with
§ 39.6(b)(4) of this chapter.
(b) Recordkeeping. Each swap dealer
and major swap participant shall
maintain all documents required to be

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Federal Register / Vol. 77, No. 176 / Tuesday, September 11, 2012 / Rules and Regulations
obtained pursuant to this section in
accordance with § 23.203 and shall
make them available promptly upon
request to any representative of the
Commission or any applicable
prudential regulator, or with regard to
swaps defined in section 1a(47)(A)(v) of
the Act, to any representative of the
Commission, the Securities and
Exchange Commission, or any
applicable prudential regulator.
Issued in Washington, DC, on August 24,
2012, by the Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.

Appendices to Confirmation, Portfolio
Reconciliation, Portfolio Compression,
and Swap Trading Relationship
Documentation Requirements for Swap
Dealers and Major Swap Participants—
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, O’Malia
and Wetjen voted in the affirmative; no
Commissioner voted in the negative.

sroberts on DSK5SPTVN1PROD with RULES

Appendix 2—Statement of Chairman
Gary Gensler
I support the final rule implementing
Congress’ direction that the Commission
adopt rules for ‘‘timely and accurate
confirmation, processing, netting,
documentation, and valuation of all swaps.’’
This direction was included in the swaps
market reform provisions of the Dodd-Frank
Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act).
Each of these requirements promotes
crucial back office standards that will reduce
risk and increase efficiency in the swaps
market. These final rules are critical to the
risk management of swap dealers and major
swap participants and lowering their risk to
the public.
The rules establish procedures to promote
legal certainty by requiring timely
confirmation of all swap transactions, setting
forth documentation requirements for
bilateral swap transactions, and requiring
timely resolutions of valuation disputes. In
addition, the rules enhance understanding of
one counterparty’s risk exposure to another,
and promote sound risk management through
regular reconciliation and compression of
swap portfolios.
The 2008 financial crisis brought to light
how large financial institutions, including
AIG, had valuation disputes and other
problems regarding documentation
standards. These rules will directly address
many of those issues, highlighting issues for
senior management and regulators at an
earlier stage.
The final rule builds upon extensive work
by the Federal Reserve Bank of New York

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(FRBNY) to improve standards in the back
offices of large financial institutions dealing
in swaps. Beginning in 2005, the FRBNY,
along with U.S. and global prudential
authorities, undertook a supervisory effort to
enhance operational efficiency and lower risk
in the swaps market by increasing
automation in swaps processing, improving
documentation, and promoting the timely
confirmation of trades.
CFTC staff also consulted with other U.S.
and foreign financial regulators, and
participated in numerous meetings with
market participants. CFTC staff worked to
address the more than 60 public comment
letters responding to the three proposed rules
comprising this final rule.

Appendix 3—Statement of
Commissioner Bart Chilton
I support this second package of internal
business conduct standard final rules. These
rules establish a set of prudent
documentation standards for registered swap
dealers (SDs) and major swap participants
(MSPs) while aiming to minimize the
burdens on non-SDs and non-MSPs. Vibrant
and liquid financial markets are necessary for
economic prosperity. As shown by the 2007–
2009 financial crisis, that prosperity itself is
gravely threatened when the rules governing
financial markets fail to curb the build-up of
systemic risk. I am pleased that the preamble
introducing these rules appropriately refers
to the tremendous cost of the financial crisis;
it is obvious that not implementing strong
regulations effectuating the intent of the
Dodd-Frank Act, including these final rules,
would result in social costs to the American
taxpayer and consumer.152 In addition, I note
that there are enormous and ongoing social
costs that taxed our economy as a result of
the reckless practices that became prevalent
in the years before the financial crisis.
The documentation and conduct standards
set forth in this release are designed to, most
importantly in my opinion, reduce valuation
disputes: Disputes between parties about the
value of a swap or portfolio of swaps.
Valuation disputes can delay the exchange of
collateral. The failure to exchange collateral
in a timely manner can have disastrous
impacts on a firm’s ability to manage its risk
and allocate capital efficiently. A large,
interconnected firm’s inability to manage its
risk and to properly allocate capital can
contribute to the generation of systemic risk.
All of these steps were vividly illustrated
during the recent financial crisis.
American International Group’s (AIG)
inability to value its portfolio accurately and
agree on valuations and collateral exchanges
with its counterparties posed a serious
problem for AIG and its counterparties
during the financial crisis.153 According to
152 See

infra above.
Testimony Before the Financial Crisis
Inquiry Commission, including AIG/Goldman
Sachs Collateral Call Timeline, available at http://
fcic-static.law.stanford.edu/cdn_media/fcictestimony/2010-0701-AIG-Goldman-supportingdocs.pdf (timeline documenting valuation disputes
and collateral calls); Testimony of Joseph Cassano,
available at http://fcic-static.law.stanford.edu/cdn_
media/fcic-testimony/2010-0630-Cassano.pdf; and
153 See

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55965

the Financial Crisis Inquiry Commission
Report:
The OTC derivatives market’s lack of
transparency and of effective price discovery
exacerbated the collateral disputes of AIG
and Goldman Sachs and similar disputes
between other derivatives counterparties.154
It is with the financial crisis in mind that
I interpret the Commission’s authority
generally and more specifically here, under
section 731 of the Dodd-Frank Act which
added new section 4s(i) to the Commodity
Exchange Act (CEA).155 The portfolio
reconciliation rules in section 23.502 will
ensure that SDs/MSPs have portfolio
valuations consistent with those of their
counterparties. The portfolio compression
rules in section 23.503 will reduce
operational risks. The swap trading
relationship documentation requirements
will 23.504 will ensure that documentation
practices in the swaps market cover a number
of key terms. The documentation of these
terms will give counterparties greater
certainty as to their legal rights and
responsibilities. These final rules, taken in
conjunction with the Commission’s other
Dodd-Frank Act-related regulations,
including part 43 regulations on real-time
reporting and subpart H of part 23 on
Business Conduct Standards for Swap
Dealers and Major Swap Participants with
Counterparties 156 will contribute
substantially to encouraging early and
effective dispute resolution and will ensure
the ‘‘timely and accurate confirmation,
processing, netting, documentation, and
valuation of all swaps.’’ 157
While these rules represent considerable
progress, I believe it should not be viewed in
a vacuum and that the Commission should
respond nimbly in responses to changes in
the market that could frustrate the underlying
purpose of these final rules (and all other
Commission rules for that matter).
Notwithstanding the progress the
Commission has made, I remain concerned
that are still a number of areas that this final
rule touches upon that remain areas of
potential future concern:
1. Dispute resolution and the requirement
to document alternative methods for
determining the value of a swap or a dispute
resolution process under regulation
23.504(b)(4)(iii).
This provision, combined with the
provision in regulation 23.503(c) to report
AIG Statement Summary, available at http://fcicstatic.law.stanford.edu/cdn_media/fcic-testimony/
2010-0630-AIG-Statement-Summary.pdf.
154 Financial Crisis Inquiry Commission, ‘‘The
Financial Crisis Inquiry Report: Final Report of the
National Commission on the Causes of the
Financial and Economic Crisis in the United
States,’’ Jan. 2011, at 353, available at http://www.
gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf
[hereinafter the FCIC Report.
155 Pub. L. 111 (2010). CEA section 4s(i) states
that each registered swap dealer and major swap
participant shall 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.
156 See, specifically 17 CFR 23.431(a)(3)(i)
requiring SDs and MSPs to disclose ‘‘the price of
the swap and the mid-market mark of the swap.’’
157 CEA section 4s(i).

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‘‘any valuation dispute in excess of
$20,000,000’’ within one business day if the
dispute is with another SD/MSP or five
business days for non-SDs/MSPs, should
encourage the resolution of disputes. These
regulations are buttressed by efforts being
made by certain industry organizations. I
encourage the Commission to remain vigilant
in this area and to monitor the disputes
reported to the Commission and to engage
with the public to determine whether these
regulations have their intended effect.
2. The implied cost of credit and the
requirement to document credit support
arrangements under regulation 23.504(b)(3).
I am concerned that these rules do not
expressly require SDs and MSPs to document
the cost of credit if such costs are a factor in
the price a SD or MSP charges a
counterparty. While this issue has been
discussed since the earliest days of the
negotiations and planning surrounding the
drafting of the Dodd-Frank Act—and many
market participants acknowledged that added
costs would be attendant to engaging in noncleared transactions—the Commission could
provide, in this rulemaking, an additional
level of transparency to transactions
involving creditworthiness considerations.158
I believe that requiring the documentation of
the embedded cost of credit as a transaction
fee or credit premium would have deter the
practice of charging customers a price on a
swap that depends on creditworthiness. My
concern is mitigated somewhat by regulation

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158 See

Better Markets comment letter.

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23.431(d)(2) (a provision finalized in a
previous rulemaking) which requires that
SDs and MSPs provide their non-SD/MSP
counterparties ‘‘with a daily mark, which
shall be the mid-market mark of the
swap.’’ 159 Such a provision would assist an
end-user to infer the embedded cost of credit
they were charged by their SD or MSP
counterparty. Armed with this information, I
encourage market participants to seek
documentation of the embedded cost of
credit as a transaction fee or credit premium.
As the Commission’s regulations become
effective, I invite the public to alert the
Commission if the practice of charging a
credit fee in the price (i.e., an embedded cost
of credit) for a swap becomes problematic by,
for example, diminishing the price discovery
utility of real-time data published to the
public under part 43 of the Commission’s
rules.
3. Rehypothecation of uncleared swaps
collateral and the requirement to document
rehypothecation terms for assets used as
margin for uncleared swaps under regulation
23.504(b)(3)(iii).
This requirement is consistent with section
724(c) of the Dodd-Frank Act (adding section
4s(l)(1)(A) to the CEA) and is a welcome
inclusion in these rules.160 Rehypothecation
159 77

FR 9733 (Feb. 17, 2012).
swap dealer or major swap participant
shall be required to notify the counterparty of the
swap dealer or major swap participant at the
beginning of a swap transaction that the
counterparty has the right to require segregation of
the funds or other property.’’
160 ‘‘A

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occurs when a person uses assets held as
collateral for one counterparty in transactions
with another counterparty. This practice
contributed to the financial crisis in a
number of ways, including: (1)
Rehypothecated collateral was particularly
difficult to recover in bankruptcy 161 and (2)
rehypothecation increases leverage in the
financial system.162 While many buy-side
firms are learning from the financial crisis
and requesting their collateral to be held in
segregated accounts, the potential for a dealer
default that could affect rehypothecated
collateral still exists. In light of recent events,
the Commission and the public should keep
a watchful eye on the risks in this area.
[FR Doc. 2012–21414 Filed 9–10–12; 8:45 am]
BILLING CODE 6351–01–P
161 This is because once the collateral is
rehypothecated, then the posting party could lose
their proprietary interest in the collateral and as a
result in bankruptcy, such a party could fall into the
category of unsecured creditors. This can delay or
prevent recovery of collateral from a bankrupt
counterparty.
162 IMF researchers recently estimated that offbalance sheet funding for dealers from
rehypothecation amounted to $4.5 trillion during
November 2007 and that it contributed substantially
to the size of the shadow banking system. See, The
(sizeable) Role of Rehypothecation in the Shadow
Banking System, Manmohan Singh and James
Aitken, IMF Working Paper, July 2010, available at
http://www.imf.org/external/pubs/ft/wp/2010/
wp10172.pdf.

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