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					                                                                       Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules                                           81519

                                                  System, which describes the application                 List of Subjects in 14 CFR Part 71:                     CFTC) is proposing regulations to
                                                  procedure.                                                Airspace, Incorporation by reference,                 implement new statutory provisions
                                                                                                          Navigation (Air).                                       established under Title VII of the Dodd-
                                                  The Proposal
                                                                                                                                                                  Frank Wall Street Reform and Consumer
                                                     The FAA is considering an                            The Proposed Amendment                                  Protection Act (Dodd-Frank Act).
                                                  amendment to Title 14, Code of Federal                    In consideration of the foregoing, the                Section 731 of the Dodd-Frank Act
                                                  Regulations (14 CFR) part 71 to establish               Federal Aviation Administration                         added a new section 4s(i) to the
                                                  Class E airspace at Wolfeboro, NH                       proposes to amend 14 CFR part 71 as                     Commodity Exchange Act (CEA), which
                                                  providing the controlled airspace                       follows:                                                requires the Commission to prescribe
                                                  required to support the new Copter                                                                              standards for swap dealers and major
                                                  RNAV GPS special standard instrument                    PART 71—DESIGNATION OF CLASS A,                         swap participants related to the timely
                                                  approach procedures for Huggins                         B, C, D, AND CLASS E AIRSPACE                           and accurate confirmation, processing,
                                                  Hospital Heliport. Controlled airspace                  AREAS; AIR TRAFFIC SERVICE                              netting, documentation, and valuation
                                                  extending upward from 700 feet above                    ROUTES; AND REPORTING POINTS                            of swaps. The proposed rules would
                                                  the surface is required for IFR                           1. The authority citation for part 71                 establish requirements for swap
                                                  operations within a 6-mile radius of the                continues to read as follows:                           confirmation, portfolio reconciliation,
                                                  point in space coordinates for the                                                                              and portfolio compression for swap
                                                                                                            Authority: 49 U.S.C. 106(g); 40103, 40113,            dealers and major swap participants.
                                                  heliport.                                               40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–
                                                                                                          1963 Comp., p. 389.                                     DATES: Submit comments on or before
                                                     Class E airspace designations are
                                                  published in Paragraph 6005 of FAA                                                                              February 28, 2011.
                                                                                                          § 71.1       [Amended]                                  ADDRESSES: You may submit comments,
                                                  order 7400.9U, dated August 18, 2010,
                                                  and effective September 15, 2010, which                   2. The incorporation by reference in                  identified by RIN number 3038–AC96
                                                  is incorporated by reference in 14 CFR                  14 CFR 71.1 of Federal Aviation                         and Confirmation, Portfolio
                                                  71.1. The Class E airspace designation                  Administration Order 7400.9U,                           Reconciliation, and Portfolio
                                                  listed in this document will be                         Airspace Designations and Reporting                     Compression Requirements for Swap
                                                  published subsequently in the Order.                    Points, dated August 18, 2010, effective                Dealers and Major Swap Participants, by
                                                                                                          September 15, 2010, is amended as                       any of the following methods:
                                                     The FAA has determined that this                     follows:                                                   • Agency Web site, via its Comments
                                                  proposed regulation only involves an                                                                            Online process at http://
                                                  established body of technical                           Paragraph 6005 Class E Airspace Areas
                                                                                                          Extending Upward from 700 Feet or More                  comments.cftc.gov. Follow the
                                                  regulations for which frequent and                                                                              instructions for submitting comments
                                                                                                          Above the Surface of the Earth.
                                                  routine amendments are necessary to                                                                             through the Web site.
                                                  keep them operationally current. It,                    *        *      *      *       *
                                                                                                                                                                     • Mail: David A. Stawick, Secretary of
                                                  therefore, (1) Is not a ‘‘significant                   ANE NH E5 Wolfeboro, NH [New]                           the Commission, Commodity Futures
                                                  regulatory action’’ under Executive                     Huggins Hospital Heliport, NH                           Trading Commission, Three Lafayette
                                                  Order 12866; (2) is not a ‘‘significant                   (Lat. 43°34′56″ N., long. 71°12′06″ W.)               Centre, 1155 21st Street, NW.,
                                                  rule’’ under DOT Regulatory Policies                    Point in Space Coordinates                              Washington, DC 20581.
                                                  and Procedures (44 FR 11034; February                     (Lat. 43°35′15″ N., long. 71°11′19″ W.)
                                                                                                                                                                     • Hand Delivery/Courier: Same as
                                                  26, 1979); and (3) does not warrant                       That airspace extending upward from 700               mail above.
                                                  preparation of a Regulatory Evaluation                  feet above the surface within a 6-mile radius
                                                                                                                                                                     • Federal eRulemaking Portal: http://
                                                  as the anticipated impact is so minimal.                of the Point in Space Coordinates (lat.
                                                                                                          43°35′15″ N., long. 71°11′19″ W.) serving the           www.regulations.gov. Follow the
                                                  Since this is a routine matter that will                                                                        instructions for submitting comments.
                                                                                                          Huggins Hospital Heliport.
                                                  only affect air traffic procedures and air                                                                      Please submit your comments using
                                                                                                            Issued in College Park, Georgia, on
                                                  navigation, it is certified that this                                                                           only one method.
                                                                                                          December 13, 2010.
                                                  proposed rule, when promulgated,                                                                                   All comments must be submitted in
                                                                                                          Mark D. Ward,
                                                  would not have a significant economic                                                                           English, or if not, accompanied by an
                                                  impact on a substantial number of small                 Manager, Operations Support Group, Eastern
                                                                                                          Service Center, Air Traffic Organization.               English translation. Comments will be
                                                  entities under the criteria of the                                                                              posted as received to http://
                                                  Regulatory Flexibility Act.                             [FR Doc. 2010–32581 Filed 12–27–10; 8:45 am]
                                                                                                                                                                  www.cftc.gov. You should submit only
                                                                                                          BILLING CODE 4910–13–P
                                                     The FAA’s authority to issue rules                                                                           information that you wish to make
                                                  regarding aviation safety is found in                                                                           available publicly. If you wish the
                                                  Title 49 of the United States Code.                                                                             Commission to consider information
                                                  Subtitle I, section 106 describes the                   COMMODITY FUTURES TRADING                               that may be exempt from disclosure
                                                  authority of the FAA Administrator.                     COMMISSION                                              under the Freedom of Information Act,
                                                  Subtitle VII, Aviation Programs,                                                                                a petition for confidential treatment of
                                                                                                          17 CFR Part 23
                                                  describes in more detail the scope of the                                                                       the exempt information may be
                                                  agency’s authority. This proposed                       RIN 3038–AC96                                           submitted according to the established
                                                  rulemaking is promulgated under the                                                                             procedures in § 145.9 of the
                                                  authority described in subtitle VII, part               Confirmation, Portfolio Reconciliation,                 Commission’s regulations, 17 CFR
                                                                                                          and Portfolio Compression
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                                                  A, subpart I, section 40103. Under that                                                                         145.9.
                                                  section, the FAA is charged with                        Requirements for Swap Dealers and                          The Commission reserves the right,
                                                  prescribing regulations to assign the use               Major Swap Participants                                 but shall have no obligation, to review,
                                                  of airspace necessary to ensure the                     AGENCY: Commodity Futures Trading                       pre-screen, filter, redact, refuse or
                                                  safety of aircraft and the efficient use of             Commission.                                             remove any or all of your submission
                                                  airspace. This proposed regulation is                   ACTION: Notice of proposed rulemaking.                  from http://www.cftc.gov that it may
                                                  within the scope of that authority as it                                                                        deem to be inappropriate for
                                                  would establish Class E airspace at                     SUMMARY: The Commodity Futures                          publication, such as obscene language.
                                                  Huggins Hospital, Wolfeboro, NH.                        Trading Commission (Commission or                       All submissions that have been redacted


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                                                  81520                Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules

                                                  or removed that contain comments on                     ‘‘governing documentation standards for               maintain, and results in a more accurate
                                                  the merits of the rulemaking will be                    swap dealers and major swap                           expression of market size.
                                                  retained in the public comment file and                 participants.’’ The Commission is                        In the past few years, market
                                                  will be considered as required under the                proposing the regulations on swap                     participants and regulators have paid
                                                  Administrative Procedure Act and other                  confirmation, portfolio reconciliation,               particular attention to the post-trade
                                                  applicable laws, and may be accessible                  and portfolio compression 4 discussed                 processing of swaps. For example,
                                                  under the Freedom of Information Act.                   below, pursuant to the authority granted              operational issues associated with the
                                                  FOR FURTHER INFORMATION CONTACT:                        under sections 4s(h)(1)(D), 4s(h)(3)(D),              over-the-counter (OTC) derivatives
                                                  Sarah E. Josephson, Associate Director,                 4s(i), and 8a(5) of the CEA. 5 The Dodd-              market have been the focus of reports
                                                  202–418–5684, sjosephson@cftc.gov;                      Frank Act requires the Commission to                  and recommendations by the President’s
                                                  Frank N. Fisanich, Special Counsel,                     promulgate these provisions by July 15,               Working Group on Financial Markets
                                                  202–418–5949, ffisanich@cftc.gov; or                    2011.                                                 (PWG).6 In response to the financial
                                                  Jocelyn Partridge, Special Counsel, 202–                   The proposed regulations reflect                   crisis in 2008, the PWG called on the
                                                  418–5926, jpartridge@cftc.gov; Division                 consultation with staff of the following              industry to improve trade matching and
                                                  of Clearing and Intermediary Oversight,                 agencies: (i) The Securities and                      confirmation and to promote portfolio
                                                  Commodity Futures Trading                               Exchange Commission; (ii) the Board of                reconciliation.
                                                  Commission, Three Lafayette Centre,                     Governors of the Federal Reserve                         Since 2005, the Federal Reserve Bank
                                                  1155 21st Street, NW., Washington, DC                   System; (iii) the Office of the                       of New York (FRBNY) has led a
                                                  20581.                                                  Comptroller of the Currency; and (iv)                 targeted, supervisory effort to enhance
                                                  SUPPLEMENTARY INFORMATION:                              the Federal Deposit Insurance                         operational efficiency and performance
                                                                                                          Corporation. Staff from each of these                 in the OTC derivatives market, by
                                                  I. Background                                                                                                 increasing automation in processing and
                                                                                                          agencies has had the opportunity to
                                                     On July 21, 2010, President Obama                    provide oral and/or written comments                  by promoting the timely confirmation of
                                                  signed the Dodd-Frank Act.1 Title VII of                to the proposal, and the proposed                     trades. Known as the OTC Derivatives
                                                  the Dodd-Frank Act 2 amended the                        regulations incorporate elements of the               Supervisors’ Group (ODSG), the FRBNY
                                                  Commodity Exchange Act (CEA) 3 to                       comments provided.                                    leads an on-going effort with OTC
                                                  establish a comprehensive regulatory                                                                          derivatives dealers’ primary supervisors,
                                                  framework to reduce risk, increase                      II. Proposed Regulations                              trade associations, industry utilities,
                                                  transparency, and promote market                           The proposed regulations would                     and private vendors, through which
                                                  integrity within the financial system by,               prescribe standards for the timely and                market participants (including buy-side
                                                  among other things: (1) Providing for the               accurate confirmation of swaps and                    participants) regularly set goals and
                                                  registration and comprehensive                          would require the reconciliation and                  commitments to bring infrastructure,
                                                  regulation of swap dealers and major                    compression of swap portfolios.                       market design, and risk management
                                                  swap participants; (2) imposing clearing                Confirmation, portfolio reconciliation,               improvements to all OTC derivatives
                                                  and trade execution requirements on                     and portfolio compression have been                   asset classes. Over the years, the ODSG
                                                  standardized derivative products; (3)                   recognized as important post-trade                    has expanded its focus from credit
                                                  creating rigorous recordkeeping and                     processing mechanisms for reducing                    derivatives to include interest rate
                                                  real-time reporting regimes; and (4)                    risk and improving operational                        derivatives, equity derivatives, foreign
                                                  enhancing the Commission’s                              efficiency by both current market                     exchange derivatives, and commodity
                                                  rulemaking and enforcement authorities                  participants and their regulators.                    derivatives. Along with this expanded
                                                  with respect to all registered entities                                                                       focus has come increased engagement
                                                  and intermediaries subject to the                          With respect to confirmation, prudent
                                                                                                                                                                with market participants on cross-asset
                                                  Commission’s oversight.                                 practice requires that, after coming to an
                                                                                                                                                                class issues. Specifically, the ODSG
                                                     Section 731 of the Dodd-Frank Act                    agreement on the terms of a transaction,
                                                                                                                                                                encouraged the industry to commit itself
                                                  amends the CEA by adding a new                          parties document the transaction in a
                                                                                                                                                                to a number of reforms, including
                                                  Section 4s, which sets forth a number of                complete and definitive written record
                                                                                                                                                                improved operational performance with
                                                  requirements for swap dealers and                       so there is legal certainty about the
                                                                                                                                                                respect to the OTC derivatives
                                                  major swap participants. Specifically,                  terms of their agreement. Through
                                                                                                                                                                confirmation process, portfolio
                                                  section 4s(i) of the CEA establishes                    portfolio reconciliation, counterparties
                                                                                                                                                                reconciliation, and portfolio
                                                  swap documentation standards for those                  are able to resolve any discrepancies or
                                                                                                                                                                compression. The regulations proposed
                                                  registrants.                                            disputes as early as possible and arrive
                                                                                                                                                                by the Commission would build upon
                                                     Section 4s(i)(1) requires swap dealers               at an understanding of their overall risk
                                                                                                                                                                the ODSG’s work.
                                                  and major swap participants to                          exposure to one another. Portfolio
                                                                                                                                                                   It is important to note at the outset,
                                                  ‘‘conform with such standards as may be                 compression allows for a reduction in
                                                                                                                                                                that the Commission expects that swap
                                                  prescribed by the Commission by rule or                 outstanding trade count and outstanding
                                                                                                                                                                dealers and major swap participants
                                                  regulation that relate to timely and                    gross notional value by replacing
                                                                                                                                                                would be able to comply with each of
                                                  accurate confirmation, processing,                      redundant trades with a smaller number
                                                                                                                                                                the proposed rules by executing a swap
                                                  netting, documentation, and valuation                   of trades and reduced gross notional
                                                                                                                                                                on a swap execution facility (SEF) or on
                                                  of all swaps.’’ Under section 4s(i)(2), the             value. This process reduces operational
                                                                                                                                                                a designated contract market (DCM), or
                                                  Commission is required to adopt rules                   risk and increases operational efficiency
                                                                                                                                                                by clearing the swap through a
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                                                                                                          because there are fewer trades to
                                                                                                                                                                derivatives clearing organization (DCO).
                                                    1 See Dodd-Frank Wall Street Reform and
                                                                                                                                                                For swaps executed on a SEF or a DCM,
                                                  Consumer Protection Act, Public Law 111–203, 124          4 The Commission may propose additional rules
                                                  Stat. 1376 (2010). The text of the Dodd-Frank Act       related to documentation provisions under section
                                                                                                                                                                the SEF or DCM will provide the
                                                  may be accessed at http://www.cftc.gov/                 4s(i) of the CEA.                                     counterparties with a definitive written
                                                  LawRegulation/OTCDERIVATIVES/index.htm.                   5 Section 8a(5) of the CEA authorizes the
                                                    2 Pursuant to Section 701 of the Dodd-Frank Act,
                                                                                                          Commission to promulgate such regulations as, in        6 See, e.g., Press Release, ‘‘President’s Working
                                                  Title VII may be cited as the ‘‘Wall Street             the judgment of the Commission, are reasonably        Group on Financial Markets, Progress Summary on
                                                  Transparency and Accountability Act of 2010.’’          necessary to effectuate any of the provisions or to   OTC Derivatives Operational Improvements’’ (Nov.
                                                    3 7 U.S.C. 1 et seq.                                  accomplish any of the purposes of the CEA.            2008).



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                                                                       Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules                                                       81521

                                                  record of the terms of their agreement,                 A. Swap Confirmation                                   CDS confirmations by 70%, and the
                                                  which will serve as a confirmation of                                                                          number of CDS confirmations
                                                                                                          1. Background
                                                  the swap. Similarly, if a swap is                                                                              outstanding more than 30 days by 85%.
                                                  executed bilaterally, but subsequently                     Over the past several years, OTC                    The industry achieved these targets
                                                  submitted to a DCO for clearing, the                    derivatives market participants and                    largely by moving 80% of total trade
                                                  DCO will require a definitive written                   their regulators have paid particular                  volume in CDS to confirmation on
                                                  record of all terms to the counterparties’              attention to the timely confirmation of                electronic platforms, eliminating
                                                                                                          swaps. The Government Accountability                   backlogs in new trades. Today, over
                                                  agreement prior to novation by the DCO;
                                                                                                          Office (GAO) found that the rapid                      90% of ‘‘electronically eligible’’ 9 CDS
                                                  this too would serve as a confirmation
                                                                                                          expansion of trading volume of swaps,                  trades are confirmed electronically, the
                                                  of the swap.
                                                                                                          such as credit derivatives since 2002,                 majority on the day of execution and up
                                                     When a swap is cleared by a central                  caused stresses on the operational                     to 98% within two days.10
                                                  counterparty, the problems that                         infrastructure of market participants.                    The ODSG has established a
                                                  portfolio reconciliation is designed to                 These stresses in turn caused the                      supervisory goal for all transactions to
                                                  solve (agreement on all terms and the                   participants’ back office systems to fail              be confirmed as soon as possible after
                                                  valuation of the swap) no longer exist                  to confirm the increased volume of                     the time of execution. Ideally, this
                                                  because the clearinghouse (1) requires a                trades for a period of time.7 The GAO                  would mean that there would be a
                                                  definitive written record of all terms of               found that the lack of automation in                   written or electronic document executed
                                                  the swap; and (2) arrives at a settlement               trade processing and the purported                     by the parties to a swap for the purpose
                                                  price for all cleared swaps on a daily                  assignment of positions by transferring                of evidencing all of the terms of the
                                                  basis. Additionally, the Commission is                  parties to third parties without notice to             swap, including the terms of any
                                                  considering a proposed regulation that                  their counterparties were factors                      termination (prior to its scheduled
                                                  would require DCOs to offer portfolio                   contributing to this backlog. If                       maturity date), assignment, novation,
                                                  compression exercises on a regular                      transactions, whether newly executed or                exchange, or similar transfer or
                                                  basis. The proposed rule for swap                       recently transferred to another party, are             conveyance of, or extinguishing of rights
                                                  dealers and major swap participants has                 left unconfirmed, there is no definitive               or obligations.
                                                                                                          written record of the contract terms.                     In the case of electronically processed
                                                  been designed to complement the
                                                                                                          Thus, in the event of a dispute, the                   transactions, all such transactions
                                                  proposed DCO rule.
                                                                                                          terms of the agreement must be                         should be matched and confirmed, at a
                                                     In designing these rules, the                        reconstructed from other evidence, such                minimum, on the same day the trade
                                                  Commission has taken care to minimize                   as e-mail trails or recorded trader                    was executed. For electronically
                                                  the burden on those parties that will not               conversations. This process is                         processed transactions, confirmation
                                                  be registered with the Commission as                    cumbersome and may not be wholly                       typically is effected by a third-party
                                                  swap dealers or major swap                              accurate. Moreover, if purported                       ‘‘matching’’ process. If transactions are
                                                  participants. To the extent that market                 transfers of swaps, in whole or in part,               not confirmed in a timely manner,
                                                  participants believe that additional                    are made without giving notice to the                  backlogs of outstanding unconfirmed
                                                  measures should be taken to reduce the                  remaining parties and obtaining their                  trades develop, increasing risk. Timely
                                                  burden or increase the benefits of                      consent, disputes may arise as to which                and accurate confirmation of
                                                  confirmation, reconciliation, and                       parties are entitled to the benefits and               transactions is critical for all
                                                  compression for the swaps market, the                   subject to the burdens of the transaction.             downstream operational and risk
                                                  Commission welcomes all comments.                          As the work of the ODSG                             management processes, including the
                                                                                                          demonstrates, the industry is capable of               correct calculation of cash flows and
                                                     The Commission requests comment                      swift movement to contemporaneous                      discharge of settlement obligations as
                                                  on all aspects of proposed §§ 23.500                    execution and confirmation. A large                    well as accurate measurement of
                                                  (definitions), 23.501 (confirmation),                   back-log of unexecuted confirmations in                counterparty credit exposures. Timely
                                                  23.502 (portfolio reconciliation), and                  the credit default swap (CDS) market                   confirmation also allows any rejections,
                                                  23.503 (portfolio compression), as well                 created by prolonged negotiations and                  exceptions, and/or discrepancies to be
                                                  as comment on the specific provisions                   inadequate confirmation procedures                     identified and resolved more quickly.
                                                  and issues highlighted in the discussion                were the subject of the first industry                    Another ODSG objective is a
                                                  below. The Commission further requests                  commitments made by participating                      marketplace that electronically
                                                  comment on an appropriate effective                     dealers to ODSG.8 In October 2005, the                 processes as many transactions as
                                                  date for final regulations, including                   participating dealers committed to                     possible in as many parts of the
                                                  comment on whether it would be                          reduce by 30% the number of                            processing life cycle as possible, but
                                                  appropriate to have staggered or delayed                confirmations outstanding more than 30                 particularly in the ‘‘upstream’’ parts of
                                                  effective dates for some regulations                    days within four months. In March                      the life cycle, where transaction
                                                  based on the nature or characteristics of               2006, the dealers committed to reduce                  information is first entered into the
                                                  the activities or entities to which they                the number of outstanding                              system (trade capture). To achieve this
                                                  apply. The Commission recognizes that                   confirmations by 70% by June 30, 2006.                 objective, as many transactions as
                                                  there will be differences in the size and               By September 2006, the industry had                    possible and practicable should be
                                                  scope of the business of particular swap                reduced the number of all outstanding                  executed on electronic platforms, such
emcdonald on DSK2BSOYB1PROD with PROPOSALS




                                                  dealers and major swap participants.
                                                                                                             7 U.S. Government Accountability Office, ‘‘Credit      9 It remains unclear precisely how much of the
                                                  Therefore, comments are solicited on
                                                                                                          Derivatives: Confirmation Backlogs Increased           total CDS market is not ‘‘electronically eligible,’’ as
                                                  whether certain provisions of the                       Dealers’ Operational Risks, But Were Successfully      eligibility is determined by the OTC derivatives
                                                  proposed regulations should be                          Addressed After Joint Regulatory Action,’’ GAO–07–     market participants.
                                                  modified or adjusted to reflect the                     716 (2007) at pages 3–4.                                  10 See March 1, 2010 Summary of OTC
                                                                                                             8 See October 4, 2005 industry commitment letter    Derivatives Commitments provided to the Federal
                                                  differences among swap dealers and                      to the Federal Reserve Bank of New York, available     Reserve Bank of New York, available at http://
                                                  major swap participants or differences                  at http://www.newyorkfed.org/newsevents/               www.newyorkfed.org/newsevents/news/markets/
                                                  among asset classes.                                    news_archive/markets/2005/an050915.html.               2010/100301_table.pdf.



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                                                  81522                Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules

                                                  as SEFs, in order to approach the ideal                 after the transaction occurs. This                      swap acknowledgment and
                                                  of ‘‘straight-through processing.’’                     approach to documenting ‘‘life cycle                    confirmation vary depending upon
                                                  Otherwise, transactions should be keyed                 event data’’ is consistent with the                     whether transactions are electronically
                                                  into electronic systems as soon as                      Commission’s proposed rules for                         executed or electronically processed.
                                                  possible after execution.                               reporting swap data to a swap data                      Under proposed § 23.501(a)(1), all swap
                                                                                                          repository.12                                           dealers and major swap participants
                                                  2. Proposed Confirmation Rule                              The timely and accurate confirmation                 entering into swap transactions with
                                                     To promote the efficient operation of                of all swaps and life cycle events for                  other swap dealers or major swap
                                                  the swap market, and to facilitate                      existing swaps would ensure that the                    participants would be required to
                                                  market participants’ overall risk                       parties know the terms of their executed                confirm their swap transactions
                                                  management, the Commission is                           transactions and the identities of their                according to the following timeframe:
                                                  proposing confirmation § 23.501.                        counterparties at all times. Confirming                    • For any swap transaction that has
                                                     For the purposes of proposed                         all swap transactions on the day of                     been executed and processed
                                                  § 23.501, proposed § 23.500 would                       execution should be standard for all                    electronically, within 15 minutes of
                                                  provide certain critical definitions                    market participants. However, the                       execution;
                                                  pertaining to confirmation. An                          Commission recognizes some entities                        • For any swap transaction that is not
                                                  acknowledgment would be defined as a                    that will not be registered as swap                     electronically executed, but that will be
                                                  written or electronic record of all the                 dealers or major swap participants may                  processed electronically, within 30
                                                  terms of a swap signed and sent by one                  not have the operational capacity to                    minutes of execution; or
                                                  party to another. When one party                        confirm their swap transactions as                         • For any swap transaction that
                                                  acknowledges the terms of a swap and                    quickly as swap dealers and major swap                  cannot be processed electronically by
                                                  its counterparty verifies it, the result is             participants. Accordingly, the                          the swap dealer or major swap
                                                  the issuance of a confirmation that                     Commission is proposing a bifurcated                    participant, within the same calendar
                                                  reflects the terms of the swap between                  approach for confirmations. Swap                        day as execution.
                                                  the parties. A confirmation thus would                  dealers and major swap participants                        Under proposed § 23.501(a)(2), swap
                                                  be defined as a written or electronic                   entering into swap transactions with                    dealers and major swap participants
                                                  record of a swap that has been signed                   other swap dealers or major swap                        entering into swap transactions with
                                                  and sent by one party and verified by                   participants would be required to obtain                counterparties that are not swap dealers
                                                  the other where that record has been                    a confirmation on the same calendar day                 or major swap participants would be
                                                  manually, electronically, or by some                    as execution (i.e., no later than T+0).                 required to send an acknowledgment of
                                                  other legally equivalent means, signed                     On the other hand, swap dealers and                  each swap transaction according to the
                                                  by the receiving counterparty. Finally,                 major swap participants entering into                   following timeframe:
                                                                                                          swap transactions with counterparties                      • For any swap transaction that has
                                                  proposed § 23.500 would define
                                                                                                          that are not swap dealers or major swap                 been executed and processed
                                                  execution to be a legally-binding oral,
                                                                                                          participants would be required to send                  electronically, within 15 minutes of
                                                  written, or electronic agreement by the
                                                                                                          an acknowledgment for each swap on                      execution;
                                                  parties. For the purposes of the
                                                                                                          the same calendar day as execution (i.e.,                  • For any swap transaction that is not
                                                  confirmation rule, the term swap
                                                                                                          no later than T+0). Swap dealers and                    executed electronically, but that will be
                                                  transaction is defined to include any
                                                                                                          major swap participants would then                      processed electronically, within 30
                                                  event that would result in a new swap
                                                                                                          have policies and procedures in place to                minutes after execution; or
                                                  or a change in the terms of a swap,                                                                                • For any swap transaction that
                                                  including execution, termination,                       confirm the swap with financial entities
                                                                                                          as defined in proposed § 23.500 13 on                   cannot be processed electronically by
                                                  assignment, novation, exchange,                                                                                 the swap dealer or major swap
                                                                                                          the same calendar day as execution and
                                                  transfer, amendment, conveyance, or                                                                             participant, within the same calendar
                                                                                                          with all other entities not later than the
                                                  extinguishing of rights or obligations                                                                          day as execution.
                                                                                                          next business day following execution.
                                                  under a swap.                                              The Commission also is proposing                        For those swap transactions entered
                                                     With regard to both acknowledgments                  that the times prescribed for achieving                 into with counterparties that are not
                                                  and confirmations, the Commission                                                                               swap dealers or major swap
                                                  intends that all the terms of a swap                      12 The Notice of Proposed Rulemaking for Swap         participants, under proposed
                                                  transaction be provided for                             Data Recordkeeping and Reporting Requirements is        § 23.501(a)(3), swap dealers and major
                                                  acknowledgment and confirmation. The                    available on the Commission’s Web site: http://         swap participants would be required to
                                                  objective is that parties have full written             comments.cftc.gov/FederalRegister/Proposed.aspx.
                                                                                                            13 This definition is taken from the end user         establish written policies and
                                                  agreement on all terms as soon as                       exception to the clearing requirement under section     procedures reasonably designed to
                                                  practicable after execution and also                    2(h)(7)(C)(i) of the CEA. The term financial entity     ensure confirmation with financial
                                                  upon any ownership event during the                     includes the following eight entities: (i) A swap       entities on the same calendar day as
                                                  life of the swap. Such life cycle events                dealer; (ii) a security-based swap dealer; (iii) a
                                                                                                          major swap participant; (iv) a major security-based     execution and with all other entities by
                                                  would include any termination (prior to                 swap participant; (v) a commodity pool as defined       the next business day after the swap
                                                  the scheduled maturity date of the                      in section 1a(10) of the CEA; (vi) a private fund as    transaction is executed. These
                                                  swap), assignment, novation, exchange,                  defined in section 202(a) of the Investment Advisers    procedures must include a requirement
                                                  transfer, amendment, or conveyance of,                  Act of 1940 (15 U.S.C. 80–b–2(a)); (vii) an employee
                                                                                                          benefit plan as defined in paragraphs (3) and (32)      that, prior to entering into any swap
                                                  or extinguishing of rights or obligations
emcdonald on DSK2BSOYB1PROD with PROPOSALS




                                                                                                          of section 3 of the Employee Retirement Income          transaction, the swap dealer or major
                                                  under the swap.11 For each of these                     Security Act of 1974 (29 U.S.C. 1002); or (viii) a      swap participant furnish to a
                                                  events, the parties should have written                 person predominantly engaged in activities that are
                                                                                                                                                                  prospective counterparty, or receive
                                                  documentation evidencing all the terms                  in the business of banking or financial in nature, as
                                                                                                          defined in section 4(k) of the Bank Holding             from a prospective counterparty, a draft
                                                  of the transaction, as soon as possible                 Company Act of 1956. See 7 U.S.C. 2(h)(7)(C)(i).        acknowledgment specifying all terms of
                                                                                                          The definition would include the statutory              the swap transaction other than pricing
                                                    11 Life cycle events would also include corporate     exclusion and limitation as contained in section
                                                  actions affecting a security or securities on which     2(h)(7)(C) and also would include any Commission
                                                                                                                                                                  and terms to be definitively agreed to at
                                                  the swap is based (e.g., a merger, dividend, stock      regulations promulgated pursuant to the statutory       execution. As is currently the custom in
                                                  split or bankruptcy).                                   section.                                                many swap markets, including credit


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                                                                       Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules                                                   81523

                                                  and equity derivative markets, the                      quickly, particularly for transactions                  • Should clearing a swap through a
                                                  parties may rely on a standard                          that are executed or processed                        DCO be deemed to satisfy the
                                                  confirmation agreement.                                 electronically?                                       confirmation requirement?
                                                     Under proposed § 23.501(b), a swap                      • Does the proposed rule provide                     • Should the terms calendar day and
                                                  dealer or major swap participant would                  sufficient time for swap dealers and                  business day be further defined and has
                                                  be required to keep records regarding                   major swap participants to provide                    the rule properly accounted for
                                                  the processing of swap                                  swap acknowledgments to their                         counterparties in different time zones
                                                  acknowledgments and confirmations.                      counterparties?                                       executing swaps?
                                                  These records would include the time                       • Are there swap transactions for                  B. Swap Portfolio Reconciliation
                                                  and date of transmission or receipt of                  which all of the terms required to be
                                                  any acknowledgment or confirmation,                     included on an acknowledgment or in a                 1. Background
                                                  the length of time between transmission                 confirmation would not be known on                       Section 4s(i) of the CEA directs the
                                                  of any acknowledgment to a                              the same calendar day as execution? If                Commission to prescribe regulations for
                                                  counterparty and receipt of the signed                  so, please describe these swap                        the timely and accurate confirmation,
                                                  confirmation, and the length of time                    transactions and include the terms that               processing, documentation, and
                                                  between execution and confirmation of                   would not be known on the same                        valuation of all swaps entered into by
                                                  the swap.                                               calendar day as execution, as well as the             swap dealers and major swap
                                                     In order to retain flexibility for all               reason these terms would not be known.                participants. Disputes related to
                                                  market participants, the proposed rules                                                                       confirming the terms of a swap, as well
                                                                                                             • Is it necessary to clarify further that
                                                  do not prescribe a particular venue or                                                                        as swap valuation disputes,14 have long
                                                                                                          the confirmation rule would apply to
                                                  platform for confirmation. As noted                                                                           been recognized as a significant problem
                                                                                                          life cycle events, such as termination,
                                                  above, currently many swap                                                                                    in the OTC derivatives market. Portfolio
                                                                                                          assignment, novation, exchange,
                                                  transactions are electronically processed                                                                     reconciliation is considered an effective
                                                                                                          transfer, amendment, or conveyance?
                                                  by third-party ‘‘matching’’ services.                                                                         means of identifying and resolving these
                                                  While the Commission encourages the                        • Are there other post-execution
                                                                                                          events for which a confirmation should                disputes. Specifically, portfolio
                                                  continued use and expansion of these                                                                          reconciliation is a post-execution
                                                  services, the approach taken in the                     be executed?
                                                                                                                                                                processing and risk management
                                                  proposed rule would allow parties the                      • Should counterparties be permitted
                                                                                                                                                                technique that is designed to:
                                                  ability to confirm bilaterally through                  to agree expressly that certain life cycle
                                                                                                                                                                (1) Identify and resolve discrepancies
                                                  whatever means they select, so long as                  events (such as assignment of payable
                                                                                                                                                                between the counterparties with regard
                                                  they are able to meet the schedule laid                 rights), do not require subsequent
                                                                                                                                                                to the terms of a swap either
                                                  out in the rule.                                        confirmations? Are there life cycle
                                                                                                                                                                immediately after execution or during
                                                     In a similar effort to retain flexibility,           events that can be carved out of the rule             the life of the swap; (2) ensure effective
                                                  at this time, the Commission is not                     while still achieving the purpose of the              confirmation of all the terms of the
                                                  prescribing the acknowledgment or                       rule? Should more time be permitted for               swap; and (3) identify and resolve
                                                  confirmation documentation that market                  confirmation of certain life cycle events,            discrepancies between the
                                                  participants must use. The Commission                   such as transfers resulting from a                    counterparties regarding the valuation
                                                  encourages the use of master                            merger, consolidation, or transfer of all             of the swap. In some instances, portfolio
                                                  confirmation agreements and other                       assets to another entity?                             reconciliation also may facilitate the
                                                  standardized documentation that has                        • Should the Commission require that               identification and resolution of
                                                  been developed by the industry in an                    electronic matching services or                       discrepancies between the
                                                  effort to reduce confirmation backlogs,                 confirmation platforms be used where                  counterparties with regard to valuations
                                                  among other things. However, the most                   reasonably practicable?                               of collateral held as margin.
                                                  critical aspect of the confirmation rule                   • Does the term ‘‘processed                           The Commission recognizes that the
                                                  is that all the terms of the swap are                   electronically’’ require more                         industry has made significant progress
                                                  agreed to in writing and in a timely                    clarification? If so, what definition                 in adopting the use of portfolio
                                                  manner.                                                 would be effective and flexible enough                reconciliation to decrease the number of
                                                     The proposed rules would apply to all                to accommodate future market                          swap disputes.15 In December 2008, the
                                                  new swaps and to all swap transactions,                 innovation?                                           ODSG’s group of 14 major dealers
                                                  as that term is defined in the rules,                      • Should the Commission require that               committed to execute daily portfolio
                                                  entered into after the effective date of                all swaps be processed electronically?                reconciliations for collateralized
                                                  the regulation.                                            • Are there circumstances where                    portfolios in excess of 500 trades
                                                                                                          swap dealers and major swap                           between participating dealers by June of
                                                  3. Comments Requested
                                                                                                          participants have the ability to process              2009.16 As of May 2009, all participating
                                                     The Commission requests comment                                                                            dealers were satisfying this
                                                                                                          a transaction electronically, but should
                                                  on all aspects of proposed § 23.501. In                                                                       commitment. In October 2009, the
                                                                                                          not be required to do so?
                                                  particular, the Commission requests
                                                  comment on the following questions:                        • Has the Commission properly                         14 See ISDA Collateral Committee, ‘‘Commentary

                                                     • Does the proposed rule                             accounted for current industry practice               to the Outline of the 2009 ISDA Protocol for
                                                  appropriately allocate the responsibility               with respect to the time necessary to                 Resolution of Disputed Collateral Calls,’’ June 2,
                                                                                                          confirm swap transactions?
emcdonald on DSK2BSOYB1PROD with PROPOSALS




                                                                                                                                                                2009 (stating ‘‘Disputed margin calls have increased
                                                  for providing the swap
                                                  acknowledgments?                                           • Would the proposed rule unduly                   significantly since late 2007, and especially during
                                                                                                                                                                2008 have been the driver of large (sometimes > $1
                                                     • Is it feasible to require that all                 restrict the types of swaps that swap                 billion) un-collateralized exposures between
                                                  acknowledgments be provided                             dealers and major swap participants                   professional firms.’’).
                                                  electronically?                                         may enter into or the persons that may                   15 The Commission also recognizes and

                                                     • Should the proposed rule require                   be their counterparties?                              encourages the industry practice of immediately
                                                                                                                                                                transferring undisputed collateral amounts.
                                                  swap dealers and major swap                                • Should executing a swap on a SEF                    16 See June 2, 2009 summary of industry
                                                  participants to provide a swap                          or DCM be deemed to satisfy the                       commitments, available at http://www.isda.org/
                                                  acknowledgment or confirmation more                     confirmation requirement?                             c_and_a/pdf/060209table.pdf.



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                                                  81524                Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules

                                                  ODSG committed to publishing a                          in proposed § 23.500 as the current                   have the technological capacity to
                                                  feasibility study on market-wide                        market value or net present value of a                perform reconciliation processes
                                                  portfolio reconciliation that would set                 swap, and material terms would be                     electronically.
                                                  forth how regular portfolio                             defined as all terms of a swap required                  Under proposed § 23.502(a)(5), swap
                                                  reconciliation could be extended                        to be reported in accordance with part                dealers and major swap participants
                                                  beyond the ODSG dealers to include                      45 of this chapter.                                   would be required to resolve any
                                                  smaller banks, buy-side participants,                      Proposed § 23.502(a) would require                 discrepancy in a valuation identified as
                                                  and derivative end users. Consistent                    swap dealers and major swap                           part of a portfolio reconciliation process
                                                  with this publication, the ODSG dealers                 participants to reconcile swap portfolios             within one business day. The
                                                  expanded their portfolio reconciliation                 with other swap dealers or major swap                 Commission recognizes that there may
                                                  commitment in March 2010 to include                     participants with the following                       be reasonable grounds for some
                                                  monthly reconciliation of collateralized                frequency: Daily for portfolios                       variation in the calculation of swap
                                                  portfolios in excess of 1,000 trades with               consisting of 300 or more swaps, at least             valuation at any given time.
                                                  any counterparty. Most recently, the                    weekly for portfolios consisting of 50 to             Consequently, the proposed rule would
                                                  industry has been preparing a new                       300 swaps, and at least quarterly for                 not require that swap dealers and major
                                                  ‘‘Convention on the Investigation of                    portfolios consisting of fewer than 50                swap participants expend resources to
                                                  Disputed Margin Calls’’ and a new                       swaps. Swap dealers and major swap                    resolve all discrepancies in the
                                                  ‘‘Formal Market Polling Procedure’’ that                participants would be required to                     valuation of the swap, but only if the
                                                  are intended to ‘‘create a consistent and               resolve immediately any discrepancy in                difference between the lower valuation
                                                  predictable process * * * that                          a material term identified as part of a               and the higher is greater than 10%.
                                                  eliminates present uncertainties and                    portfolio reconciliation process. The                    In addition, given that there are a
                                                  delays.’’ 17                                            Commission is proposing an immediate                  number of services and industry-led
                                                     Accordingly, the Commission is                       resolution requirement for material                   initiatives that may facilitate resolution
                                                  proposing § 23.502, which would                         terms for the same reasons that                       of valuation disputes, at this time the
                                                  require swap dealers and major swap                     necessitate timely confirmation—parties               Commission is not proposing to
                                                  participants to reconcile their portfolios              need to know the terms of their                       mandate that swap dealers and major
                                                  with one another and provide                            executed agreements with one another.                 swap participants implement any
                                                  counterparties who are not registered as                A discrepancy in the terms of a swap                  specific procedure for resolution of a
                                                  swap dealers or major swap participants                 likely indicates that the parties have                discrepancy in the valuation of a swap.
                                                  with regular opportunities for portfolio                failed to confirm the swap in                         Rather, it is only proposing a deadline
                                                  reconciliation. In order for the                        accordance with Commission                            for dispute resolution of one business
                                                  marketplace to realize the full risk                    regulations, and, therefore, the parties              day following discovery of such
                                                  reduction benefits of portfolio                         should take immediate action to resolve               discrepancy.
                                                  reconciliation, the Commission is                       the discrepancy. This requirement                        For swap portfolios with entities other
                                                  proposing to expand portfolio                           would support and ensure compliance                   than swap dealers or major swap
                                                  reconciliation to all transactions,                     with proposed § 23.501, which requires                participants, proposed § 23.502(b)
                                                  whether collateralized or                               a confirmation of all terms of a swap.                would require swap dealers and major
                                                  uncollateralized. For the swap market to                   The Commission believes that                       swap participants to establish written
                                                  operate efficiently and to reduce                       requiring reconciliation of all swap                  policies and procedures to perform
                                                                                                          portfolios among swap dealers and                     reconciliation, but would not prescribe
                                                  systemic risk, portfolio reconciliation
                                                                                                          major swap participants (rather than                  the manner in which the reconciliation
                                                  should be a proactive process that
                                                                                                          only collateralized portfolios, as                    must be performed. For example, the
                                                  delivers a consolidated view of
                                                                                                          contemplated by the ODSG work) is                     exchange of terms and valuations
                                                  counterparty exposure down to the
                                                                                                          appropriate because CEA section 4s(e)                 between the counterparties may consist
                                                  transaction level. By identifying and
                                                                                                          requires that swap dealers and major                  of one party reviewing the details and
                                                  managing mismatches in key economic
                                                                                                          swap participants will be subject to                  valuations delivered by the other party
                                                  terms and valuation for individual
                                                                                                          minimum capital and margin                            and either affirming or objecting to such
                                                  transactions across an entire portfolio,
                                                                                                          requirements. As a result, the                        details and valuations. The frequency
                                                  overall risk can be identified and
                                                                                                          Commission anticipates that most, if not              parameters of portfolio reconciliation
                                                  reduced.                                                                                                      would be similar to those for swap
                                                                                                          all, swaps entered by swap dealers and
                                                  2. Proposed Portfolio Reconciliation                    major swap participants will be subject               portfolios between swap dealers or
                                                  Rule                                                    to some form of collateralization. The                major swap participants.18 There are
                                                     For the purposes of proposed                         Commission also believes that requiring               some important distinctions in the
                                                  § 23.502, swap portfolio reconciliation                 more frequent reconciliation of smaller               proposed treatment of swap portfolios
                                                  would be defined in proposed § 23.500                   portfolios is appropriate because section             between a swap dealer or major swap
                                                  as a process by which the two parties to                2(a)(13)(G) of the CEA requires all swaps             participant and others that promote
                                                  one or more swaps: (1) Exchange the                     to be reported to a registered swap data              flexibility for those entities that will not
                                                  terms of all swaps in the portfolio                     repository, and, therefore, the                       be registered with the Commission.
                                                  between the parties; (2) exchange each                  Commission anticipates that swap                      Swap dealers and major swap
                                                  party’s valuation of each swap in a                     dealers and major swap participants                   participants would be required simply
emcdonald on DSK2BSOYB1PROD with PROPOSALS




                                                                                                          will be able to efficiently reconcile their           to establish written procedures
                                                  portfolio between the parties as of the
                                                                                                          internal records with their                           reasonably designed to resolve any
                                                  close of business on the immediately
                                                                                                          counterparties electronically by                      discrepancies in the material terms or
                                                  preceding business day; and (3) resolve
                                                                                                          reference to data in the repositories. The            valuation of each swap identified as part
                                                  any discrepancy in material terms and
                                                  valuations. Valuation would be defined                  threshold of 300 swaps for daily
                                                                                                          reconciliation is intended to capture                   18 The frequency thresholds are similar: Daily for

                                                                                                          swap portfolios where there is a high                 portfolios consisting of 500 or more swaps, at least
                                                    17 See ‘‘ISDA 2010 Convention on the                                                                        weekly for portfolios consisting of 100–500 swaps,
                                                  Investigation of Disputed Margin Calls’’ and ‘‘ISDA     likelihood that the swap dealer or major              and at least quarterly for portfolios consisting of
                                                  2010 Formal Market Polling Procedure.’’                 swap participant’s counterparty will                  less than 100 swaps.



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                                                                       Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules                                                 81525

                                                  of a portfolio reconciliation process in a                 • Should all discrepancies in swap                 process does not alter the risk profiles
                                                  timely fashion. Again, differences in                   transaction terms be resolved or just the             of the individual participants beyond a
                                                  valuation of a swap need not be deemed                  material ones?                                        level acceptable to the participant.
                                                  a discrepancy unless the difference                        • Should the definition of material                   Portfolio compression exercises can
                                                  between the lower valuation and the                     terms be clarified?                                   be performed on a bilateral or
                                                  higher valuation is greater than 10% of                    • Should financial entities as defined             multilateral basis. Multilateral
                                                  the higher valuation.                                   in proposed § 23.500 be required to                   compression exercises are preferable
                                                     Proposed § 23.502(c) would create a                  participate in portfolio reconciliation               because the larger number of
                                                  safe harbor for cleared swaps because                   under proposed § 23.502(a)?                           participants significantly increases the
                                                  portfolio reconciliation is needed                      C. Portfolio Compression                              number of trades that can be eliminated
                                                  primarily for uncleared swaps. When                                                                           and removes the need for bilateral
                                                  swaps are cleared, the clearinghouse                    1. Background                                         negotiation between counterparties. In a
                                                  requires that each swap be matched                         Section 4s(i) of the CEA directs the               multilateral portfolio compression
                                                  prior to novation by the clearinghouse.                 Commission to prescribe regulations for               exercise, the replacement swaps may be
                                                  Moreover, once cleared, clearinghouses                  the timely and accurate processing and                with the same or different
                                                  determine daily settlement prices,                      netting of all swaps entered into by                  counterparties.
                                                  which preclude any valuation disputes.                  swap dealers and major swap                              The benefits of portfolio compression
                                                     The proposed rule would apply to all                 participants. Portfolio compression is an             to both individual market participants
                                                  swaps within a swap portfolio as of the                 important, post-trade processing and                  and to the market as a whole are
                                                  effective date of the regulation.                       netting mechanism that can be an                      considerable. The reduced transaction
                                                     Finally, proposed § 23.502(d) would                  effective and efficient tool for the timely           count decreases operational risk
                                                  require that swap dealers and major                     and accurate processing and netting of                generally as there are fewer trades to
                                                  swap participants maintain records of                   swaps by market participants.                         maintain, process, and settle.21 The
                                                  each discrepancy identified during                      Accordingly, the Commission is                        reduction in the outstanding gross
                                                  portfolio reconciliation and the length                 proposing § 23.503, which would                       notional value of the swaps also allows
                                                  of time taken to resolve that                           require swap dealers and major swap                   for increased capital liquidity and
                                                  discrepancy.                                            participants to engage in certain                     efficiency. Firms can set aside less
                                                  3. Comments Requested                                   bilateral and multilateral portfolio                  capital for their positions while
                                                                                                          compression exercises.                                maintaining their desired risk positions
                                                     The Commission requests comment                         Portfolio compression is a mechanism               in the market. The diminished
                                                  on all aspects of proposed § 23.502(d).                 whereby substantially similar                         operational risk for the individual
                                                  In particular, the Commission requests                  transactions among two or more                        market participants achieved by
                                                  comment on the following questions:                     counterparties are terminated and                     portfolio compression, in turn, may
                                                     • Are the proposed deadlines for                                                                           lessen systemic risk and enhance the
                                                                                                          replaced with a smaller number of
                                                  swap portfolio discrepancy resolution in                                                                      overall stability of the financial markets.
                                                                                                          transactions of decreased notional value
                                                  the proposed regulation appropriate?                                                                          Compression also may provide a more
                                                                                                          in an effort to reduce the risk, cost, and
                                                     • Are the reconciliation thresholds                                                                        accurate expression of overall market
                                                                                                          inefficiency of maintaining unnecessary
                                                  and frequency requirements                                                                                    size and composition, and provide
                                                                                                          transactions on the counterparties’
                                                  appropriate?                                                                                                  market participants with a more precise
                                                     • Are swap dealers and major swap                    books. In many cases, these redundant
                                                                                                          or economically-equivalent positions                  picture of their exposures.
                                                  participants likely to have a large                                                                              The usefulness of portfolio
                                                  number of counterparties with whom                      serve no useful business purpose, but
                                                                                                          can create unnecessary risk,19 as well as             compression as a risk management tool
                                                  they would be required to perform daily                                                                       has been acknowledged widely. In 2008,
                                                  reconciliation that do not have the                     operational and capital inefficiencies. In
                                                                                                          a portfolio compression exercise, swap                the PWG identified frequent portfolio
                                                  technological capacity to perform                                                                             compression of outstanding trades as a
                                                  reconciliation processes electronically?                market participants whose combined
                                                                                                          portfolios include outstanding                        key policy objective in the effort to
                                                     • Is the proposal that a valuation
                                                                                                          transactions that contain substantially               strengthen the OTC derivatives market
                                                  difference of less than 10% not be
                                                                                                          similar economic terms and/or that                    infrastructure.22 Similarly, the 2010
                                                  deemed to be a discrepancy
                                                                                                          would result in redundant payments                    staff report outlining policy perspectives
                                                  appropriate? If not, please provide a
                                                                                                          wholly or partially net their swaps by                on OTC derivatives infrastructure issued
                                                  suggested valuation discrepancy
                                                                                                          terminating the original swaps and                    by the FRBNY identified trade
                                                  threshold.
                                                     • Should the proposed rule include a                 replacing them with a smaller number                  compression as an element of strong risk
                                                  provision that requires discrepancy                     of new transactions that have a lower                 management and recommended that
                                                  resolution if the aggregate of valuation                gross notional value.                                 market participants engage in regular,
                                                  differences of less than 10% across a                      Market vendors assert that as many as              market-wide portfolio compression
                                                  portfolio exceeds a certain threshold? If               40,000 trades can be terminated in a                  exercises.23
                                                                                                          single portfolio compression cycle.20                    The value of portfolio compression
                                                  so, please provide a suggested
                                                                                                          Because portfolio compression                         also is illustrated by existing market
                                                  threshold.
                                                     • How would the requirement to                       participants are permitted to establish               participation in compression exercises.
                                                                                                          their own credit, market, and cash
emcdonald on DSK2BSOYB1PROD with PROPOSALS




                                                  resolve valuation discrepancies in one                                                                          21 See ‘‘ISDA 2009 A Yearbook of ISDA
                                                  day for swaps among swap dealers and                    payment risk tolerances and to establish
                                                                                                                                                                Activities,’’ International Swaps and Derivatives
                                                  major swap participants affect the very                 their own mark-to-market values for the               Association, Inc. (2009).
                                                  detailed and complex industry                           transactions to be compressed, the                      22 ‘‘Policy Objectives for the OTC Derivatives

                                                  initiatives currently being considered                                                                        Markets,’’ President’s Working Group on Financial
                                                                                                            19 Federal Reserve Bank of New York Staff Report    Markets (Nov. 14, 2008).
                                                  for resolving valuation disputes?                       No. 424: ‘‘Policy Perspectives on OTC Derivatives       23 Federal Reserve Bank of New York Staff Report
                                                     • Should all terms of a swap                         Market Infrastructure,’’ Jan. 2010 (revised Mar.      No. 424: ‘‘Policy Perspectives on OTC Derivatives
                                                  transaction be reconciled or just the key               2010).                                                Market Infrastructure,’’ Jan. 2010 (revised Mar.
                                                  economic terms?                                           20 See http://www.trioptima.com.                    2010).



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                                                  81526                Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules

                                                  In March 2010, the Depository Trust and                 swap participant. A swap dealer or                       maintain written policies and
                                                  Clearing Corporation (DTCC) explicitly                  major swap participant also would be                     procedures for periodically terminating
                                                  attributed the reduction in the gross                   permitted to establish counterparty,                     all fully offsetting swaps and
                                                  notional value of the contracts in its                  market, cash payment, and other risk                     periodically engaging in compression
                                                  warehouse to industry supported                         tolerances and to exclude potential                      exercises.
                                                  portfolio compression.24 TriOptima,                     counterparties from the compression                         The proposed rule would apply to all
                                                  which offers the TriReduce portfolio                    exercise, provided that the swap dealer                  swaps within a swap portfolio as of the
                                                  compression service, estimates that it                  or major swap participant is not using                   effective date of the regulation.
                                                  has terminated $106.3 trillion gross                    the risk tolerances or counterparty
                                                  notional of interest rate swaps and $66.9               exclusions to evade the compression                      3. Comments Requested
                                                  trillion gross notional of credit swaps                 requirements.                                              The Commission is requesting
                                                  since its inception in 2003.25 Similarly,                  In recognition that portfolio
                                                                                                                                                                   comment on all aspects of the portfolio
                                                  Creditex and Markit, which offer                        compression currently is not available
                                                                                                                                                                   compression rule, and specifically
                                                  portfolio compression exercises in                      for all asset classes and all transactions
                                                                                                                                                                   requests comment on the following
                                                  single name credit default swaps, have                  within an asset class,27 the Commission
                                                                                                                                                                   questions:
                                                  enabled participating institutions to                   also is proposing that swap dealers and
                                                  eliminate $4.5 trillion in notional                     major swap participants be required to                     • Should the Commission require
                                                  between late 2008 through 2009.26                       terminate bilaterally all fully offsetting               swap dealers and major swap
                                                                                                          swaps between them by the close of                       participants to engage in bilateral and
                                                  2. Proposed Compression Rule                            business on the business day following                   multilateral compression exercises,
                                                     Based upon these considerations, the                 the day the parties entered into the                     particularly with respect to transactions
                                                  Commission is proposing § 23.503,                       offsetting swap transaction and to                       where the counterparty is not a swap
                                                  which would impose certain portfolio                    engage annually in bilateral portfolio                   dealer or major swap participant?
                                                  compression requirements upon swap                      compression exercises with                                 • Should the compression
                                                  dealers and major swap participants.                    counterparties that are also swap dealers                requirement be restricted to particular
                                                  Specifically, swap dealers and major                    or major swap participants. Swap                         asset classes?
                                                  swap participants would be required to                  dealers and major swap participants                        • With what frequency should
                                                  participate in multilateral compression                 need not engage in bilateral portfolio                   bilateral or multilateral compression be
                                                  exercises that are offered by those DCOs                compression exercises, however, to the                   required?
                                                  or self-regulatory organizations of which               extent that the counterparties have                        • What are the costs associated with
                                                  the swap dealer or major swap                           mutually participated in a multilateral                  engaging in bilateral and multilateral
                                                  participant is a member. The                            exercise involving the swaps between                     compression and are such costs a barrier
                                                  Commission would encourage swap                         them during the same year.                               to participation?
                                                  dealers and major swap participants to                     The Commission anticipates that
                                                                                                                                                                     • Should the Commission expressly
                                                  work with the DCOs and self-regulatory                  portfolio compression exercises will be
                                                                                                                                                                   define the transactions that are eligible
                                                  organizations of which they are                         offered by additional vendors and will
                                                                                                                                                                   for inclusion in a portfolio compression
                                                  members to develop portfolio                            encompass additional products and
                                                                                                                                                                   exercise or leave that determination to
                                                  compression opportunities.                              asset classes as the industry progresses
                                                     The portfolio compression obligation                                                                          those conducting the compression
                                                                                                          toward increased product
                                                  would be limited to swaps in which the                                                                           exercise and/or to those participating in
                                                                                                          standardization and centralized
                                                  counterparty is also a swap dealer or                                                                            the exercise?
                                                                                                          clearing. To afford the Commission the
                                                  major swap participant and swaps that                   flexibility to react to the expected future                • What factors (e.g., sufficiently
                                                  are eligible for inclusion in the exercise,             availability and need for portfolio                      standardized terms) would render a
                                                  as determined by those conducting the                   compression exercises, proposed                          particular swap eligible or ineligible for
                                                  compression exercise and agreed to by                   § 23.503 also would require swap                         inclusion in a bilateral or multilateral
                                                  those participating in the exercise. A                  dealers and major swap participants to                   compression exercise?
                                                  swap dealer or major swap participant                   participate in all multilateral portfolio                  • Should the Commission provide
                                                  would be permitted to exclude swaps                     compression exercises required by                        specific risk management, accounting,
                                                  from a compression exercise if                          Commission regulation or order.                          regulatory, and other rationale under
                                                  including the swap would be reasonably                     Proposed § 23.503 would not mandate                   which a swap dealer or major swap
                                                  likely to increase significantly the risk               portfolio compression exercises for                      participant may exclude particular
                                                  exposure of the swap dealer or major                    swaps outstanding between a swap                         swaps transactions from a multilateral
                                                                                                          dealer or a major swap participant and                   portfolio compression exercise?
                                                     24 DTCC Press Release, ‘‘DTCC Trade Information
                                                                                                          counterparties that are neither swap                       • How much time would be sufficient
                                                  Warehouse Completes Record Year Processing OTC          dealers nor major swap participants.
                                                  Credit Derivatives’’ (Mar. 11, 2010). Notably,
                                                                                                                                                                   to allow swap dealers and major swap
                                                  beginning in August 2008, ISDA encouraged               Instead, swap dealers and major swap                     participants to come into compliance
                                                  compression exercises for credit default swaps by       participants would be required to                        with the proposed portfolio
                                                  selecting the service provider and defining the                                                                  compression requirements?
                                                  terms of service.                                          27 At the present time, the principal portfolio
                                                     25 See http://www.trioptima.com. Between 2007
                                                                                                          compression vendors offer compression exercises
                                                                                                                                                                     • Should the Commission require
                                                                                                                                                                   participation in compression exercises
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                                                  and 2008, TriOptima reduced $54.7 trillion gross        for limited types of trades in a limited number of
                                                  notional of interest rate swaps and $49.1 trillion      asset classes. Compression currently is available for    conducted only by registered derivatives
                                                  gross notional of credit swaps. In March of 2010,       certain interest rate swaps and credit default swaps     clearing organizations or by all central
                                                  the staff of the Federal Reserve Bank of New York       and, to a lesser degree, specific energy products. For
                                                  estimated that since 2008 nearly $50 trillion gross     example, TriOptima’s TriReduce service provides
                                                                                                                                                                   counterparties of which the swap dealer
                                                  notional of credit default swap positions has been      portfolio compression services for: (1) Interest rate    or major swap participant may be a
                                                  eliminated through portfolio compression. Federal       swap transactions in twenty-three currencies; (2)        member?
                                                  Reserve Bank of New York Staff Report No. 424:          credit default swaps (index, single name, and
                                                  ‘‘Policy Perspectives on OTC Derivatives Market         tranches); and (3) a more limited number of energy
                                                                                                                                                                     • Should financial entities as defined
                                                  Infrastructure,’’ Jan. 2010 (revised Mar. 2010).        products. Markit and Creditex offer portfolio            in proposed § 23.500 be subject to the
                                                     26 See http://www.isdacdsmarketplace.com.            compression for credit default swaps.                    provisions of § 23.503(a), (b), and (c)?


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                                                                       Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules                                            81527

                                                  III. Related Matters                                    was indicative of the size of the                        ensuring that swap dealers and major
                                                                                                          business. Major swap participants, by                    swap participants document the terms
                                                  A. Regulatory Flexibility Act
                                                                                                          statutory definition, maintain                           of all of their swaps, reconcile their
                                                     The Regulatory Flexibility Act (RFA)                 substantial positions in swaps or                        swap portfolios to resolve any
                                                  requires that agencies consider whether                 maintain outstanding swap positions                      discrepancies or disputes, and wholly or
                                                  the rules they propose will have a                      that create substantial counterparty                     partially terminate some or all
                                                  significant economic impact on a                        exposure that could have serious                         outstanding swaps through regular
                                                  substantial number of small entities.28                 adverse effects on the financial stability               compression exercises. Commission
                                                  The Commission previously has                           of the United States banking system or                   staff would use the information related
                                                  established certain definitions of ‘‘small              financial markets. Accordingly, for                      to each of these important risk-reducing
                                                  entities’’ to be used in evaluating the                 purposes of the RFA for this                             activities when conducting the
                                                  impact of its regulations on small                      rulemaking, the Commission is hereby                     Commission’s examination and
                                                  entities in accordance with the RFA.29                  proposing that major swap participants                   oversight program with respect to the
                                                  The proposed rules would affect swap                    not be considered ‘‘small entities’’ for                 registrants.
                                                  dealers and major swap participants.                    essentially the same reasons that large                     If the proposed regulations are
                                                     Swap dealers and major swap                          traders have previously been                             adopted, responses to this collection of
                                                  participants are new categories of                      determined not to be small entities.                     information would be mandatory. The
                                                  registrants. Accordingly, the                              Moreover, the Commission is carrying                  Commission will protect proprietary
                                                  Commission has not previously                           out Congressional mandates by                            information according to the Freedom of
                                                  addressed the question of whether such                  proposing this regulation. Specifically,                 Information Act and 17 CFR part 145,
                                                  persons are, in fact, small entities for                the Commission is proposing these                        ‘‘Commission Records and Information.’’
                                                  purposes of the RFA. However, the                       regulations to comply with the Dodd-                     In addition, section 8(a)(1) of the CEA
                                                  Commission previously has determined                    Frank Act, the aim of which is to reduce                 strictly prohibits the Commission,
                                                  that futures commission merchants                       systemic risk presented by swap dealers                  unless specifically authorized by the
                                                  should not be considered to be small                    and swap market participants through                     CEA, from making public ‘‘data and
                                                  entities for purposes of the RFA.30 The                 comprehensive regulation. The                            information that would separately
                                                  Commission’s determination was based,                   Commission does not believe that there                   disclose the business transactions or
                                                  in part, upon the obligation of futures                 are regulatory alternatives to those being               market positions of any person and
                                                  commission merchants to meet the                        proposed that would be consistent with                   trade secrets or names of customers.’’
                                                  minimum financial requirements                          the statutory mandate. Accordingly, the                  The Commission also is required to
                                                  established by the Commission to                        Chairman, on behalf of the Commission,                   protect certain information contained in
                                                  enhance the protection of customers’                    hereby certifies pursuant to 5 U.S.C.                    a government system of records
                                                  segregated funds and protect the                        605(b) that the proposed rules will not                  according to the Privacy Act of 1974, 5
                                                  financial condition of futures                          have a significant economic impact on                    U.S.C. 552a.
                                                  commission merchants generally.31 Like                  a substantial number of small entities.
                                                                                                                                                                   1. Information Provided by Reporting
                                                  futures commission merchants, swap                      B. Paperwork Reduction Act                               Entities/Persons
                                                  dealers will be subject to minimum
                                                  capital and margin requirements and are                    The Paperwork Reduction Act                              Proposed §§ 23.501, 23.502, and
                                                  expected to comprise the largest global                 (PRA) 33 imposes certain requirements                    23.503 would require swap dealers and
                                                  financial firms. The Commission is                      on Federal agencies (including the                       major swap participants to make and
                                                  required to exempt from swap dealer                     Commission) in connection with their                     retain records of confirmations,
                                                  designation any entities that engage in                 conducting or sponsoring any collection                  portfolio reconciliations, and portfolio
                                                  a de minimis level of swaps dealing in                  of information as defined by the PRA.                    compression exercises. The proposed
                                                  connection with transactions with or on                 This proposed rulemaking would result                    regulations do not impose any reporting
                                                  behalf of customers. The Commission                     in new collection of information                         requirements. The proposed regulations
                                                  anticipates that this exemption would                   requirements within the meaning of the                   will be an important part of the
                                                  tend to exclude small entities from                     PRA. The Commission therefore is                         Commission’s regulatory program for
                                                  registration. Accordingly, for purposes                 submitting this proposal to the Office of                swap dealers and major swap
                                                                                                          Management and Budget (OMB) for                          participants. The information required
                                                  of the RFA for this rulemaking, the
                                                                                                          review in accordance with 44 U.S.C.                      to be preserved would be used by
                                                  Commission is hereby proposing that
                                                                                                          3507(d) and 5 CFR 1320.11. The title for                 representatives of the Commission and
                                                  swap dealers not be considered ‘‘small
                                                                                                          this collection of information is                        any examining authority responsible for
                                                  entities’’ for essentially the same reasons
                                                                                                          ‘‘Confirmation, Portfolio Reconciliation,                reviewing the activities of the swap
                                                  that futures commission merchants have
                                                                                                          and Portfolio Compression                                dealer or major swap participant to
                                                  previously been determined not to be
                                                                                                          Requirements for Swap Dealers and                        ensure compliance with the CEA and
                                                  small entities and in light of the
                                                                                                          Major Swap Participants.’’ An agency                     applicable Commission regulations.
                                                  exemption from the definition of swap
                                                                                                          may not conduct or sponsor, and a                           The annual burden associated with
                                                  dealer for those engaging in a de
                                                                                                          person is not required to respond to, a                  these proposed regulations is estimated
                                                  minimis level of swap dealing.
                                                                                                          collection of information unless it                      to be 1,282.5 hours, at an annual cost of
                                                     The Commission also has previously
                                                                                                          displays a currently valid control                       $1,282,250 for each swap dealer and
                                                  determined that large traders are not
emcdonald on DSK2BSOYB1PROD with PROPOSALS




                                                                                                          number. The OMB has not yet assigned                     major swap participant. Burden means
                                                  ‘‘small entities’’ for RFA purposes.32 In
                                                                                                          this collection a control number.                        the total time, effort or financial
                                                  that determination, the Commission
                                                                                                             The collection of information under                   resources expended by persons to
                                                  considered that a large trading position
                                                                                                          these proposed rules is necessary to                     generate, maintain, retain, disclose, or
                                                    28 5 U.S.C. 601 et seq.                               implement certain provisions of the                      provide information to or for a Federal
                                                    29 47  FR 18618, Apr. 30, 1982.                       CEA, as amended by the Dodd-Frank                        agency. Specifically, the Commission
                                                    30 Id. at 18619.                                      Act. Specifically, it is essential to                    anticipates that swap dealers and major
                                                    31 Id.                                                                                                         swap participants will spend an average
                                                    32 Id. at 18620.                                        33 44   U.S.C. 3501 et seq.                            of 40 hours per year drafting and


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                                                  81528                Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules

                                                  updating the policies and procedures                       Estimated aggregate annual hour                        Estimated aggregate number of
                                                  required by the proposed regulations;                   burden: 12,000 burden hours [300                        annual responses: 2,436,000 [300
                                                  252 hours per year making and retaining                 registrants × 40 hours per registrant].                 registrants × 8,120 responses].
                                                  the acknowledgment and confirmation                        Acknowledgment and Confirmation
                                                                                                                                                                    Estimated annual hour burden per
                                                  records required by proposed § 23.501;                  Recordkeeping. This hourly burden
                                                                                                                                                                  registrant: 812 hours [8,120 × .10 hours
                                                  812 hours per year making and retaining                 arises from the proposed requirement
                                                                                                          that swap dealers and major swap                        per response].
                                                  the portfolio reconciliation records
                                                  required by proposed § 23.502; and                      participants make and maintain records                    Estimated aggregate annual hour
                                                  178.5 hours per year making and                         of the date and time of transmission to,                burden: 243,600 burden hours [300
                                                  retaining the bilateral offset and                      or receipt from, a counterparty of an                   registrants × 812 hours per registrant].
                                                  portfolio compression records required                  acknowledgment or confirmation; the                       Portfolio Compression Recordkeeping.
                                                  by proposed § 23.503.                                   length of time between the                              This hourly burden results from the
                                                     It is not currently known how many                   acknowledgment and confirmation of                      proposed requirement that swap dealers
                                                  swap dealers and major swap                             each swap; and the length of time                       and major swap participants make and
                                                  participants will become subject to                     between execution and confirmation of                   maintain records of the bilateral offsets
                                                  these rules, and this will not be known                 each swap.
                                                                                                                                                                  and portfolio compression exercises in
                                                  to the Commission until the registration                   Number of registrants: 300.
                                                                                                             Frequency of collection: daily.                      which they participate, including the
                                                  requirements for these entities become                                                                          beginning and completion dates; the
                                                  effective after July 16, 2011, the date on                 Estimated number of annual
                                                                                                          responses per registrant: 252 [252                      swaps that were included and excluded;
                                                  which the Dodd-Frank Act becomes                                                                                the applicable risk tolerance levels; and
                                                  effective. While the Commission                         trading days].
                                                                                                             Estimated aggregate number of                        the results of the particular exercise.
                                                  believes there will be approximately 200
                                                                                                          annual responses: 75,600 [300                           The proposed regulations would require
                                                  swap dealers and 50 major swap
                                                                                                          registrants × 252 trading days].                        that each swap dealer and major swap
                                                  participants, it has taken a conservative
                                                                                                             Estimated annual hour burden per                     participant terminate fully offsetting
                                                  approach, for PRA purposes, in
                                                                                                          registrant: 252 [252 trading days × 1                   swaps; participate in certain multilateral
                                                  estimating that there will be a combined
                                                                                                          hour per day].                                          compression exercises; and participate
                                                  number of 300 swap dealers and major                       Estimated aggregate annual hour
                                                  swap participants who will be required                                                                          in annual bilateral portfolio
                                                                                                          burden: 75,600 burden hours [300 × 252                  compression exercises with each
                                                  to comply with the recordkeeping                        hours].
                                                  requirements of the proposed rules. The                                                                         counterparty that is also a swap dealer
                                                                                                             Portfolio Reconciliation
                                                  Commission estimated the number of                                                                              or major swap participant (except to the
                                                                                                          Recordkeeping. This hourly burden
                                                  affected entities based on industry data.                                                                       extent that the counterparties
                                                                                                          arises from the proposed requirement
                                                     According to recent Bureau of Labor                  that swap dealers and major swap                        participate in multilateral compression
                                                  Statistics findings, the mean hourly                    participants make and maintain records                  exercises for the same swaps). Swap
                                                  wage of an employee under occupation                    of the portfolio reconciliation exercises               dealers and major swap participants
                                                  code 11–3031, ‘‘Financial Managers,’’                   in which they engage. Registrants would                 also would be required to maintain
                                                  (which includes operations managers)                    be required to reconcile portfolios with                policies and procedures for periodically
                                                  that is employed by the ‘‘Securities and                counterparties that are swap dealers and                engaging in portfolio compression
                                                  Commodity Contracts Intermediation                      major swap participants on a daily,                     exercises with other counterparties.
                                                  and Brokerage’’ industry is $74.41.34                   weekly, or quarterly basis, depending                     Number of registrants: 300.
                                                  Because swap dealers and major swap                     upon the size of the portfolio. They also
                                                  participants include large financial                                                                              Frequency of collection: As needed.
                                                                                                          would be required to maintain policies
                                                  institutions whose operations                           and procedures for conducting portfolio                   Estimated number of annual
                                                  management employees’ salaries may                      reconciliation with other counterparties                responses per registrant: 1,029 [24
                                                  exceed the mean wage, the Commission                    with similar frequency.                                 multilateral compression records 36] +
                                                  has estimated the cost burden of these                     Number of registrants: 300.                          [465 bilateral compression exercise
                                                  proposed regulations based upon an                         Frequency of collection: daily,
                                                  average salary of $100 per hour.                        weekly, or quarterly.
                                                     Accordingly, the estimated burden                       Estimated number of annual
                                                  was calculated as follows:                              responses per registrant: 8,120.35
                                                     Drafting and Updating Policies and
                                                                                                             35 Due to the absence of prior experience in
                                                  Procedures. This hourly burden arises
                                                                                                          regulating swap dealers and major swap
                                                  from the time necessary to develop and                  participants and with regulations similar to the
                                                  periodically update the policies and                    proposed rules, the actual, average number of
                                                  procedures required by the proposed                     counterparties that a swap dealer or major swap
                                                                                                                                                                  proposed rulemakings, the Commission has
                                                  regulations.                                            participant is likely to have and the average size of
                                                                                                          its portfolio with particular counterparties is         estimated that each of the 14 major swap dealers
                                                     Number of registrants: 300.                          uncertain. The estimate of 5,600 portfolio              has an average 7,500 counterparties and the other
                                                     Frequency of collection: Initial                     reconciliation records is based upon the assumption     286 swap dealers and major swap participants have
                                                                                                          that each swap dealer and major swap participant        an average of 200 counterparties per year, for an
                                                  implementation, updating as needed.
emcdonald on DSK2BSOYB1PROD with PROPOSALS




                                                                                                          engages in swap transactions with approximately         average of 540 total counterparties per registrant.
                                                     Estimated number of annual                           one third (100) of the other swap dealers or major      The Commission estimates that 440 of those
                                                  responses per registrant: 1.                            swap participants and that 10% of such portfolios       counterparties would not be other swap dealers or
                                                                                                          would require daily reconciliation; 20% would           major swap participants.
                                                     Estimated aggregate number of                        require weekly reconciliation; and 70% would              36 This estimate assumes that swap dealers and
                                                  annual responses: 300.                                  require quarterly reconciliation. The estimate also
                                                                                                                                                                  major swap participants would engage in
                                                     Estimated annual hour burden per                     is based upon the assumption that a swap dealer or
                                                                                                          major swap participant has an average of 440 other      multilateral compression exercises for 2 asset
                                                  registrant: 40 hours.                                                                                           classes at an average rate of 12 multilateral
                                                                                                          counterparties and that all of the portfolios with
                                                                                                          those counterparties generally would be limited to      compression exercises per year (approximately 1
                                                    34 http://www.bls.gov/oes/current/oes113031.htm.      quarterly reconciliation. Consistent with other         per month).



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                                                                        Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules                                           81529

                                                  records 37] + [540 bilateral offset                       occupation code 15–1021 and computer                   Comments may be submitted directly
                                                  records 38].                                              software engineers under program codes               to the Office of Information and
                                                    Estimated aggregate number of                           15–1031 and 1032 are between $34.10                  Regulatory Affairs, by fax at (202) 395–
                                                  annual responses: 308,700 [300                            and $44.94.39 Because swap dealers and               6566 or by e-mail at
                                                  registrants × 1,029 responses per year].                  major swap participants generally will               OIRAsubmissions@omb.eop.gov. Please
                                                    Estimated annual hour burden per                        be large entities that may engage                    provide the Commission with a copy of
                                                  registrant: 178.5 hours [24 multilateral                  employees with wages above the mean,                 submitted comments so that all
                                                  compression records × .5 hours per                        the Commission has conservatively                    comments can be summarized and
                                                  records] + [465 bilateral compression                     chosen to use a mean hourly                          addressed in the final rule preamble.
                                                  exercise records × .3 hours per records]                  programming wage of $60 per hour.                    Refer to the Addresses section of this
                                                  + [540 bilateral offset records × .05                     Accordingly, the start-up burden                     notice of proposed rulemaking for
                                                  hours per record].                                        associated with the required                         comment submission instructions to the
                                                    Estimated aggregate annual hour                         technological improvements would be                  Commission.
                                                  burden: 53,550 burden hours [300                          $2,400 [$60 × 40 hour per affected                     A copy of the supporting statements
                                                  registrants × 178.5 hours per registrant].                registrant] or $720,000 in the aggregate.            for the collections of information
                                                    Based upon the above, the aggregate                                                                          discussed above may be obtained by
                                                  hourly burden for all registrants is                      2. Information Collection Comments                   visiting RegInfo.gov. OMB is required to
                                                  334,350 hours and $33,435,000 [334,350                      The Commission invites the public                  make a decision concerning the
                                                  × $100 per hour].                                         and other Federal agencies to comment                collection of information between 30
                                                    In addition to the per hour burden                                                                           and 60 days after publication of this
                                                                                                            on any aspect of the recordkeeping
                                                  discussed above, the Commission                                                                                document in the Federal Register.
                                                                                                            burdens discussed above. The
                                                  anticipates that swap dealers and major                                                                        Therefore, a comment is best assured of
                                                                                                            Commission specifically requests
                                                  swap participants may incur minimal                                                                            having its full effect if OMB receives it
                                                                                                            comment on the variables used in the
                                                  start-up costs in connection with the                                                                          within 30 days of publication.
                                                                                                            above-referenced hourly burden
                                                  proposed recordkeeping obligations.
                                                                                                            calculations. For example, the                       C. Cost-Benefit Analysis
                                                  Such costs would include the
                                                                                                            Commission requests comment on the
                                                  expenditures related to developing and                                                                            Section 15(a) of the CEA40 requires
                                                                                                            following:
                                                  installing new recordkeeping                                                                                   the Commission to consider the costs
                                                  technology or re-programming or                             • What is the total number of swap
                                                                                                                                                                 and benefits of its actions before issuing
                                                  updating existing recordkeeping                           dealers and major swap participants in
                                                                                                                                                                 a rulemaking under the CEA. By its
                                                  technology and systems to enable the                      the marketplace?
                                                                                                                                                                 terms, Section 15(a) does not require the
                                                  swap dealer or major swap participant                       • What is the average number of
                                                                                                                                                                 Commission to quantify the costs and
                                                  to collect, maintain, and re-produce any                  counterparties that a swap dealer or
                                                                                                                                                                 benefits of a new regulation or to
                                                  newly required records. The                               major swap participant is likely to have?            determine whether the benefits of the
                                                  Commission believes that swap dealers                       • What percentage of those                         rule outweigh its costs; rather, it
                                                  and major swap participants generally                     counterparties are other swap dealers or             requires that the Commission ‘‘consider’’
                                                  could adapt their current infrastructure                  major swap participants?                             the costs and benefits of its actions.
                                                  to accommodate the new or amended                           • What is the average size (number of                 Section 15(a) further specifies that
                                                  technology and thus, no significant                       swaps) of a portfolio that a swap dealer             costs and benefits of a proposed
                                                  infrastructure expenditures would be                      or major swap participant is likely to               rulemaking shall be evaluated in light of
                                                  needed. The Commission estimates the                      have with a particular type of                       five broad areas of market and public
                                                  programming burden hours associated                       counterparty?                                        concern: (1) Protection of market
                                                  with technology improvements to be 40                       • What is the average number of                    participants and the public; (2)
                                                  hours.                                                    acknowledgment and confirmation                      efficiency, competitiveness, and
                                                    According to recent Bureau of Labor                     records that a swap dealer or major                  financial integrity of futures markets; (3)
                                                  Statistics findings, the mean hourly                      swap participant would likely be                     price discovery; (4) sound risk
                                                  wages of computer programmers under                       required to make under the proposed                  management practices; and (5) other
                                                                                                            regulations?                                         public interest considerations. The
                                                    37 As with other approximations set forth in this         Pursuant to 44 U.S.C. 3506(c)(2)(B),               Commission may, in its discretion, give
                                                  proposal, the estimate of 465 bilateral compression       the Commission solicits comments in
                                                  exercise records is based upon the assumption that
                                                                                                                                                                 greater weight to any one of the five
                                                  each swap dealer and major swap participant
                                                                                                            order to: (i) Evaluate whether the                   enumerated considerations and could,
                                                  engages in swap transactions with approximately           proposed collection of information is                in its discretion, determine that,
                                                  one third (100) of the other swap dealers or major        necessary for the proper performance of              notwithstanding its costs, a particular
                                                  swap participants. Because it is anticipated that         the functions of the Commission,
                                                  most swaps between swap dealers and major swap
                                                                                                                                                                 regulation was necessary or appropriate
                                                  participants would be eligible for multilateral
                                                                                                            including whether the information will               to protect the public interest or to
                                                  portfolio compression exercises, the Commission           have practical utility; (ii) evaluate the            effectuate any of the provisions or to
                                                  expects that a swap dealer or major swap                  accuracy of the Commission’s estimate                accomplish any of the purposes of the
                                                  participant would need to engage in annual                of the burden of the proposed collection
                                                  bilateral compression with only one quarter of (25)
                                                                                                                                                                 CEA.
                                                  such counterparties. The estimate also is based
                                                                                                            of information; (iii) determine whether                 Summary of proposed requirements.
                                                  upon the assumption that the average swap dealer          there are ways to enhance the quality,               The proposed regulations would
emcdonald on DSK2BSOYB1PROD with PROPOSALS




                                                  or major swap participant has an average of 440           utility, and clarity of the information to           implement new section 4s(i) of the CEA
                                                  non-swap dealer or major swap participant                 be collected; and (iv) minimize the
                                                  counterparties and would engage in 1 bilateral
                                                                                                                                                                 which was added by section 731 of the
                                                  portfolio compression exercise with each. This
                                                                                                            burden of the collection of information              Dodd-Frank Act. The proposed
                                                  would result in a total of 465 bilateral portfolio        on those who are to respond, including               regulations would set forth certain
                                                  compression records (25 + 440).                           through the use of automated collection              requirements for swap confirmations,
                                                    38 This estimate is based upon the assumption
                                                                                                            techniques or other forms of information             portfolio reconciliation, and portfolio
                                                  that each swap dealer and major swap participant          technology.
                                                  will have an average of 1 set of swaps that is eligible                                                        compression applicable to swap dealers
                                                  for annual bilateral offset with each of its estimated
                                                  540 counterparties per year.                               39 http://www.bls.gov/oes/current/oes113031.htm.      40 7   U.S.C. 19(a).



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                                                  81530                Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules

                                                  and major swap participants and related                 other information that they may have                  (d) Execution means, with respect to
                                                  recordkeeping requirements.                             quantifying or qualifying the costs and            a swap transaction, an agreement by the
                                                     Costs. With respect to costs, the                    benefits of the proposed rules with their          counterparties (whether orally, in
                                                  Commission has determined that the                      comment letters.                                   writing, electronically, or otherwise) to
                                                  nominal cost that would be borne by                                                                        the terms of the swap transaction that
                                                  swap dealers and major swap                             List of Subjects in 17 CFR Part 23
                                                                                                                                                             legally binds the counterparties to such
                                                  participants to institute the policies and                 Antitrust, Commodity futures,                   terms under applicable law.
                                                  procedures and recordkeeping systems                    Conduct standards, Conflict of Interests,             (e) Financial entity has the meaning
                                                  necessary to satisfy the new regulatory                 Major swap participants, Reporting and             given to the term in section 2h(7)(C) of
                                                  requirements are far outweighed by the                  recordkeeping, Swap dealers, Swaps.                the Act and any Commission regulations
                                                  benefits that would accrue to the                          For the reasons stated in this release,         promulgated thereunder, provided that
                                                  financial system as a whole as a result                 the Commission proposes to amend 17                the term shall not include a swap dealer
                                                  of the implementation of the rules. It is               CFR part 23, as proposed to be added in or major swap participant.
                                                  expected that any additional cost                       FR Doc. 2010–XXXX, published on                       (f) Fully offsetting swaps means swaps
                                                  imposed by the confirmation, portfolio                  XXXX (75 FR XXXX), as follows:                     of equivalent terms where no net cash
                                                  reconciliation, and portfolio                                                                              flow would be owed to either
                                                  compression requirements of proposed                    PART 23—SWAP DEALERS AND                           counterparty after the offset of payment
                                                  §§ 23.501, 23.502, and 23.503 would be                  MAJOR SWAP PARTICIPANTS                            obligations thereunder.
                                                  minimal because the confirmation,                                                                             (g) Material terms means all terms of
                                                                                                             1. The authority citation for part 23 to
                                                  reconciliation, and compression                                                                            a swap required to be reported in
                                                                                                          read as follows:
                                                  processes required under the rules are                                                                     accordance with part 45 of this chapter.
                                                  already part of a prudent operational                      Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1,        (h) Multilateral portfolio compression
                                                  processing regime that many, if not                     6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a, exercise means an exercise in which
                                                  most, swap dealers and major swap                       18, 19, 21.                                        multiple swap counterparties wholly or
                                                  participants already undertake as part of                  2. Subpart I, (consisting of §§ 23.500,         partially terminate some or all of the
                                                  their ordinary course of business.                      23.501, 23.502, and 23.503) is added to            swaps outstanding among those
                                                     Moreover, most swap dealers and                      read as follows:                                   counterparties and replace the swaps
                                                  major swap participants have adequate                                                                      with a smaller number of swaps whose
                                                                                                          Subpart I—Swap Documentation
                                                  resources and existing back office                                                                         combined notional value is less than the
                                                  operational systems that are capable of                 Sec.                                               combined notional value of the original
                                                  adjusting to the new regulatory                         23.500 Definitions.
                                                                                                          23.501 Swap confirmation.
                                                                                                                                                             swaps included in the exercise. The
                                                  framework without material diversion of                 23.502 Portfolio reconciliation.                   replacement swaps may be with the
                                                  resources away from commercial                          23.503 Portfolio compression.                      same or different counterparties.
                                                  operations. As discussed in the                                                                               (i) Portfolio reconciliation means any
                                                  preamble, there are also numerous                       Subpart I—Swap Documentation                       process by which the two parties to one
                                                  third-party vendors that provide                                                                           or more swaps:
                                                  confirmation, compression, and                          § 23.500 Definitions.                                 (1) Exchange the terms of all swaps in
                                                  reconciliation services. Some of these                     For purposes of subpart I, the                  the swap portfolio between the
                                                  providers charge fees based on results                  following terms shall be defined as                counterparties;
                                                  achieved (such as number of swaps                       provided.                                             (2) Exchange each counterparty’s
                                                  compressed) and, thus, the cost would                      (a) Acknowledgment means a written              valuation of each swap in the swap
                                                  be necessarily proportionate to the                     or electronic record of all of the terms           portfolio between the counterparties as
                                                  benefit.                                                of a swap signed and sent by one                   of the close of business on the
                                                     Benefits. With respect to benefits, the              counterparty to the other.                         immediately preceding business day;
                                                  Commission has determined that the                         (b) Bilateral portfolio compression             and
                                                  proposed regulations would require a                    exercise means an exercise in which two               (3) Resolve any discrepancy in
                                                  swap dealer or major swap participant                   swap counterparties wholly or partially            material terms and valuations.
                                                  to confirm, reconcile, and compress                     terminate some or all of the swaps                    (j) Processed electronically means to
                                                  their swaps in a manner that will result                outstanding between those                          be entered into a swap dealer or major
                                                  in reduced risk, increased transparency,                counterparties and replace those swaps             swap participant’s computerized
                                                  and greater market integrity in the                     with a smaller number of swaps whose               processing systems to facilitate
                                                  swaps market. The proposed swap                         combined notional value is less than the clearance and settlement.
                                                  confirmation, portfolio reconciliation,                 combined notional value of the original               (k) Prudential regulator has the
                                                  and portfolio compression rules would                   swaps included in the exercise.                    meaning given to the term in section
                                                  further the goal of avoiding market                        (c) Confirmation means the                      1a(39) of the Commodity Exchange Act
                                                  disruptions and financial losses to                     consummation (electronically or                    and includes the Board of Governors of
                                                  market participants and the general                     otherwise) of legally binding                      the Federal Reserve System, the Office
                                                  public. Among other benefits, the                       documentation (electronic or otherwise) of the Comptroller of the Currency, the
                                                  proposed rules would promote levels of                  that memorializes the agreement of the             Federal Deposit Insurance Corporation,
                                                  operational scalability and resilience                  counterparties to all of the terms of a            the Farm Credit Association, and the
emcdonald on DSK2BSOYB1PROD with PROPOSALS




                                                  that are most evident in periods of                     swap transaction. A confirmation must              Federal Housing Finance Agency, as
                                                  sustained high volume and market                        be in writing (whether electronic or               applicable to the swap dealer or major
                                                  volatility. Therefore, the Commission                   otherwise) and must legally supersede              swap participant. The term also
                                                  believes it is prudent to prescribe these               any previous agreement (electronically             includes the Federal Deposit Insurance
                                                  proposed regulations.                                   or otherwise). A confirmation is created Corporation, with respect to any
                                                     Public Comment. The Commission                       when an acknowledgment is manually,                financial company as defined in section
                                                  invites public comment on its cost-                     electronically, or by some other legally           201 of the Dodd-Frank Wall Street
                                                  benefit considerations. Commentators                    equivalent means, signed by the                    Reform and Consumer Protection Act or
                                                  are also invited to submit any data or                  receiving counterparty.                            any insured depository institution


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                                                                       Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules                                          81531

                                                  under the Federal Deposit Insurance                        (3) Each swap dealer and major swap                  (i) Once each business day for each
                                                  Act, and with respect to each affiliate of              participant shall establish, maintain,                swap portfolio that includes 300 or
                                                  any such company or institution.                        and enforce written policies and                      more swaps;
                                                     (l) Swap portfolio means all swaps                   procedures reasonably designed to                       (ii) Once each week for each swap
                                                  currently in effect between a particular                ensure that it executes a confirmation                portfolio that includes more than 50 but
                                                  swap dealer or major swap participant                   for each swap transaction that it enters              fewer than 300 swaps on any business
                                                  and a particular counterparty.                          into with a counterparty that is a                    day during any week; and
                                                     (m) Swap transaction means any                       financial entity within the same                        (iii) Once each calendar quarter for
                                                  event that results in a new swap or in                  calendar day as execution and with a                  each swap portfolio that includes no
                                                  a change to the terms of a swap,                        counterparty that is not a swap dealer,               more than 50 swaps at any time during
                                                  including execution, termination,                       major swap participant, or a financial                the calendar quarter.
                                                  assignment, novation, exchange,                         entity not later than the next business                 (4) Each swap dealer and major swap
                                                  transfer, amendment, conveyance, or                     day after execution. Such procedures                  participant shall resolve immediately
                                                  extinguishing of rights or obligations of               shall include a requirement that, prior               any discrepancy in a material term of a
                                                  a swap.                                                 to execution of any such swap, the swap               swap identified as part of a portfolio
                                                     (n) Unwind proposal means a                          dealer or major swap participant furnish              reconciliation.
                                                  proposal offered by the sponsor of a                    to a prospective counterparty, or receive               (5) Each swap dealer and major swap
                                                  multilateral portfolio compression                      from a prospective counterparty, a draft              participant shall resolve any
                                                  exercise which, if accepted, would                      acknowledgment specifying all terms of                discrepancy in a valuation identified as
                                                  wholly or partially terminate some or all               the swap transaction other than the                   part of a portfolio reconciliation within
                                                  of the original swaps included in the                   applicable pricing and other relevant                 one business day. A difference between
                                                  exercise.                                               terms that are to be expressly agreed at              the lower valuation and the higher
                                                     (o) Valuation means the current                      execution.                                            valuation of less than 10% of the higher
                                                  market value or net present value of a                     (b) Recordkeeping. (1) Each swap                   valuation need not be deemed a
                                                  swap.                                                   dealer and major swap participant shall               discrepancy.
                                                                                                          make and retain a record of:                            (b) Swaps with entities other than
                                                  § 23.501   Swap confirmation.                                                                                 swap dealers or major swap
                                                                                                             (i) The date and time of transmission
                                                     (a) Confirmation.                                    to, or receipt from, a counterparty of any            participants. Each swap dealer and
                                                     (1) Each swap dealer and major swap                  acknowledgment;                                       major swap participant shall establish,
                                                  participant entering into a swap                           (ii) The date and time of transmission             maintain, and enforce written policies
                                                  transaction with a counterparty that is a               to, or receipt from, a counterparty of any            and procedures for engaging in portfolio
                                                  swap dealer or major swap participant                   confirmation;                                         reconciliation as follows for all swaps in
                                                  shall execute a confirmation for the                       (iii) The length of time between                   which its counterparty is neither a swap
                                                  swap transaction according to the                       acknowledgment and confirmation of                    dealer nor a major swap participant.
                                                  following schedule:                                     each swap; and                                          (1) Each swap dealer or major swap
                                                     (i) For any swap transaction that has                   (iv) The length of time between                    participant shall agree in writing with
                                                  been executed and processed                             execution and confirmation of each                    each of its counterparties on the terms
                                                  electronically, within 15 minutes of                    swap.                                                 of the portfolio reconciliation.
                                                  execution;                                                 (2) All records required to be                       (2) The portfolio reconciliation may
                                                     (ii) For any swap transaction that is                maintained pursuant to this section                   be performed on a bilateral basis by the
                                                  not executed electronically, but that will              shall be maintained in accordance with                counterparties or by a qualified third
                                                  be processed electronically, within 30                  § 1.31 and shall be made available                    party.
                                                  minutes of execution; or                                promptly upon request to any                            (3) The portfolio reconciliation shall
                                                     (iii) For any swap transaction that                  representative of the Commission or any               be performed no less frequently than:
                                                  cannot be processed electronically by                   applicable prudential regulator, or with                (i) Once each business day for each
                                                  the swap dealer or major swap                           regard to swaps defined in section                    swap portfolio that includes 500 or
                                                  participant, within the same calendar                   1a(47)(A)(v), to any representative of the            more swaps;
                                                  day as execution.                                       Commission, the Securities and                          (ii) Once each week for each swap
                                                     (2) Each swap dealer and major swap                  Exchange Commission, or any                           portfolio that includes more than 100
                                                  participant entering into a swap                        applicable prudential regulator.                      but fewer than 500 swaps on any
                                                  transaction with a counterparty that is                                                                       business day during any week; and
                                                  not a swap dealer or a major swap                       § 23.502    Portfolio reconciliation.                   (iii) Once each calendar quarter for
                                                  participant shall send an                                  (a) Swaps with swap dealers or major               each swap portfolio that includes no
                                                  acknowledgment of such swap                             swap participants. Each swap dealer                   more than 100 swaps at any time during
                                                  transaction according to the following                  and major swap participant shall engage               the calendar quarter.
                                                  schedule:                                               in portfolio reconciliation as follows for              (4) Each swap dealer or major swap
                                                     (i) For any swap transaction that has                all swaps in which its counterparty is                participant shall establish, maintain,
                                                  been executed and processed                             also a swap dealer or major swap                      and enforce written procedures
                                                  electronically, within 15 minutes of                    participant.                                          reasonably designed to resolve any
                                                  execution;                                                 (1) Each swap dealer or major swap                 discrepancies in the material terms or
emcdonald on DSK2BSOYB1PROD with PROPOSALS




                                                     (ii) For any swap transaction that is                participant shall agree in writing with               valuation of each swap identified as part
                                                  not executed electronically, but that will              each of its counterparties on the terms               of a portfolio reconciliation process in a
                                                  be processed electronically, within 30                  of the portfolio reconciliation.                      timely fashion. A difference between the
                                                  minutes of execution; or                                   (2) The portfolio reconciliation may               lower valuation and the higher
                                                     (iii) For any swap transaction that                  be performed on a bilateral basis by the              valuation of less than 10% of the higher
                                                  cannot be processed electronically by                   counterparties or by a qualified third                valuation need not be deemed a
                                                  the swap dealer or major swap                           party.                                                discrepancy.
                                                  participant, within the same calendar                      (3) The portfolio reconciliation shall               (c) Reconciliation of cleared swaps.
                                                  day as execution.                                       be performed no less frequently than:                 Nothing in this section shall apply to a


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                                                  81532                Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules

                                                  swap that is cleared by a derivatives                   following with respect to each                        cash payment, or other risk tolerance
                                                  clearing organization.                                  multilateral portfolio compression                    levels set by the swap dealer or major
                                                     (d) Recordkeeping. A record of each                  exercise in which it participates:                    swap participant; and the results of the
                                                  swap portfolio reconciliation, including                   (i) Transactions included. Each swap               compression, including the
                                                  a record of each discrepancy and the                    dealer and major swap participant shall               identification of the swaps that were
                                                  length of time for resolution of each                   include in the multilateral portfolio                 terminated and any new swaps and the
                                                  discrepancy not resolved within one                     compression exercise all swaps in                     counterparties thereto that resulted from
                                                  business day, shall be maintained in                    which its counterparty is also a swap                 the exercise.
                                                  accordance with § 1.31 and shall be                     dealer or major swap participant that are
                                                                                                                                                                  (2) All records required to be
                                                  made available promptly upon request                    eligible to be included in the particular
                                                                                                                                                                maintained pursuant to this section
                                                  to any representative of the Commission                 exercise, unless including the swap
                                                                                                                                                                shall be maintained in accordance with
                                                  or any applicable prudential regulator,                 would be reasonably likely to
                                                                                                                                                                § 1.31 and shall be made available
                                                  or with regard to swaps defined in                      significantly increase the risk exposure
                                                                                                                                                                promptly upon request to any
                                                  section 1a(47)(A)(v) of the Act, to any                 of the swap dealer or major swap
                                                                                                                                                                representative of the Commission or any
                                                  representative of the Commission, the                   participant.
                                                                                                             (ii) Counterparty, market, and cash                applicable prudential regulator, or with
                                                  Securities and Exchange Commission,                                                                           regard to swaps defined in section
                                                  or any applicable prudential regulator.                 payment risk tolerances.
                                                                                                          Notwithstanding § 23.503(c)(3)(i), a                  1a(47)(A)(v) of the Act, to any
                                                  § 23.503   Portfolio compression.                       swap dealer or a major swap participant               representative of the Commission, the
                                                     (a) Bilateral offset. Each fully                     may establish counterparty, market,                   Securities and Exchange Commission,
                                                  offsetting swap between a swap dealer                   cash payment, or other risk tolerances or             or any applicable prudential regulator.
                                                  or major swap participant and another                   exclude specific potential                              Issued in Washington, DC on December 16,
                                                  swap dealer or major swap participant                   counterparties, provided that the swap                2010, by the Commission.
                                                  shall be terminated no later than the                   dealer or major swap participant does                 David A. Stawick,
                                                  close of business on the business day                   not use such risk tolerances or                       Secretary of the Commission.
                                                  following the day on which the                          counterparty exclusions to evade the
                                                  counterparties entered into the fully                   requirements of this regulation.                      Appendices to Confirmation, Portfolio
                                                  offsetting swap.                                          (iii) Acceptance of unwind proposal.                Reconciliation, and Portfolio
                                                     (b) Bilateral compression. Each swap                 No swap dealer or major swap                          Compression Requirements for Swap
                                                  dealer and major swap participant shall                 participant shall unreasonably                        Dealers and Major Swap Participants—
                                                  engage in a bilateral portfolio                         withhold, delay, or condition consent to              Commissioners Voting Summary and
                                                  compression exercise for each swap in                   an unwind proposal.                                   Statements of Commissioners
                                                  which the counterparty is also a swap                     (d) Policies and procedures.
                                                                                                            (1) Each swap dealer and major swap                   Note: The following appendices will not
                                                  dealer or major swap participant at least                                                                     appear in the Code of Federal Regulations.
                                                  once per calendar year, except to the                   participant shall establish, maintain,
                                                  extent that the swap dealer or major                    and enforce written policies and
                                                                                                                                                                Appendix 1—Commissioners Voting
                                                  swap participant and the counterparty                   procedures for engaging in the bilateral
                                                                                                                                                                Summary
                                                  have participated in a multilateral                     and multilateral portfolio compression
                                                  compression exercise involving such                     exercises required by this section with                 On this matter, Chairman Gensler and
                                                  swap during the same calendar year.                     respect to all swaps in which its                     Commissioners Dunn, Sommers, Chilton and
                                                     (c) Multilateral compression. Each                   counterparty is also a swap dealer or                 O’Malia voted in the affirmative. No
                                                                                                          major swap participant.                               Commissioner voted in the negative.
                                                  swap dealer and major swap participant
                                                  shall engage in the following portfolio                   (2) Each swap dealer and major swap                 Appendix 2—Statement of Chairman
                                                  compression exercises for each swap in                  participant shall establish, maintain,                Gary Gensler
                                                  which its counterparty is also a swap                   and enforce written policies and
                                                                                                          procedures for periodically terminating                  I support the proposed rulemaking that
                                                  dealer or major swap participant:                                                                             establishes essential business conduct
                                                     (1) Each swap dealer and major swap                  fully offsetting swaps and for
                                                                                                                                                                standards for swap dealers and major swap
                                                  participant shall participate in all                    periodically engaging in portfolio                    participants. Today’s rule establishes
                                                  multilateral portfolio compression                      compression exercises with respect to                 confirmation, portfolio reconciliation and
                                                  exercises required by Commission                        swaps in which its counterparty is an                 portfolio compression requirements for such
                                                  regulation or order.                                    entity other than a swap dealer or major              parties. The proposed regulations are
                                                     (2) Each swap dealer and major swap                  swap participant, to the extent that the              consistent with Congress’s direction through
                                                  participant shall participate in all                    outstanding swaps are able to be                      the Dodd-Frank Act to prescribe standards
                                                  multilateral portfolio compression                      terminated through a portfolio                        for the timely and accurate confirmation,
                                                  exercises that are initiated, offered, or               compression exercise.                                 processing, netting and valuation of swap
                                                                                                            (e) Recordkeeping. (1) Each swap                    transactions. One of the primary goals of
                                                  sponsored by any of the following
                                                                                                          dealer and major swap participant shall               Dodd-Frank Act was to establish a
                                                  entities to the extent that any swap in                                                                       comprehensive regulatory framework that
                                                  the portfolio of the swap dealer or major               make and maintain a record of each
                                                                                                                                                                would reduce risk, increase transparency and
                                                  swap participant is eligible for inclusion              bilateral offset and each bilateral or                promote market integrity. The proposed
                                                  in the exercise:                                        multilateral portfolio compression                    regulations accomplish this goal by
emcdonald on DSK2BSOYB1PROD with PROPOSALS




                                                     (i) Any derivatives clearing                         exercise in which it participates,                    establishing procedures that will promote
                                                  organization of which the swap dealer                   including the beginning and completion                legal certainty regarding swap transactions,
                                                  or major swap participant is a member;                  dates of the offset or exercise; the                  early resolutions of valuation disputes,
                                                  or                                                      included swaps and counterparties                     enhanced understanding of one
                                                     (ii) Any self-regulatory organization of             thereto; the swaps that were eligible for             counterparty’s risk exposure to another,
                                                  which the swap dealer or major swap                     inclusion in the exercise, but were                   reduced operational risk and increased
                                                  participant is a member.                                excluded by the swap dealer or major                  operational efficiency.
                                                     (3) Each swap dealer and major swap                  swap participant and the reason for the               [FR Doc. 2010–32264 Filed 12–27–10; 8:45 am]
                                                  participant shall comply with the                       exclusion; the counterparty, market,                  BILLING CODE 6351–01–P




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