Federalregister 022411 B
Federalregister 022411 B
Federalregister 022411 B
ruN: 3038-AC98
CUSTOMER POSITIONS
regulations to implement Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act). Proposed regulations would establish the time frame for a
swap dealer (SD), major swap participant (MSP), futures commission merchant (FCM), swap
execution facility (SEF), and designated contract market (DCM) to submit contracts, agreements,
also would facilitate compliance with DCO Core Principle C (Participant and Product Eligibility)
in connection with standards for cleared products and the prompt and efficient processing of all
contracts, agreements, and transactions submitted for clearing. The Commission is further
coordination with DCOs in the development of rules and procedures to facilitate clearing.
(Treatment of Funds), requiring a DCO, upon customer request, to promptly transfer customer
positions and related funds from one clearing member to another, without requiring the close-out
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DATES: Submit comments on or before [INSERT DATE 30 DAYS AFTER DATE OF
ADDRESSES: You may submit comments, identified by RIN number 3038-AC98, by any of
., Agency website, via its Comments Online process: http://comments.cftc.gov. Follow the
Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581.
submitting comments.
only information that you wish to make available publicly. If you wish the Commission to
consider information that may be exempt from disclosure under the Freedom of Information Act
(FOIA), a petition for confidential treatment of the exempt information may be submitted
Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact,
refuse, or remove any or all of your submission from http://www.cfic.gov that it may deem to be
inappropriate for publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the rulemaking will be retained in
1 Commission regulations referred to herein are found at 17 CFR Ch. 1 (2010). They are accessible on the
Commission's website at http://www.cfic.gov.
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the public comment file and will be considered as required under the Administrative Procedure
Act and other applicable laws, and may be accessible under FOIA.
Clearing and Intermediary Oversight; Riva Spear Adriance, Associate Director, 202-418-5494,
Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21 st Street,
SUPPLEMENTARY INFORMATION:
I. Bacl{ground.
On July 21,2010, President Obama signed the Dodd-Frank Act? Title VII of the Dodd-
Frank Act3 amended the Commodity Exchange Act (CEA)4 to establish a comprehensive
regulatory framework to reduce risk, increase transparency, and promote market integrity within
the financial system by, among other things: (1) providing for the registration and comprehensive
regulation of SDs and MSPs; (2) imposing clearing and trade execution requirements on
standardized derivative products; (3) creating rigorous recordkeeping and real-time reporting
2 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203,124 Stat. 1376 (2010). The
text of the Dodd-Frank Act may be accessed at
http://www.cfic.gov/LawRegulation/OTCDERIVATIVES/index.htm.
3Pursuant to section 701 of the Dodd-Frank Act, Title VII may be cited as the "Wall Street Transparency and
Accountability Act of2010."
4 7 U.S.C. 1 et seq.
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regimes; and (4) enhancing the Commission's rulemaking and enforcement authorities with
respect to all registered entities and intermediaries subject to the Commission's oversight.
establish the time frame for an SD, MSP, FCM, SEF, or DCM to process and submit contracts,
agreements, or transactions to a DCO for clearing; to establish certain product standards and a
time frame for a DCO to clear such contracts, agreements, and transactions; and to facilitate a
DCO's transfer of open positions from a carrying clearing member to another clearing member
without unwinding and re-booking the position. These supplement proposed regulations that
Currently, a significant number of swaps are not cleared and, for those that are cleared,
there may be a delay in the substitution of a DCO as the counterparty to the transaction through a
novation of the original contract, agreement, or transaction. 6 In many instances, this delay can
be up to a week. For example, some clearinghouses accept bilateral trades for clearing on a
batched basis once a week. This time lag potentially presents credit risk to the swap
counterparties and the DCO because the value of a position may change significantly between
the time of execution and the time of novation, thereby allowing financial exposure to
accumulate in the absence of daily mark-to-market. Among the purposes of clearing are the
5 See 76 FR 6715, Feb. 8,2011 (proposed rules for SD and MSP documentation); 76 FR 3698, Jan. 20,2011,
(proposed rules for DCO Core Principles C and F); 76 FR 1214, Jan. 7, 2011 (proposed rules for SEF Core Principle
7; 75 FR 81519, Dec. 28, 2010, (proposed rules for SD and MSP confIrmation, portfolio reconciliation, and portfolio
compression); 75 FR 80572, Dec. 22, 2010 (proposed rules for DCM Core Principle 11).
6 A clearinghouse becomes the counterparty to trades with market participants through novation, an open offer
system, or an analogous legally binding arrangement. Through novation, the original contract between the buyer
and seller is extinguished and replaced by two new contracts, one between the clearinghouse and the buyer and the
other between the clearinghouse and the seller. In an open offer system, a clearinghouse is automatically and
immediately interposed in a transaction at the moment the buyer and seIler agree on the terms.
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reduction of risk and the enhancement of financial certainty, and this delay diminishes these
benefits of clearing swaps that Congress sought to promote in the Dodd-Frank Act. Delay in
clearing is also inconsistent with other proposed regulations concerning product eligibility and
financial integrity of transactions insofar as the delay constrains liquidity and increases risk.
The Commission recognizes that there may be instances when a delay in acceptance of a
transaction by a DCO is unavoidable. For instance, when new products are first listed for
clearing, existing legacy transactions may have to be moved into clearing incrementally.
The swap market infrastructure established by the Dodd-Frank Act provides for the
trading of swaps on a SEF or DCM. The Dodd-Frank Act also establishes certain parameters for
the bilateral execution of swaps among entities registered as SDs or MSPs and their
counterparties. Swaps traded on a SEF or DCM, as well as swaps executed bilaterally, that are
subject to mandatory clearing (and have not been electively excepted from mandatory clearing
by an end user under section 2(h)(7) of the CEA), must be cleared by a registered DCO. For
swaps executed bilaterally that are not required to be cleared, if the parties to the transaction
agree to clear, they may submit the swap to a registered DCO for clearing.
Through this proposed rulemaking, the Commission seeks to expand access to, and to
strengthen the financial integrity of, the swap markets subject to Commission oversight by
requiring, and establishing uniform standards for, prompt processing, submission, and
acceptance of swaps eligible for clearing by DCOs. This requires setting an appropriate time
frame for the processing and submission of swaps for clearing, as well as a time frame for the
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2. Transfer of swaps positions and related funds.
Currently, in the futures industry, a request by a customer to transfer its open positions
and related funds from its carrying FCM to another FCM is accomplished within a reasonable
period of time (typically within two business days). However, under current practice for some
cleared swaps, a customer's request to transfer all or a portion of its swap positions and related
funds may be subject to a more significant delay. (A party to a cleared swap may wish to
transfer its positions from its current clearing member to another clearing member because there
is concern about the carrying clearing member's financial strength or for competitive reasons
relating to customer service or pricing). In these instances, a patty must either enter into an
offsetting position without terminating its original position, thereby creating economically
the Commission seeks to ensure that DCOs do not impose economic or operational obstacles to
the prompt transfer of customer positions and related funds from one clearing member to
another, upon the request of a customer. The Commission's purpose in this regard is to
formalize and apply to swaps clearing, the futures clearinghouse practice of transferring
customer positions and related funds without close-out and re-booking of the positions.
A. Proposed § 23.506 - SD and MSP Submission of Swaps for Processing and Clearing.
1. Proposed regulations.
Section 731 ofthe Dodd-Frank Act amends the CEA by adding a new section 4s, which
sets forth a number of requirements for SDs and MSPs. Specifically, section 4s(i) of the CEA
establishes swap documentation standards for SDs and MSPs and requires them to "conform
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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." Accordingly, the Commission is proposing regulations on swap processing and clearing
discussed below, pursuant to the authority granted under sections 4s(h)(1)(D), 4s(h)(3)(D), 4s(i),
and Sa( 5) of the CEA. 7 These proposed regulations for SDs and MSPs are intended to
complement the proposed regulations for DCOs, which require timely acceptance of swaps for
clearing. s
In order to ensure compliance with any mandatory clearing requirement issued pursuant
to section 2(h)(1) of the CEA and to promote the mitigation of counterparty credit risk through
the use of central clearing, the Commission is proposing § 23.506(a)(1), which would require
that SDs and MSPs have the ability to route swaps that are not executed on a SEF or DCM to a
DCO in a manner that is acceptable to the DCO for the purposes of risk management. Under
§ 23.506(a)(2), SDs and MSPs would also be required to coordinate with DCOs to facilitate
prompt and efficient processing in accordance with proposed regulations related to the timing of
clearing by DCOs.
Proposed § 23.506(a) does not prescribe the manner by which SDs or MSPs route their
swaps to DCOs and provide for prompt and efficient processing. Indeed, in many instances, it is
likely that DCOs will enable SDs and MSPs to submit their swaps to clearing via third-party
platforms and other service providers. In this manner, privately negotiated swaps may be
7 7 U.S.C. 6s(h)(1)(D); 7 U.S.C. 6s(h)(3)(D); 7 U.S.C. 6s(i); and 7 U.S.C. 12a(5). Section 8a(5) of the CEA
authorizes the Commission to promulgate such regulations as, in the judgment of the Commission, are reasonably
necessary to effectuate any of the provisions or to accomplish any of the purposes of the CEA.
8 See discussion in section II.B. of this notice.
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Proposed § 23.506(b) would set forth timing requirements for submitting swaps to DCOs
in those instances where the swap is subject to a clearing mandate and in those instances when a
submit a swap that is not executed on a SEF or DCM, but is subject to a clearing mandate under
section 2(h)(1) of the CEA (and has not been electively excepted from mandatory clearing by an
end user under section 2(h)(7) of the CEA) as soon as technologically practicable following
execution of the swap, but no later than the close of business on the day of execution.
For those swaps that are not subject to a clearing mandate, but both counterparties to the
swap have elected to clear the swap, under proposed § 23.506(b)(2), the SD or MSP would be
required to submit the swap for clearing not later than the next business day after execution of
the swap or the agreement to clear, if later than execution. This time frame reflects the
possibility that, unlike a trade that takes place, on a DCM, in the case of a bilateral swap, the
parties may need time to agree to terms that would conform with a DCO's template for swaps it
will accept for clearing. As noted previously, any delay between execution and novation to a
clearinghouse potentially presents credit risk to the swap counterparties and the DCO because
the value of the position could change significantly between the time of execution and the time
of novation, thereby allowing financial exposure to accumulate in the absence of daily mark-to-
market. The proposed regulation would serve to limit this delay as much as reasonably possible.
Proposed § 23.506 is consistent with regulations previously proposed for SDs and MSPs,
including proposed § 23.501, which requires confirmation of all swaps.9 In fact, by providing
for confirmation upon acceptance for clearing pursuant to proposed § 39 .12(b)(7)(v), SDs and
9 See 76 FR at 81531.
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Proposed § 23.506 is consistent with the Commission's proposed regulations requiring
reporting of swap transaction data to a registered swap data repository. 10 Under these proposed
regulations, SDs and MSPs are required to report certain information about a swap that is not
executed on a SEF or DCM to a registered swap data repository "promptly following verification
of the primary economic terms by the counterpaliies with each other at or immediately following
execution of the swap, but in no event later than: 30 minutes after execution of the swap if
swap if verification of primary economic terms does not occur electronically."ll One of the
The proposed regulation also is consistent with the Commission's proposed regulations
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requiring real-time public reporting of swap transaction and pricing data. Under these
proposed regulations, SDs and MSPs are required to report celiain information about a swap that
is not executed on a SEF or DCM to a registered swap data repository that accepts and publicly
disseminates swap transaction and pricing data, as soon as technologically practicable following
execution of such swap.14 The information required to be repOlied under the proposed
2. Solicitation of comments.
10 See 75 FR 76574, Dec. 8,2010 (proposed rules for swap data recordkeeping and reporting requirements).
II Proposed § 45.3(a)(1)(iii)(A), 75 FR at 76600.
12 Proposed § 45. 1(q)(20), 75 FR at 76598.
13 See 75 FR 76140, Dec. 7, 2010 (proposed rules for real-time public reporting of swap transaction data).
14 Proposed § 43.3(a)(3), 75 FR at 76172.
15 Proposed § 43.4 and Appendix A to part 43, 75 FR at 76174 and 76177.
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The Commission solicits comment on all aspects of the proposed § 23.506. It further
requests responses to the following specific questions: Should the regulations specify how an
SD or MSP must ensure that it has the capacity to route swaps to a DCO? Are there any
systemic obstacles to the DCO, SD, and MSP coordination required under the proposed
regulation?
Are the proposed time frames in § 23 .506(b) appropriate? Are they operationally
feasible? What is the operational feasibility of same-day clearing for swaps executed bilaterally
that are required to be cleared and those that will not be required to be cleared? The Commission
further requests comment on the use of the phrase "as soon as technologically practicable."
Core Principle C requires each DCO to establish "appropriate standards for determining
the eligibility of agreements, contracts, or transactions submitted to the [DCO] for clearing.,,16
The Commission has previously proposed § 39 .12(b) to implement this provision, I 7 pursuant to
its rulemaking authority under sections 5b(c)(2)(A) and 8a(5) of the CEA. 18
As previously published for public notice and comment, proposed § 39.12(b)(1) would
agreements, contracts, or transactions submitted to the DCO for clearing, taking into account the
DCO's ability to manage the risks associated with such agreements, contracts, or transactions. 19
Proposed § 39.12(b)(2) would codify the requirements of section 2(h)(1)(B) of the CEA
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regarding a DCO's offset of economically equivalent swaps,z° Proposed § 39.12(b)(3) would
require a DCO to select contract unit sizes that maximize liquidity, open access, and risk
management. 21 Finally, proposed § 39.12(b)(4) would require each DCO that clears swaps to
have rules stating that upon acceptance of a swap by the DCO for clearing, (i) the original swap
is extinguished, (ii) it is replaced by equal and opposite swaps between clearing members and the
DCO, (iii) all terms ofthe cleared swaps must conform to templates established under DCO
rules, and (iv) if a swap is cleared by a clearing member on behalf of a customer, all terms of the
swap, as carried in the customer account on the books of the clearing member, must conform to
the terms of the cleared swap established under the DCO"s rules. 22
Principle C, the Commission is (1) re-proposing § 39.12(b)(2) to clarify the role of a DCO in
establishing the terms and conditions for swaps that it accepts for clearing;23 (2) proposing a new
§ 39.12(b)(4) that would prohibit a DCO from refusing to clear a product where neither party to
contract units for clearing purposes that are smaller than the contract units in which trades
submitted for clearing were executed; and (4) proposing a new § 39 .12(b)(7) that would clarify
20 Id. Section 2(h)(I)(B) of the CEA, 7 U.S.C. 2(h)(l)(B), requires a DCO to adopt rules providing that all swaps
with the same terms and conditions submitted to the DCO for clearing are economically equivalent within the DCO
and may be offset with each other within the DCO. Section 2(h)(l)(B) further requires a DCO to provide for non-
discriminatory clearing of a swap executed bilaterally or on or subject to the rules of an unaffiliated SEF or DCM.
21 See 76 FR at 3720.
22 Id.
23 To provide additional clarity regarding open access to clearing, the Commission is proposing to renumber the
second sentence of proposed § 39.l2(b)(2) as § 39.l2(b)(3) and to inseli a new paragraph (b)(4). Accordingly,
proposed paragraphs (b)(3) and (b)(4) would be renumbered as paragraphs (b)(5) and (b)(6), respectively.
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the timing of the actions described in previously proposed §§ 39.12(b)(4)(i) and (ii) (renumbered
as paragraph (b )(6)), i.e., requirements that upon acceptance of a swap by the DCO for clearing,
(i) the original swap is extinguished and (ii) it is replaced by equal and opposite swaps between
As previously proposed, § 39 .12(b)(2) required a DCO to "adopt rules providing that all
swaps with the same terms and conditions submitted to the derivatives clearing organization for
clearing are economically equivalent within the derivatives clearing organization and may be
offset with each other within the derivatives clearing organization. ,,24 It also required that a
The Commission is proposing to revise the first provision of § 39. 12(b)(2) to clarify that
a DCO must adopt rules to establish templates for the terms and conditions of swaps that it will
clear. Accordingly, the proposed provision now reads: "A derivatives clearing organization shall
adopt rules providing that all swaps with the same terms and conditions, as defined by templates
established under derivatives clearing organization rules, submitted to the derivatives clearing
organization for clearing are economically equivalent within the derivatives clearing
organization and may be offset with each other within the derivatives clearing organization."
As noted above, the second provision of previously proposed § 39 .12(b )(2) would be
24 See 76 FR at 3720.
25 Id.
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Some clearinghouses have indicated that they intend to require that, for a transaction to
be eligible for clearing, one of the executing parties must be a clearing member. This has the
effect of preventing trades between two patties who are not clearing members from being
cleared. Such a restriction of open access serves no apparent risk management purpose and
operates to keep certain trades out of the clearing process and to constrain liquidity for cleared
trades. Moreover, such restrictions also may raise competitive issues under Core Principle N
(Antitrust Considerations).26
refusing to clear a product where neither party to the original contract, agreement, or transaction
is a clearing member. The Commission notes that parties that are not clearing members would
still have to submit their bilateral trades for clearing through a clearing member of the DCO.
§ 39.12(b)(5), which would require a DCO to "select contract unit sizes that maximize liquidity,
open access, and risk management.,,27 To the extent appropriate to further these objectives, a
DCO would be further required to select contract units for clearing purposes that are smaller than
the contract units in which trades submitted for clearing were executed. 28 The purpose of this
provision is to require the DCO to split a cleared swap into smaller units in order to promote
liquidity by permitting more parties to trade the product, to facilitate open access by permitting
26 See Section 5b(c)(2)(N) of the CEA, which provides that "Unless necessary or appropriate to achieve the
purposes ofthis Act, a derivatives clearing organization shall not-
(i) adopt any rule or take any action that results in any unreasonable restraint oftrade; or
(ii) impose any material anticompetitive burden."
27 See 76 FR at 3720.
28 Id.
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more clearing members to clear the product, and to aid risk management by enabling a DCO, in
the event of a default, to have more potential counterparties to take on positions during a
liquidation.
undertaken by the DCO and the objectives to be served. Accordingly, the Commission proposes
that the introductory sentence of § 39.12(b)(5) read as follows: "A derivatives clearing
organization shall select contract unit sizes and other terms and conditions that maximize
liquidity, facilitate transparency in pricing, promote open access, and allow for effective risk
management." This would clarify that, in establishing product templates under its rules, the
DCO is required to select other terms and conditions in addition to unit size, such as termination
or maturity period, settlement features, and cash flow conventions, to facilitate price
Proposed § 39. 12(b)(7)(i) would establish general standards for the adoption of rules that
establish a time frame for clearing. The DCO would have to coordinate with each SEF and
DCM that lists for trading a product that is cleared by the DCO, in developing rules and
procedures to facilitate prompt and efficient processing of all contracts, agreements, and
For prompt and efficient clearing to occur, the rules, procedures, and operational systems
of the trading platform and the clearinghouse must mesh. Vertically integrated trading and
clearing systems currently process high volumes of transactions quickly and efficiently. The
Commission believes that trading platforms and DCOs under separate control should be able to
coordinate with one another to achieve similar results. The Commission also recognizes that
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there may be issues of connectivity between and among trading platforms and clearinghouses.
The Commission requests comment on how best to facilitate the development of infrastructure,
Proposed paragraph (ii) would require a DCO to have rules that provide that the DCO
will accept for clearing, immediately upon execution, all contracts, agreements, and transactions
that are listed for clearing by the DCO and (A) that are entered into on or subject to the rules of a
SEF or DCM; (B) for which the executing parties have clearing arrangements in place with
clearing members of the DCO; and (C) for which the executing parties identify the DCO as the
intended clearinghouse.
Rules, procedures, and operational systems along these lines currently work well for
many exchange-traded futures. Similar requirements could be applied across multiple exchanges
and clearinghouses for swaps. The parties would need to have clearing arrangements in place
with clearing members in advance of execution. In cases where more than one DCO offered
clearing services, the parties also would need to specify in advance where the trade should be
Proposed paragraph (iii), which governs swaps subject to mandatory clearing, would
require a DCO to have rules that provide that the DCO will accept for clearing, upon submission,
all contracts, agreements, and transactions that are listed for clearing by the DCO and (A) that
are not executed on or subject to the rules of a SEF or DCM; (B) that are subject to mandatory
clearing pursuant to section 2(h) of the CEA; (C) that are submitted by the parties to the DCO, in
accordance with § 23.506 of the Commission's regulations; (D) for which the executing parties
have clearing arrangements in place with clearing members of the DCO; and (E) for which the
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Proposed paragraph (iv) would provide for a longer time frame for clearing swaps not
executed on or subject to the rules of a SEF or DCM and not subject to mandatory clearing. It
would require a DCO to have rules that provide that the DCO will process for clearing, no later
than the close of business on the day of.submission to the DCO, all swaps that are listed for
clearing by the DCO and (A) that are not executed on a SEF or a DCM; (B) that are not subject
to mandatory clearing pursuant to section 2(h) of the CEA; (C) that are submitted by the parties
to the DCO in accordance with proposed § 23.506; (D) for which the executing parties have
clearing arrangements in place with clearing members of the DCO; and (E) for which the
Because the execution of bilateral trades might not be automated and because the parties
to a trade might not decide that they want to clear the trade until some time after execution,
immediate clearing might not be feasible. However, a DCO should provide sufficient clarity
about its participant and product eligibility requirements to enable swap counterparties to
determine whether a bilateral trade would be acceptable to be cleared within one day of
submission.
Proposed § 39 .12(b)(7)(v) would require that DCOs accepting a swap for clearing
provide the counterparties with a definitive written record of the terms of their agreement, which
will serve as a confirmation of the swap. This requirement would facilitate the timely processing
and confirmation of swaps not executed on a SEF or DCM by allowing parties to confirm their
transaction by submitting it to a DCO for clearing. Swaps executed on a SEF or DCM are
29 See 76 FR at 1240.
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documentation (electronic or otherwise) that memorializes the agreement of the counterparties to
all of the terms of a swap.3D By providing for confirmation upon acceptance for clearing, SDs
and MSPs would be able to satisfy proposed § 23.501, which requires timely confirmation of all
swaps.
(e) Proposed §§ 37.702 and 38.601-reciprocal requirements for SEFs and DCMs.
In connection with proposing that a DCO coordinate the development of rules and
procedures with each SEF and DCM that lists for trading a product that is cleared by the DCO,
The Commission previously proposed §§ 37.700 to 703 to implement SEF Core Principle
7 (Financial Integrity of Transactions), pursuant to its rulemaking authority under sections 5h(h)
and 8a(5) of the CEA. 31 Core Principle 7 requires a SEF to "establish and enforce rules and
procedures for ensuring the financial integrity of swaps entered on or through the facilities of the
swap execution facility, including the clearing and settlement of the swaps pursuant to section
2(h)(1) [of the CEA].,,32 As previously proposed, § 37.702(b) would require a SEF to provide
for the financial integrity of its transactions cleared by a DCO by ensuring that the SEF has the
capacity to route transactions to the DCO in a manner acceptable to the DCO for purposes of risk
37. 702(b) as paragraph (b)(1) and add a new paragraph (b )(2) to require the SEF to additionally
17
provide for the financial integrity of cleared transactions by coordinating with each DCO to
which it submits transactions for clearing, in the development of rules and procedures to
facilitate prompt and efficient transaction processing in accordance with the requirements of
Core Principle 11 (Financial Integrity of Transactions) pursuant to its rulemaking authority under
sections 5(d)(1) and Sa(5) of the CEA. 34 Core Principle 11 requires a DCM to "establish and
enforce -(A) rules and procedures for ensuring the financial integrity of transactions entered into
on or through the facilities of the contract market (including the clearance and settlement of the
transactions with a derivatives clearing organization); and (B) rules to ensure-(i) the financial
integrity of any-(I) futures commission merchant; and (II) introducing broker; and (ii) the
transactions executed on or through a DCM, other than transactions in security futures products,
must be cleared through a registered DCO in accordance with the provisions of part 39 of the
Commission's regulations. 36 In this notice, the Commission proposes to renumber this provision
as paragraph (a) of proposed § 3S.601 and add a new paragraph (b) to specifically require the
DCM to coordinate with each DCO to which it submits transactions for clearing, in the
development of DCO rules and procedures to facilitate prompt and efficient transaction
regulations.
3. Solicitation of comments.
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The Commission solicits comment on all aspects of the proposed regulations. It further
requests responses to the following specific questions: Are there any systemic or legal obstacles
to the DCO, SEF, and DCM coordination required under the proposed regulation? Are the
proposed time frames appropriate? Are they operationally feasible? More specifically, for
futures traded on a DCM, rules and procedures are in place under which bunched orders are
accepted for clearing immediately upon execution, with allocation to individual customer
accounts occurring before the end of the day. Are similar procedures operationally feasible for
swaps executed as block trades? What amount of time is necessary for asset managers to
allocate block trades to the individual entities on whose behalf they manage money, prior to the
allocated trades being sent to clearing (i.e. end of day, two hours, etc.)? Should the submission
of block trades to a DCO be treated differently than other trades executed on or subject to the
rules of a SEF or DCM? What is the operational feasibility of same-day clearing for bilateral
(a) establish standards and procedures that are designed to protect and ensure the safety of its
clearing members' funds and assets; (b) hold such funds and assets in a manner by which to
minimize the risk of loss or of delay in the DCO' s access to the assets and funds; and (c) only
invest such funds and assets in instruments with minimal credit, market, and liquidity risks. 38
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The Commission has proposed § 39.15 to establish standards for compliance with Core Principle
2. Newly-proposed regulations.
Commission is proposing a new § 39.15(d) to require a DCO to facilitate the prompt transfer of
customer positions from one clearing member of the DCO to another clearing member of the
Efficient and complete portability of customer positions and the funds related to those
positions is important in both pre-default and post-default scenarios. A DCO should therefore
structure its portability arrangements in a way that facilitates the prompt and efficient transfer of
all or a portion of a customer's positions and funds from one clearing member to one or more
other clearing members. A DCO's rules and procedures should require clearing members to
facilitate the transfer of customer positions and funds upon the customer's request, subject to any
Proposed § 39.15(d) would require a DCO to have rules providing that, upon the request
of a customer and subject to the consent of the receiving clearing member, the DCO will
promptly transfer all or a portion of such customer's portfolio of positions and related funds from
the carrying clearing member of the DCO to another clearing member of the DCO, without
requiring the close-out and re-booking of the positions prior to the requested transfer. The term
"promptly," as used in this provision is intended to mean as soon as possible and within a
reasonable period oftime. Based on current futures industry standards, this time frame is
39 See 76 FR at 3723.
40 In connection with the proposed addition of new paragraph (d), the Commission also proposes to renumber
previously proposed paragraph (d) as paragraph (e).
20
typically no more than two business days. The requirement that a DCO not require close-out and
re-booking of positions eliminates a source of unnecessary delay and market disruption, and
conforms with current futures industry practice. 41 The Commission is unaware of any reason
that the transfer of cleared swaps positions cannot be accomplished by means of the same
3. Solicitation of comments.
The Commission requests comment on whether the use of the term "promptly" provides
adequate guidance or whether another descriptive term or phrase, such as "within a reasonable
period of time" or "as soon as practicable" would better convey the intended meaning. The
Commission is not proposing that a specific time frame be included in § 39 .1S(d) because as
technology evolves, it is likely that the transfer of customer positions and related funds can be
accomplished more quickly and with greater operational efficiency. The Commission requests
comment on the proposed time frame and possible alternative standards that could be applied.
As noted above, the Commission believes that the transfer of cleared customer swap
positions can be processed in the same manner as futures positions. The Commission requests
comment on whether there are distinctions between futures and cleared swaps positions that
would require a different type of processing such that the cleared swaps positions would have to
be closed out and re-booked prior to transfer from the carrying clearing member to another
clearing member.
41 See, ~ National Futures Association Rule 2-27 "Transfer of Customer Accounts" (requiring that in response
to a customer's request to transfer its account, the carrying member must confirm the account balances and
positions to the receiving member and then effect the requested transfer); and Chicago Mercantile Exchange Rule
853 "Transfer of Trades" (permitting existing trades to be transferred either on the books of a clearing member or
from one clearing member to another clearing member provided 1. the transfer merely constitutes a change from
one account to another account where the underlying beneficial ownership in the accounts remains the same; or 2.
an error has been made in the clearing of a trade and the error is discovered and the transfer is completed within two
business days after the trade date).
21
The proposed regulation places an obligation on the DCO to promptly transfer customer
positions and related funds, and the Commission requests comment on whether the regulation
also should require that a DCO adopt rules that would require its clearing members to facilitate
The Regulatory Flexibility Act (RF A) requires that agencies consider whether the
regulations they propose will have a significant economic impact on a substantial number of
small entities. 42 The Commission previously has established certain definitions of "small
entities" to be used in evaluating the impact of its regulations on small entities in accordance
with the RF A. 43 The proposed regulations would affect SDs and MSPs.
SDs and MSPs are new categories of registrants. Accordingly, the Commission has not
previously addressed the question of whether such persons are, in fact, small entities for purposes
of the RF A. The Commission previously has determined, however, that futures commission
merchants (FCMs) should not be considered to be small entities for purposes of the RFA.44 The
Commission's determination was based, in part, upon the obligation of FCMs to meet the
customers' segregated funds and protect the financial condition of FCMs generally.45 Like
FCMs, SDs will be subject to minimum capital and margin requirements and are expected to
22
comprise the largest global financial firms. The Commission is required to exempt from SD
registration any entities that engage in a de minimis level of swaps dealing in connection with
transactions with or on behalf of customers. The Commission anticipates that this exemption
would tend to exclude small entities from registration. Accordingly, for purposes of the RF A for
this rulemaking, the Commission is hereby proposing that SDs not be considered "small entities"
for essentially the same reasons that FCMs have previously been determined not to be small
entities and in light of the exemption from the definition of SD for those engaging in a de
The Commission also has previously determined that large traders are not "small entities"
for RF A purposes. 46 In that determination, the Commission considered that a large trading
position was indicative of the size of the business. MSPs, by statutory definition, maintain
substantial positions in swaps or maintain outstanding swap positions that create substantial
counterparty exposure that could have serious adverse effects on the financial stability of the
United States banking system or financial markets. Accordingly, for purposes of the RFA for
this rulemaking, the Commission is hereby proposing that MSPs not be considered "small
entities" for essentially the same reasons that large traders have previously been determined not
to be small entities.
regulation. Specifically, the Commission is proposing these regulations to comply with the
Dodd-Frank Act, the aim of which is to reduce systemic risk presented by SDs and MSPs
through comprehensive regulation. The Commission does not believe that there are regulatory
alternatives to those being proposed that would be consistent with the statutory mandate.
46 Id. at 18620.
23
Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C.
605(b) that the proposed regulations will not have a significant economic impact on a substantial
The Commission invites the public to comment on whether SDs and MSPs should be
As noted above, the RF A requires that agencies consider whether the regulations they
propose will have a significant economic impact on a substantial number of small entities. The
evaluating the impact of its regulations on small entities in accordance with the RF A.
The regulations adopted herein will affect SEFs. While SEFs are new entities to be
regulated by the Commission pursuant to the Dodd-Frank Act, in a recent rulemaking proposal,47
the Commission proposed that SEFs should not be considered as small entities for the purpose of
the RF A. The Dodd-Frank Act defines a SEF to mean "a trading system or platform in which
multiple participants have the ability to execute or trade swaps by accepting bids and offers made
by multiple participants in the facility or system, through any means of interstate commerce,
including any trading facility, that - (A) facilitates the execution of swaps between persons; and
In such rulemaking, the Commission proposed that SEFs not be considered to be "small
entities" for essentially the same reasons that DCMs and DCOs have previously been determined
not to be small entities. These reasons include the fact that the Commission designates a DCM
24
or registers a DCO only when it meets specific criteria including the expenditure of sufficient
Commission will register an entity as a SEF only after it has met specific criteria including the
program. 49 Once registered, a SEF will be required to comply with the additional requirements
set forth in the final form of the proposed Part 37 rulemaking. 5o Under such rulemaking, the
Commission proposed that SEFs should also not be considered small entities based on, among
other things, the central role SEFs will play in the national regulatory scheme overseeing the
trading of swaps. 51 Not only will SEFs playa vital role in the national economy, but they will be
subject to Commission oversight with statutory duties to enforce the regulations adopted by their
Accordingly, the Commission does not expect the regulations, as proposed herein, to
have a significant economic impact on a substantial number of small entities. Therefore, the
Chairman, on behalf of the Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the
proposed regulations will not have a significant economic impact on a substantial number of
small entities.
The Commission invites the public to comment on whether SEFs should be considered
The regulations proposed by the Commission will affect DCMs and DCOs (some of
which will be designated as systemically important DCOs). As noted above, the Commission
49 See 76 FR 1214.
50 Id.
5l Id. at 1235.
25
has previously established certain definitions of "small entities" to be used by the Commission in
evaluating the impact of its regulations on small entities in accordance with the RF A. The
Commission has previously determined that DCMs and DCOs are not small entities for the
certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations will not have a significant
The Paperwork Reduction Act (PRA)53 imposes certain requirements on Federal agencies
in connection with their conducting or sponsoring any collection of information as defined by the
PRA. Under the PRA, an agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently valid control number from
the Office of Management and Budget (OMB). The Commission believes that these proposed
regulations will not impose any new information collection requirements that require approval of
C. Cost-Benefit Analysis.
Section 15(a) of the CEA requires the Commission to consider the costs and benefits of
its actions before issuing a rulemaking under the CEA. By its terms, Section 15(a) does not
require the Commission to quantify the costs and benefits of a regulation or to determine whether
the benefits of the rulemaking outweigh its costs; rather, it requires that the Commission
52 See 47 FR 18618, 18621, Apr. 30, 1982 (DCM detennination); 66 FR 45605,45609, Aug. 29, 2001 (DCO
detenninati on).
53 44 U.S.C. 3501 et seq.
26
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; (3) price
discovery; (4) sound risk management practices; and (5) other public interest considerations.
The Commission may in its discretion give greater weight to anyone of the five enumerated
areas and could in its discretion determine that, notwithstanding its costs, a particular regulation
is necessary or appropriate to protect the public interest or to effectuate any of the provisions or
Summary of proposed requirements. The proposed regulations would establish the time
frame for SDs, MSPs, FCMs, DCMs, and SEFs to submit contracts, agreements, or transactions
to a DCO for clearing. The proposed regulations would implement new section 4s(i) of the CEA
by establishing standards for SDs and MSPs related to the timely processing and clearing of
swaps. The proposed regulations also would implement SEF Core Principle 7 (Financial
requiring coordination with DCOs in the development of rules and procedures to facilitate
clearing. Additionally, the proposed regulations would facilitate compliance with DCO Core
Principle C (Participant and Product Eligibility) in connection with the prompt and efficient
processing of all contracts, agreements, and transactions submitted for clearing. Finally, the
proposed regulations would implement DCO Core Principle F (Treatment of Funds), requiring a
DCO, upon customer request, to promptly transfer customer positions and related funds from one
clearing member to another, without requiring the close-out and re-booking of the positions.
Costs. The Commission has determined that the costs borne by SDs, MSPs, FCMs,
SEFs, DCMs, and DCOs to implement the new timing requirements for processing and clearing
27
positions and for transferring customer positions and related funds, may be limited and far
outweighed by the accrual of benefits to the financial system as a result of the regulations'
implementation. Indeed, as discussed in Section I.B.2., the timely transfer of futures positions
and funds is currently practiced; thus, the additional costs of similar processes for swaps may not
be too significant. Rather, timely transfers of positions and funds between clearing members
would reduce economic and operational obstacles. Moreover, the Commission has determined
that the costs of implementing new timing requirements for clearing would not be significantly
burdensome to a DCO given that immediate processing and clearing of futures contracts is the
current industry standard. Furthermore, the clearing delays in the swaps market (as discussed in
Sections I.B.1, above) creates a credit risk because the value of position may change between
execution and novation, thereby allowing financial exposure to accumulate in the absence of
daily mark-to-market, and additionally can have negative effects on liquidity and the market's
Benefits. The Commission has determined that the benefits of the proposed regulations
are considerable. Through this proposed rulemaking, market access will be expanded by
requiring and establishing uniform standards for, prompt processing and clearing of swaps
eligible for clearing by DCOs. Other benefits of timely clearing include the promotion of
centralized trading and clearing; increased financial and legal certainty; and the timely notice of
information so that parties and market participants can gauge risk exposure, liquidity, and market
integrity. Timely clearing increases liquidity, enhances price discovery for traders, and reduces
risk to markets by informing market participants of margin concerns and whether safeguards
should be triggered. Significantly, the Commission notes that these regulations would aid
28
clearing of swaps. The proposed new regulation regarding a DCO's timely transfer of swaps
positions and related funds would benefit market participants by eliminating economic 01'
standardization of swaps clearing and procedures for customer account transfer will be more akin
to valuable practices used in the futures market. The Commission believes it is prudent to
List of Subjects
17 CFR Part 23
17 CFR Part 37
Swaps, Swap execution facilities, Registration application, Registered entities, Reporting and
recordkeeping requirements.
17 CFR Part 38
17 CFR Part 39
In light of the foregoing, the Commission hereby proposes to amend parts 23,37,38, and 39
29
AUTHORITY: 7 U.S.C. la, 2,6, 6a, 6b, 6b-1, 6c, 6p, 61', 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a,
18, 19,21.
2. Revise the table of contents for part 23, subpart I to read as follows:
Sec.
23.500 Definitions.
(a) Swap processing. (1) Each swap dealer and major swap participant shall ensure that it
has the capacity to route swap transactions not executed on a swap execution facility or
(2) Each swap dealer and major swap participant shall coordinate with each derivatives
clearing organization to which the swap dealer, major swap participant, or its clearing member,
submits transactions for clearing, to facilitate prompt and efficient swap transaction processing in
30
(b) Swap clearing. With respect to each swap that is not executed on a swap execution
facility or a designated contract market, each swap dealer and major swap pmiicipant shall:
(1) If such swap is subject to a mandatory clearing requirement pursuant to section 2(h)(1) of
the Act and an exception pursuant to 2(h)(7) is not applicable, submit such swap for clearing to a
swap, but no later than the close of business on the day of execution; or
(2) If such swap is not subject to a mandatory clearing requirement pursuant to section
2(h)(1) of the Act but is accepted for clearing by any derivatives clearing organization and the
swap dealer or major swap pmiicipant and its counterpmiy agree that such swap will be
submitted for clearing, submit such swap for clearing not later than the next business day after
AUTHORITY: 7 U.S.C. la, 2,5,6, 6c, 7, 7a-2, 7b-3 and 12a, as amended by the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.
A swap execution facility must provide for the financial integrity of its transactions:
(a) [Reserved.]
31
(1) By ensuring that the swap execution facility has the capacity to route transactions to the
transactions for clearing, in the development of rules and procedures to facilitate prompt and
chapter.
(c) [Reserved.]
(d) [Reserved.]
AUTHORITY: 7 U.S.C. la, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j, 6k, 61, 6m, 6n, 7, 7a-2, 7b, 7b-
1, 7b-3, 8,9, 15, and 21, as amended by the Dodd-Frank Wall Street Reform and Consumer
(a) Transactions executed on or through the designated contract market, other than
derivatives clearing organization, in accordance with the provisions of part 39 of this chapter.
(b) A designated contract market must coordinate with each derivatives clearing
organization to which it submits transactions for clearing, in the development of rules and
32
procedures to facilitate prompt and efficient transaction processing in accordance with the
AUTHORITY: 7 USC la, 2,5,6, 6d, 7a-l, 7a-2, and 7b as amended by the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.
(a) [Reserved.]
(b)(1) [Reserved.]
(2) A derivatives clearing organization shall adopt rules providing that all swaps with the
same terms and conditions, as defined by templates established under derivatives clearing
organization rules, submitted to the derivatives clearing organization for clearing are
economically equivalent within the derivatives clearing organization and may be offset with each
swap executed bilaterally or on or subj ect to the rules of an unaffiliated swap execution facility
(4) A derivatives clearing organization shall not require that one of the original executing
parties must be a clearing member in order for a contract, agreement, or transaction to be eligible
for clearing.
33
(5) A derivatives clearing organization shall select contract unit sizes and other terms and
conditions that maximize liquidity, facilitate transparency in pricing, promote open access, and
allow for effective risk management. To the extent appropriate to fmiher these objectives, a
derivatives clearing organization shall select contract units for clearing purposes that are smaller
than the contract units in which trades submitted for clearing were executed.
(6) A derivatives clearing organization that clears swaps shall have rules providing that,
(ii) The original swap is replaced by equal and opposite swaps between clearing members
(iii) All terms of the cleared swaps must conform to templates established under derivatives
(iv) Ifa swap is cleared by a clearing member on behalf of a customer, all terms of the swap,
as carried in the customer account on the books of the clearing member, must conform to the
terms of the cleared swap established under the derivatives clearing organization's rules.
(7) Time frame for clearing. (i) General. Each derivatives clearing organization shall
coordinate with each swap execution facility and designated contract market that lists for trading
a product that is cleared by the derivatives clearing organization, in developing rules and
procedures to facilitate prompt and efficient processing of all contracts, agreements, and
designated contract market. A derivatives clearing organization shall have rules that provide that
the derivatives clearing organization will accept for clearing, immediately upon execution, all
34
contracts, agreements, and transactions that are listed for clearing by the derivatives clearing
organization and
(A) That are entered into on a swap execution facility or designated contract market;
(B) For which the executing parties have clearing arrangements in place with clearing
(C) For which the executing parties identify the derivatives clearing organization as the
intended clearinghouse.
(iii) Swaps not executed on or subject to the rules of a swap execution facility or a
organization shall have rules that provide that the derivatives clearing organization will accept
for clearing, upon submission to the derivatives clearing organization, all swaps that are listed for
(A) That are not executed on a swap execution facility or a designated contract market;
(B) That are subject to mandatory clearing pursuant to section 2(h) of the Act;
(C) That are submitted by the parties to the derivatives clearing organization, in accordance
(D) For which the executing parties have clearing arrangements in place with clearing
(E) For which the executing parties identify the derivatives clearing organization as the
intended clearinghouse.
(iv) Swaps not executed on or subject to the rules of a swap execution facility or a
designated contract market and not subject to mandatory clearing. A derivatives clearing
organization shall have rules that provide that the derivatives clearing organization will accept
35
for clearing, no later than the close of business on the day of submission to the derivatives
clearing organization, all swaps that are listed for clearing by the derivatives clearing
organization and
(A) That are not executed on a swap execution facility or a designated contract market;
(B) That are not subject to mandatory clearing pursuant to section 2(h) of the Act;
(C) That are submitted by the parties to the derivatives clearing organization, in accordance
(D) For which the executing parties have clearing arrangements in place with clearing
(E) For which the executing parties identify the derivatives clearing organization as the
intended clearinghouse.
(v) All swaps not executed on a swap execution facility or a designated contract market and
submitted for clearing. A derivatives clearing organization shall have rules that provide that all
swaps submitted to the derivatives clearing organization for clearing shall include written
documentation that memorializes all of the terms of the transaction and legally supersedes any
previous agreement. The confirmation of all terms of the transaction shall take place at the same
(a)-(c) [Reserved.]
(d) Transfer of customer positions. A derivatives clearing organization shall have rules
providing that, upon the request of a customer and subject to the consent of the receiving
clearing member, the derivatives clearing organization will promptly transfer all or a portion of
36
such customer's portfolio of positions and related funds from the carrying clearing member of
the derivatives clearing organization to another clearing member of the derivatives clearing
organization, without requiring the close-out and re-booking of the positions prior to the
requested transfer.
(e) Permitted investments. Funds and assets belonging to clearing members and their
customers that are invested by a derivatives clearing organization shall be held in instruments
with minimal credit, market, and liquidity risks. Any investment of customer funds or assets by
a derivatives clearing organization shall comply with § 1.25 of this part, as if all such funds and
assets comprise customer funds subject to segregation pursuant to section 4d(a) of the Act and
Ct·
David A. Stawick,
37
Appendices to Requirements for Processing, Clearing and Transfer of Customer Positions--
NOTE: The following appendices will not appear in the Code of Federal Regulations
On this matter, Chairman Gensler and Commissioners Dunn, Sommers, Chilton and O'Malia
voted in the affirmative; no Commissioner voted in the negative.
I support the proposed rulemaking regarding straight-though processing because it furthers the
goal of expanding access to and strengthening the financial integrity of the swap markets. These
proposed regulations would require and establish uniform standards for prompt processing,
submission and acceptance for clearing of swaps eligible for clearing. Such uniform standards,
similar to the practices in the futures markets, lower risk because they allow market participants
to get the prompt benefit of clearing rather than having to first enter into a bilateral transaction
In addition, I support the requirement for prompt and efficient transfer of customer positions
clearinghouse, upon a customer's request. This would promote efficiency and avoid unnecessary
delay and market disruption. Furthermore, users of derivatives could get the benefit of greater
38