[Federal Register Volume 76, Number 47 (Thursday, March 10, 2011)]
[Proposed Rules]
[Pages 13101-13111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4707]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 23, 37, 38, and 39

RIN 3038-AC98


Requirements for Processing, Clearing, and Transfer of Customer 
Positions

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
proposing regulations to implement Title VII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Dodd-Frank Act). Proposed 
regulations would establish the time frame for a swap dealer (SD), 
major swap participant (MSP), futures commission merchant (FCM), swap 
execution facility (SEF), and designated contract market (DCM) to 
submit contracts, agreements, or transactions to a derivatives clearing 
organization (DCO) for clearing. Proposed regulations also would 
facilitate compliance with DCO Core Principle C (Participant and 
Product Eligibility) in connection with standards for cleared products 
and the prompt and efficient processing of all contracts, agreements, 
and transactions submitted for clearing. The Commission is further 
proposing related regulations implementing SEF Core Principle 7 
(Financial Integrity of Transactions) and DCM Core Principle 11 
(Financial Integrity of Transactions), requiring coordination with DCOs 
in the

[[Page 13102]]

development of rules and procedures to facilitate clearing. 
Additionally, the Commission is proposing a regulation to implement DCO 
Core Principle F (Treatment of Funds), requiring a DCO, upon customer 
request, to promptly transfer customer positions and related funds from 
one clearing member to another, without requiring the close-out and re-
booking of the positions.

DATES: Submit comments on or before April 11, 2011.

ADDRESSES: You may submit comments, identified by RIN number 3038-AC98, 
by any of the following methods:
    <bullet> Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
    <bullet> Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
    <bullet> Hand Delivery/Courier: Same as mail above.
    <bullet> Federal eRulemaking Portal: http://www.Regulations.gov. 
Follow the instructions for submitting comments.

Please submit comments by only one method.

    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that may be exempt from disclosure under the Freedom of 
Information Act (FOIA), a petition for confidential treatment of the 
exempt information may be submitted according to the procedures 
established in Sec.  145.9 of the Commission's regulations.\1\ The 
Commission reserves the right, but shall have no obligation, to review, 
pre-screen, filter, redact, refuse, or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
FOIA.
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    \1\ Commission regulations referred to herein are found at 17 
CFR Ch. 1 (2010). They are accessible on the Commission's Web site 
at http://www.cftc.gov.

FOR FURTHER INFORMATION CONTACT: John C. Lawton, Deputy Director, 202-
418-5480, <a href="/cdn-cgi/l/email-protection#c2a8aea3b5b6adac82a1a4b6a1eca5adb4"><span class="__cf_email__" data-cfemail="93f9fff2e4e7fcfdd3f0f5e7f0bdf4fce5">[email protected]</span></a>; Phyllis P. Dietz, Associate Director, 202-
418-5449, <a href="/cdn-cgi/l/email-protection#7b0b1f121e0f013b181d0f18551c140d"><span class="__cf_email__" data-cfemail="2757434e42535d674441534409404851">[email protected]</span></a>; Sarah E. Josephson, Associate Director, 202-
418-5684, <a href="/cdn-cgi/l/email-protection#67140d081402170f140809270401130449000811"><span class="__cf_email__" data-cfemail="80f3eaeff3e5f0e8f3efeec0e3e6f4e3aee7eff6">[email protected]</span></a>, Division of Clearing and Intermediary 
Oversight; Riva Spear Adriance, Associate Director, 202-418-5494, 
<a href="/cdn-cgi/l/email-protection#62100306100b030c010722010416014c050d14"><span class="__cf_email__" data-cfemail="bcceddd8ced5ddd2dfd9fcdfdac8df92dbd3ca">[email protected]</span></a>; Nancy Markowitz, Assistant Deputy Director, 202-
418-5453, <a href="/cdn-cgi/l/email-protection#e38d8e8291888c948a9799a380859780cd848c95"><span class="__cf_email__" data-cfemail="a1cfccc0d3caced6c8d5dbe1c2c7d5c28fc6ced7">[email protected]</span></a>; Nadia Zakir, Attorney-Advisor, 202-418-
5720, <a href="/cdn-cgi/l/email-protection#77190d161c1e05371411031459101801"><span class="__cf_email__" data-cfemail="5a34203b3133281a393c2e39743d352c">[email protected]</span></a>; Mauricio Melara, Attorney-Advisor, 202-418-5719, 
<a href="/cdn-cgi/l/email-protection#234e4e464f42514263404557400d444c55"><span class="__cf_email__" data-cfemail="046969616865766544676270672a636b72">[email protected]</span></a>; Division of Market Oversight, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
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Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Title VII of the Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\2\ 
Title VII of the Dodd-Frank Act \3\ amended the Commodity Exchange Act 
(CEA) \4\ to establish a comprehensive regulatory framework to reduce 
risk, increase transparency, and promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and comprehensive regulation of SDs and MSPs; (2) imposing 
clearing and trade execution requirements on standardized derivative 
products; (3) creating rigorous recordkeeping and real-time reporting 
regimes; and (4) enhancing the Commission's rulemaking and enforcement 
authorities with respect to all registered entities and intermediaries 
subject to the Commission's oversight.
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \3\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \4\ 7 U.S.C. 1 et seq.
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    In this notice of proposed rulemaking, the Commission proposes to 
adopt regulations to establish the time frame for an SD, MSP, FCM, SEF, 
or DCM to process and submit contracts, agreements, or transactions to 
a DCO for clearing; to establish certain product standards and a time 
frame for a DCO to clear such contracts, agreements, and transactions; 
and to facilitate a DCO's transfer of open positions from a carrying 
clearing member to another clearing member without unwinding and re-
booking the position. These supplement proposed regulations that were 
previously published for public comment.\5\
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    \5\ See e.g., 76 FR 6715, Feb. 8, 2011 (proposed rules for SD 
and MSP documentation); 76 FR 3698, Jan. 20, 2011, (proposed rules 
for DCO Core Principles C and F); 76 FR 1214, Jan. 7, 2011 (proposed 
rules for SEF Core Principle 7; 75 FR 81519, Dec. 28, 2010, 
(proposed rules for SD and MSP confirmation, portfolio 
reconciliation, and portfolio compression); 75 FR 80572, Dec. 22, 
2010 (proposed rules for DCM Core Principle 11).
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B. Existing Swap Clearing Practices

1. Time Frame for Clearing
    Currently, a significant number of swaps are not cleared and, for 
those that are cleared, there may be a delay in the substitution of a 
DCO as the counterparty to the transaction through a novation of the 
original contract, agreement, or transaction.\6\ In many instances, 
this delay can be up to a week. For example, some clearinghouses accept 
bilateral trades for clearing on a batched basis once a week. This time 
lag potentially presents credit risk to the swap counterparties and the 
DCO because the value of a position may change significantly between 
the time of execution and the time of novation, thereby allowing 
financial exposure to accumulate in the absence of daily mark-to-
market. Among the purposes of clearing are the reduction of risk and 
the enhancement of financial certainty, and this delay diminishes these 
benefits of clearing swaps that Congress sought to promote in the Dodd-
Frank Act. Delay in clearing is also inconsistent with other proposed 
regulations concerning product eligibility and financial integrity of 
transactions insofar as the delay constrains liquidity and increases 
risk.
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    \6\ A clearinghouse becomes the counterparty to trades with 
market participants through novation, an open offer system, or an 
analogous legally binding arrangement. Through novation, the 
original contract between the buyer and seller is extinguished and 
replaced by two new contracts, one between the clearinghouse and the 
buyer and the other between the clearinghouse and the seller. In an 
open offer system, a clearinghouse is automatically and immediately 
interposed in a transaction at the moment the buyer and seller agree 
on the terms.
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    The Commission recognizes that there may be instances when a delay 
in acceptance of a transaction by a DCO is unavoidable. For instance, 
when new products are first listed for clearing, existing legacy 
transactions may have to be moved into clearing incrementally. However, 
this process, sometimes referred to as backloading or migration, should 
be accomplished as quickly as possible.
    The swap market infrastructure established by the Dodd-Frank Act 
provides for the trading of swaps on a SEF or DCM. The Dodd-Frank Act 
also

[[Page 13103]]

establishes certain parameters for the bilateral execution of swaps 
among entities registered as SDs or MSPs and their counterparties. 
Swaps traded on a SEF or DCM, as well as swaps executed bilaterally, 
that are subject to mandatory clearing (and have not been electively 
excepted from mandatory clearing by an end user under section 2(h)(7) 
of the CEA), must be cleared by a registered DCO. For swaps executed 
bilaterally that are not required to be cleared, if the parties to the 
transaction agree to clear, they may submit the swap to a registered 
DCO for clearing.
    Through this proposed rulemaking, the Commission seeks to expand 
access to, and to strengthen the financial integrity of, the swap 
markets subject to Commission oversight by requiring, and establishing 
uniform standards for, prompt processing, submission, and acceptance of 
swaps eligible for clearing by DCOs. This requires setting an 
appropriate time frame for the processing and submission of swaps for 
clearing, as well as a time frame for the clearing of swaps by the DCO.
2. Transfer of Swaps Positions and Related Funds
    Currently, in the futures industry, a request by a customer to 
transfer its open positions and related funds from its carrying FCM to 
another FCM is accomplished within a reasonable period of time 
(typically within two business days). However, under current practice 
for some cleared swaps, a customer's request to transfer all or a 
portion of its swap positions and related funds may be subject to a 
more significant delay. (A party to a cleared swap may wish to transfer 
its positions from its current clearing member to another clearing 
member because there is concern about the carrying clearing member's 
financial strength or for competitive reasons relating to customer 
service or pricing). In these instances, a party must either enter into 
an offsetting position without terminating its original position, 
thereby creating economically unnecessary trades, or ``unwind'' the 
position with the clearinghouse.
    In proposing a new regulation to implement DCO Core Principle F 
(Treatment of Funds), the Commission seeks to ensure that DCOs do not 
impose economic or operational obstacles to the prompt transfer of 
customer positions and related funds from one clearing member to 
another, upon the request of a customer. The Commission's purpose in 
this regard is to formalize and apply to swaps clearing, the futures 
clearinghouse practice of transferring customer positions and related 
funds without close-out and re-booking of the positions.

II. Proposed Regulations

A. Proposed Sec.  23.506--SD and MSP Submission of Swaps for Processing 
and Clearing

1. Proposed Regulations
    Section 731 of the Dodd-Frank Act amends the CEA by adding a new 
section 4s, which sets forth a number of requirements for SDs and MSPs. 
Specifically, section 4s(i) of the CEA establishes swap documentation 
standards for SDs and MSPs and requires them to ``conform with such 
standards as may be prescribed by the Commission by rule or regulation 
that relate to timely and accurate confirmation, processing, netting, 
documentation, and valuation of all swaps.'' Accordingly, the 
Commission is proposing regulations on swap processing and clearing 
discussed below, pursuant to the authority granted under sections 
4s(h)(1)(D), 4s(h)(3)(D), 4s(i), and 8a(5) of the CEA.\7\ These 
proposed regulations for SDs and MSPs are intended to complement the 
proposed regulations for DCOs, which require timely acceptance of swaps 
for clearing.\8\
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    \7\ 7 U.S.C. 6s(h)(1)(D); 7 U.S.C. 6s(h)(3)(D); 7 U.S.C. 6s(i); 
and 7 U.S.C. 12a(5). Section 8a(5) of the CEA authorizes the 
Commission to promulgate such regulations as, in the judgment of the 
Commission, are reasonably necessary to effectuate any of the 
provisions or to accomplish any of the purposes of the CEA.
    \8\ See discussion in section II.B. of this notice.
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    In order to ensure compliance with any mandatory clearing 
requirement issued pursuant to section 2(h)(1) of the CEA and to 
promote the mitigation of counterparty credit risk through the use of 
central clearing, the Commission is proposing Sec.  23.506(a)(1), which 
would require that SDs and MSPs have the ability to route swaps that 
are not executed on a SEF or DCM to a DCO in a manner that is 
acceptable to the DCO for the purposes of risk management. Under Sec.  
23.506(a)(2), SDs and MSPs would also be required to coordinate with 
DCOs to facilitate prompt and efficient processing in accordance with 
proposed regulations related to the timing of clearing by DCOs.
    Proposed Sec.  23.506(a) does not prescribe the manner by which SDs 
or MSPs route their swaps to DCOs and provide for prompt and efficient 
processing. Indeed, in many instances, it is likely that DCOs will 
enable SDs and MSPs to submit their swaps to clearing via third-party 
platforms and other service providers. In this manner, privately 
negotiated swaps may be submitted to DCOs with minimal burden on market 
participants.
    Proposed Sec.  23.506(b) would set forth timing requirements for 
submitting swaps to DCOs in those instances where the swap is subject 
to a clearing mandate and in those instances when a swap is not subject 
to a mandate. Under Sec.  23.506(b)(1), an SD or MSP would be required 
to submit a swap that is not executed on a SEF or DCM, but is subject 
to a clearing mandate under section 2(h)(1) of the CEA (and has not 
been electively excepted from mandatory clearing by an end user under 
section 2(h)(7) of the CEA) as soon as technologically practicable 
following execution of the swap, but no later than the close of 
business on the day of execution.
    For those swaps that are not subject to a clearing mandate, but 
both counterparties to the swap have elected to clear the swap, under 
proposed Sec.  23.506(b)(2), the SD or MSP would be required to submit 
the swap for clearing not later than the next business day after 
execution of the swap or the agreement to clear, if later than 
execution. This time frame reflects the possibility that, unlike a 
trade that takes place on a DCM, in the case of a bilateral swap, the 
parties may need time to agree to terms that would conform with a DCO's 
template for swaps it will accept for clearing. As noted previously, 
any delay between execution and novation to a clearinghouse potentially 
presents credit risk to the swap counterparties and the DCO because the 
value of the position could change significantly between the time of 
execution and the time of novation, thereby allowing financial exposure 
to accumulate in the absence of daily mark-to-market. The proposed 
regulation would serve to limit this delay as much as reasonably 
possible.
    Proposed Sec.  23.506 is consistent with regulations previously 
proposed for SDs and MSPs, including proposed Sec.  23.501, which 
requires confirmation of all swaps.\9\ In fact, by providing for 
confirmation upon acceptance for clearing pursuant to proposed Sec.  
39.12(b)(7)(v), SDs and MSPs would be able to satisfy proposed Sec.  
23.501.
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    \9\ See 76 FR at 81531.
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    Proposed Sec.  23.506 is consistent with the Commission's proposed 
regulations requiring reporting of swap transaction data to a 
registered swap data repository.\10\ Under these proposed regulations, 
SDs and MSPs are required to report certain information about a

[[Page 13104]]

swap that is not executed on a SEF or DCM to a registered swap data 
repository ``promptly following verification of the primary economic 
terms by the counterparties with each other at or immediately following 
execution of the swap, but in no event later than: 30 minutes after 
execution of the swap if verification of primary economic terms occurs 
electronically; or 24 hours after execution of a swap if verification 
of primary economic terms does not occur electronically.'' \11\ One of 
the ``primary economic terms'' required to be reported under such 
proposed regulations is an indication of whether or not the swap will 
be cleared by a DCO.\12\
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    \10\ See 75 FR 76574, Dec. 8, 2010 (proposed rules for swap data 
recordkeeping and reporting requirements).
    \11\ Proposed Sec.  45.3(a)(1)(iii)(A), 75 FR at 76600.
    \12\ Proposed Sec.  45.1(q)(20), 75 FR at 76598.
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    The proposed regulation also is consistent with the Commission's 
proposed regulations requiring real-time public reporting of swap 
transaction and pricing data.\13\ Under these proposed regulations, SDs 
and MSPs are required to report certain information about a swap that 
is not executed on a SEF or DCM to a registered swap data repository 
that accepts and publicly disseminates swap transaction and pricing 
data, as soon as technologically practicable following execution of 
such swap.\14\ The information required to be reported under the 
proposed regulations includes an indication of whether or not a swap is 
cleared by a DCO.\15\
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    \13\ See 75 FR 76140, Dec. 7, 2010 (proposed rules for real-time 
public reporting of swap transaction data).
    \14\ Proposed Sec.  43.3(a)(3), 75 FR at 76172.
    \15\ Proposed Sec.  43.4 and Appendix A to part 43, 75 FR at 
76174 and 76177.
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2. Solicitation of Comments
    The Commission solicits comment on all aspects of the proposed 
Sec.  23.506. It further requests responses to the following specific 
questions: Should the regulations specify how an SD or MSP must ensure 
that it has the capacity to route swaps to a DCO? Are there any 
systemic obstacles to the DCO, SD, and MSP coordination required under 
the proposed regulation?
    Are the proposed time frames in Sec.  23.506(b) appropriate? Are 
they operationally feasible? What is the operational feasibility of 
same-day clearing for swaps executed bilaterally that are required to 
be cleared and those that will not be required to be cleared? The 
Commission further requests comment on the use of the phrase ``as soon 
as technologically practicable.''

B. Proposed Sec.  39.12--Acceptance and Clearing of Swaps by a DCO

1. Recently Proposed Product Eligibility Standards Under Core Principle 
C
    Core Principle C requires each DCO to establish ``appropriate 
standards for determining the eligibility of agreements, contracts, or 
transactions submitted to the [DCO] for clearing.'' \16\ The Commission 
has previously proposed Sec.  39.12(b) to implement this provision,\17\ 
pursuant to its rulemaking authority under sections 5b(c)(2)(A) and 
8a(5) of the CEA.\18\
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    \16\ Section 5b(c)(2)(C)(i)(II) of the CEA; 7 U.S.C. 7a-
1(c)(2)(C)(i)(II).
    \17\ See 76 FR 3698.
    \18\ 7 U.S.C. 7a-1(c)(2)(A); and 7 U.S.C. 12a(5).
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    As previously published for public notice and comment, proposed 
Sec.  39.12(b)(1) would require a DCO to establish appropriate 
requirements for determining the eligibility of agreements, contracts, 
or transactions submitted to the DCO for clearing, taking into account 
the DCO's ability to manage the risks associated with such agreements, 
contracts, or transactions.\19\ Proposed Sec.  39.12(b)(2) would codify 
the requirements of section 2(h)(1)(B) of the CEA regarding a DCO's 
offset of economically equivalent swaps.\20\ Proposed Sec.  39.12(b)(3) 
would require a DCO to select contract unit sizes that maximize 
liquidity, open access, and risk management.\21\ Finally, proposed 
Sec.  39.12(b)(4) would require each DCO that clears swaps to have 
rules stating that upon acceptance of a swap by the DCO for clearing, 
(i) the original swap is extinguished, (ii) it is replaced by equal and 
opposite swaps between clearing members and the DCO, (iii) all terms of 
the cleared swaps must conform to templates established under DCO 
rules, and (iv) if a swap is cleared by a clearing member on behalf of 
a customer, all terms of the swap, as carried in the customer account 
on the books of the clearing member, must conform to the terms of the 
cleared swap established under the DCO's rules.\22\
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    \19\ See 76 FR at 3720.
    \20\ Id. Section 2(h)(1)(B) of the CEA, 7 U.S.C. 2(h)(1)(B), 
requires a DCO to adopt rules providing that all swaps with the same 
terms and conditions submitted to the DCO for clearing are 
economically equivalent within the DCO and may be offset with each 
other within the DCO. Section 2(h)(1)(B) further requires a DCO to 
provide for non-discriminatory clearing of a swap executed 
bilaterally or on or subject to the rules of an unaffiliated SEF or 
DCM.
    \21\ See 76 FR at 3720.
    \22\ Id.
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2. Re-Proposed and Newly Proposed Regulations
    To refine and supplement the previously proposed regulations 
implementing Core Principle C, the Commission is (1) re-proposing Sec.  
39.12(b)(2) to clarify the role of a DCO in establishing the terms and 
conditions for swaps that it accepts for clearing; \23\ (2) proposing a 
new Sec.  39.12(b)(4) that would prohibit a DCO from refusing to clear 
a product where neither party to the original contract, agreement, or 
transaction is a clearing member; (3) re-proposing Sec.  39.12(b)(3) 
(renumbered as Sec.  39.12(b)(5)) to clarify a DCO's role and 
objectives in selecting contract units for clearing purposes that are 
smaller than the contract units in which trades submitted for clearing 
were executed; and (4) proposing a new Sec.  39.12(b)(7) that would 
clarify the timing of the actions described in previously proposed 
Sec. Sec.  39.12(b)(4)(i) and (ii) (renumbered as paragraph (b)(6)), 
i.e., requirements that upon acceptance of a swap by the DCO for 
clearing, (i) the original swap is extinguished and (ii) it is replaced 
by equal and opposite swaps between clearing members and the DCO.
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    \23\ To provide additional clarity regarding open access to 
clearing, the Commission is proposing to renumber the second 
sentence of proposed Sec.  39.12(b)(2) as Sec.  39.12(b)(3) and to 
insert a new paragraph (b)(4). Accordingly, proposed paragraphs 
(b)(3) and (b)(4) would be renumbered as paragraphs (b)(5) and 
(b)(6), respectively.
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(a) Section 39.12(b)(2)
    As previously proposed, Sec.  39.12(b)(2) required a DCO to ``adopt 
rules providing that all swaps with the same terms and conditions 
submitted to the derivatives clearing organization for clearing are 
economically equivalent within the derivatives clearing organization 
and may be offset with each other within the derivatives clearing 
organization.'' \24\ It also required that a DCO provide for non-
discriminatory clearing of a swap executed bilaterally or on or subject 
to the rules of an unaffiliated SEF or DCM.\25\
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    \24\ See 76 FR at 3720.
    \25\ Id.
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    The Commission is proposing to revise the first provision of Sec.  
39.12(b)(2) to clarify that a DCO must adopt rules to establish 
templates for the terms and conditions of swaps that it will clear. 
Accordingly, the proposed provision now reads: ``A derivatives clearing 
organization shall adopt rules providing that all swaps with the same 
terms and conditions, as defined by templates established under 
derivatives clearing organization rules, submitted to the derivatives 
clearing organization for

[[Page 13105]]

clearing are economically equivalent within the derivatives clearing 
organization and may be offset with each other within the derivatives 
clearing organization.''
    As noted above, the second provision of previously proposed Sec.  
39.12(b)(2) would be unchanged, and would be renumbered as Sec.  
39.12(b)(3).
(b) Section 39.12(b)(4)
    Some clearinghouses have indicated that they intend to require 
that, for a transaction to be eligible for clearing, one of the 
executing parties must be a clearing member. This has the effect of 
preventing trades between two parties who are not clearing members from 
being cleared. Such a restriction of open access serves no apparent 
risk management purpose and operates to keep certain trades out of the 
clearing process and to constrain liquidity for cleared trades. 
Moreover, such restrictions also may raise competitive issues under 
Core Principle N (Antitrust Considerations).\26\
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    \26\ See Section 5b(c)(2)(N) of the CEA, which provides that 
``Unless necessary or appropriate to achieve the purposes of this 
Act, a derivatives clearing organization shall not--
     (i) Adopt any rule or take any action that results in any 
unreasonable restraint of trade; or
     (ii) Impose any material anticompetitive burden.''
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    Accordingly, the Commission is proposing new Sec.  39.12(b)(4) to 
prohibit a DCO from refusing to clear a product where neither party to 
the original contract, agreement, or transaction is a clearing member. 
The Commission notes that parties that are not clearing members would 
still have to submit their bilateral trades for clearing through a 
clearing member of the DCO.
(c) Section 39.12(b)(5)
    The Commission previously proposed Sec.  39.12(b)(3), now proposed 
to be renumbered at Sec.  39.12(b)(5), which would require a DCO to 
``select contract unit sizes that maximize liquidity, open access, and 
risk management.'' \27\ To the extent appropriate to further these 
objectives, a DCO would be further required to select contract units 
for clearing purposes that are smaller than the contract units in which 
trades submitted for clearing were executed.\28\ The purpose of this 
provision is to require the DCO to split a cleared swap into smaller 
units in order to promote liquidity by permitting more parties to trade 
the product, to facilitate open access by permitting more clearing 
members to clear the product, and to aid risk management by enabling a 
DCO, in the event of a default, to have more potential counterparties 
to take on positions during a liquidation.
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    \27\ See 76 FR at 3720.
    \28\ Id.
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    The Commission is now proposing to expand its description of the 
actions to be undertaken by the DCO and the objectives to be served. 
Accordingly, the Commission proposes that the introductory sentence of 
Sec.  39.12(b)(5) read as follows: ``A derivatives clearing 
organization shall select contract unit sizes and other terms and 
conditions that maximize liquidity, facilitate transparency in pricing, 
promote open access, and allow for effective risk management.'' This 
would clarify that, in establishing product templates under its rules, 
the DCO is required to select other terms and conditions in addition to 
unit size, such as termination or maturity period, settlement features, 
and cash flow conventions, to facilitate price transparency in addition 
to liquidity, open access, and risk management.
(d) Section 39.12(b)(7)
    Proposed Sec.  39.12(b)(7)(i) would establish general standards for 
the adoption of rules that establish a time frame for clearing. The DCO 
would have to coordinate with each SEF and DCM that lists for trading a 
product that is cleared by the DCO, in developing rules and procedures 
to facilitate prompt and efficient processing of all contracts, 
agreements, and transactions submitted to the DCO for clearing.
    For prompt and efficient clearing to occur, the rules, procedures, 
and operational systems of the trading platform and the clearinghouse 
must mesh. Vertically integrated trading and clearing systems currently 
process high volumes of transactions quickly and efficiently. The 
Commission believes that trading platforms and DCOs under separate 
control should be able to coordinate with one another to achieve 
similar results. The Commission also recognizes that there may be 
issues of connectivity between and among trading platforms and 
clearinghouses. The Commission requests comment on how best to 
facilitate the development of infrastructure, systems, and procedures 
to address these issues.
    Proposed paragraph (ii) would require a DCO to have rules that 
provide that the DCO will accept for clearing, immediately upon 
execution, all contracts, agreements, and transactions that are listed 
for clearing by the DCO and (A) that are entered into on or subject to 
the rules of a SEF or DCM; (B) for which the executing parties have 
clearing arrangements in place with clearing members of the DCO; and 
(C) for which the executing parties identify the DCO as the intended 
clearinghouse.
    Rules, procedures, and operational systems along these lines 
currently work well for many exchange-traded futures. Similar 
requirements could be applied across multiple exchanges and 
clearinghouses for swaps. The parties would need to have clearing 
arrangements in place with clearing members in advance of execution. In 
cases where more than one DCO offered clearing services, the parties 
also would need to specify in advance where the trade should be sent 
for clearing.
    Proposed paragraph (iii), which governs swaps subject to mandatory 
clearing, would require a DCO to have rules that provide that the DCO 
will accept for clearing, upon submission, all contracts, agreements, 
and transactions that are listed for clearing by the DCO and (A) That 
are not executed on or subject to the rules of a SEF or DCM; (B) that 
are subject to mandatory clearing pursuant to section 2(h) of the CEA; 
(C) that are submitted by the parties to the DCO, in accordance with 
Sec.  23.506 of the Commission's regulations; (D) for which the 
executing parties have clearing arrangements in place with clearing 
members of the DCO; and (E) for which the executing parties identify 
the DCO as the intended clearinghouse.
    Proposed paragraph (iv) would provide for a longer time frame for 
clearing swaps not executed on or subject to the rules of a SEF or DCM 
and not subject to mandatory clearing. It would require a DCO to have 
rules that provide that the DCO will process for clearing, no later 
than the close of business on the day of submission to the DCO, all 
swaps that are listed for clearing by the DCO and (A) that are not 
executed on a SEF or a DCM; (B) that are not subject to mandatory 
clearing pursuant to section 2(h) of the CEA; (C) that are submitted by 
the parties to the DCO in accordance with proposed Sec.  23.506; (D) 
for which the executing parties have clearing arrangements in place 
with clearing members of the DCO; and (E) for which the executing 
parties identify the DCO as the intended clearinghouse.
    Because the execution of bilateral trades might not be automated 
and because the parties to a trade might not decide that they want to 
clear the trade until some time after execution, immediate clearing 
might not be feasible. However, a DCO should provide sufficient clarity 
about its participant and product eligibility requirements to enable 
swap counterparties to determine whether a bilateral trade would be 
acceptable to be cleared within one day of submission.
    Proposed Sec.  39.12(b)(7)(v) would require that DCOs accepting a 
swap for

[[Page 13106]]

clearing provide the counterparties with a definitive written record of 
the terms of their agreement, which will serve as a confirmation of the 
swap. This requirement would facilitate the timely processing and 
confirmation of swaps not executed on a SEF or DCM by allowing parties 
to confirm their transaction by submitting it to a DCO for clearing. 
Swaps executed on a SEF or DCM are confirmed upon execution.\29\ In 
other regulations proposed by the Commission, a swap confirmation is 
defined as the consummation (electronically or otherwise) of legally 
binding documentation (electronic or otherwise) that memorializes the 
agreement of the counterparties to all of the terms of a swap.\30\ By 
providing for confirmation upon acceptance for clearing, SDs and MSPs 
would be able to satisfy proposed Sec.  23.501, which requires timely 
confirmation of all swaps.
---------------------------------------------------------------------------

    \29\ See 76 FR at 1240.
    \30\ See 75 FR 76140; and 75 FR 76574.
---------------------------------------------------------------------------

(e) Proposed Sec. Sec.  37.702 and 38.601--Reciprocal Requirements for 
SEFs and DCMs
    In connection with proposing that a DCO coordinate the development 
of rules and procedures with each SEF and DCM that lists for trading a 
product that is cleared by the DCO, the Commission is re-proposing 
certain amendments to parts 37 and 38 of the Commission's regulations 
to include reciprocal coordination obligations for SEFs and DCMs.
    The Commission previously proposed Sec. Sec.  37.700 to 703 to 
implement SEF Core Principle 7 (Financial Integrity of Transactions), 
pursuant to its rulemaking authority under sections 5h(h) and 8a(5) of 
the CEA.\31\ Core Principle 7 requires a SEF to ``establish and enforce 
rules and procedures for ensuring the financial integrity of swaps 
entered on or through the facilities of the swap execution facility, 
including the clearing and settlement of the swaps pursuant to section 
2(h)(1) [of the CEA].'' \32\ As previously proposed, Sec.  37.702(b) 
would require a SEF to provide for the financial integrity of its 
transactions cleared by a DCO by ensuring that the SEF has the capacity 
to route transactions to the DCO in a manner acceptable to the DCO for 
purposes of risk management.\33\ In this notice, the Commission 
proposes to renumber previously proposed Sec.  37.702(b) as paragraph 
(b)(1) and add a new paragraph (b)(2) to require the SEF to 
additionally provide for the financial integrity of cleared 
transactions by coordinating with each DCO to which it submits 
transactions for clearing, in the development of rules and procedures 
to facilitate prompt and efficient transaction processing in accordance 
with the requirements of Sec.  39.12(b)(7) of the Commission's 
regulations.
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    \31\ See 76 FR 1214; 7 U.S.C. 7b-3(h); and 7 U.S.C. 12a(5).
    \32\ Section 5h(f)(7) of the CEA, 7 U.S.C. 7b-3(f)(7).
    \33\ See 76 FR at 1248. Section 37.702(b), as originally 
proposed, referred to ``ongoing'' risk management. In renumbering 
and re-proposing this provision herein, the Commission is deleting 
the term ``ongoing'' because it is superfluous and could create 
confusion when read in conjunction with other Commission regulations 
that refer to ``risk management.'' See, e.g., proposed Sec.  39.13 
relating to risk management for DCOs, 76 FR at 3720.
---------------------------------------------------------------------------

    Similarly, the Commission previously proposed Sec. Sec.  38.600 to 
607 to implement DCM Core Principle 11 (Financial Integrity of 
Transactions) pursuant to its rulemaking authority under sections 
5(d)(1) and 8a(5) of the CEA.\34\ Core Principle 11 requires a DCM to 
``establish and enforce--(A) rules and procedures for ensuring the 
financial integrity of transactions entered into on or through the 
facilities of the contract market (including the clearance and 
settlement of the transactions with a derivatives clearing 
organization); and (B) rules to ensure--(i) the financial integrity of 
any--(I) futures commission merchant; and (II) introducing broker; and 
(ii) the protection of customer funds.'' \35\ As previously proposed, 
Sec.  38.601 would require that transactions executed on or through a 
DCM, other than transactions in security futures products, must be 
cleared through a registered DCO in accordance with the provisions of 
part 39 of the Commission's regulations.\36\ In this notice, the 
Commission proposes to renumber this provision as paragraph (a) of 
proposed Sec.  38.601 and add a new paragraph (b) to specifically 
require the DCM to coordinate with each DCO to which it submits 
transactions for clearing, in the development of DCO rules and 
procedures to facilitate prompt and efficient transaction processing in 
accordance with the requirements of Sec.  39.12(b)(7) of the 
Commission's regulations.
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    \34\ See 75 FR 80572; 7 U.S.C. 7(d)(1); and 7.U.S.C. 12a(5).
    \35\ Section 5(d)(11) of the CEA, 7 U.S.C. 7(d)(11).
    \36\ See 75 FR at 80618.
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3. Solicitation of Comments
    The Commission solicits comment on all aspects of the proposed 
regulations. It further requests responses to the following specific 
questions: Are there any systemic or legal obstacles to the DCO, SEF, 
and DCM coordination required under the proposed regulation? Are the 
proposed time frames appropriate? Are they operationally feasible? More 
specifically, for futures traded on a DCM, rules and procedures are in 
place under which bunched orders are accepted for clearing immediately 
upon execution, with allocation to individual customer accounts 
occurring before the end of the day. Are similar procedures 
operationally feasible for swaps executed as block trades? What amount 
of time is necessary for asset managers to allocate block trades to the 
individual entities on whose behalf they manage money, prior to the 
allocated trades being sent to clearing (i.e. end of day, two hours, 
etc.)? Should the submission of block trades to a DCO be treated 
differently than other trades executed on or subject to the rules of a 
SEF or DCM? What is the operational feasibility of same-day clearing 
for bilateral swaps that are not required to be cleared?

C. Proposed Sec.  39.15--Transfer of Customer Positions and Related 
Funds

1. Recently Proposed Treatment of Funds Standards Under Core Principle 
F
    Core Principle F, as amended by the Dodd-Frank Act,\37\ requires a 
DCO to: (a) Establish standards and procedures that are designed to 
protect and ensure the safety of its clearing members' funds and 
assets; (b) hold such funds and assets in a manner by which to minimize 
the risk of loss or of delay in the DCO's access to the assets and 
funds; and (c) only invest such funds and assets in instruments with 
minimal credit, market, and liquidity risks.\38\ The Commission has 
proposed Sec.  39.15 to establish standards for compliance with Core 
Principle F.\39\
---------------------------------------------------------------------------

    \37\ Section 5b(c)(2)(F) of the CEA; 7 U.S.C. 7a-1(c)(2)(F) 
(Core Principle F).
    \38\ Prior to amendment by the Dodd-Frank Act, Core Principle F 
provided that ``[t]he applicant shall have standards and procedures 
designed to protect and ensure the safety of member and participant 
funds.''
    \39\ See 76 FR at 3723.
---------------------------------------------------------------------------

2. Newly-Proposed Regulations
    To supplement the previously proposed regulations implementing Core 
Principle F, the Commission is proposing a new Sec.  39.15(d) to 
require a DCO to facilitate the prompt transfer of customer positions 
from one clearing member of the DCO to another clearing member of the 
DCO.\40\
---------------------------------------------------------------------------

    \40\ In connection with the proposed addition of new paragraph 
(d), the Commission also proposes to renumber previously proposed 
paragraph (d) as paragraph (e).
---------------------------------------------------------------------------

    Efficient and complete portability of customer positions and the 
funds

[[Page 13107]]

related to those positions is important in both pre-default and post-
default scenarios. A DCO should therefore structure its portability 
arrangements in a way that facilitates the prompt and efficient 
transfer of all or a portion of a customer's positions and funds from 
one clearing member to one or more other clearing members. A DCO's 
rules and procedures should require clearing members to facilitate the 
transfer of customer positions and funds upon the customer's request, 
subject to any notice or other contractual requirements.
    Proposed Sec.  39.15(d) would require a DCO to have rules providing 
that, upon the request of a customer and subject to the consent of the 
receiving clearing member, the DCO will promptly transfer all or a 
portion of such customer's portfolio of positions and related funds 
from the carrying clearing member of the DCO to another clearing member 
of the DCO, without requiring the close-out and re-booking of the 
positions prior to the requested transfer. The term ``promptly,'' as 
used in this provision is intended to mean as soon as possible and 
within a reasonable period of time. Based on current futures industry 
standards, this time frame is typically no more than two business days. 
The requirement that a DCO not require close-out and re-booking of 
positions eliminates a source of unnecessary delay and market 
disruption, and conforms with current futures industry practice.\41\ 
The Commission is unaware of any reason that the transfer of cleared 
swaps positions cannot be accomplished by means of the same process 
that has been used for futures positions.
---------------------------------------------------------------------------

    \41\ See, e.g., National Futures Association Rule 2-27 
``Transfer of Customer Accounts'' (requiring that in response to a 
customer's request to transfer its account, the carrying member must 
confirm the account balances and positions to the receiving member 
and then effect the requested transfer); and Chicago Mercantile 
Exchange Rule 853 ``Transfer of Trades'' (permitting existing trades 
to be transferred either on the books of a clearing member or from 
one clearing member to another clearing member provided 1. the 
transfer merely constitutes a change from one account to another 
account where the underlying beneficial ownership in the accounts 
remains the same; or 2. an error has been made in the clearing of a 
trade and the error is discovered and the transfer is completed 
within two business days after the trade date).
---------------------------------------------------------------------------

3. Solicitation of Comments
    The Commission requests comment on whether the use of the term 
``promptly'' provides adequate guidance or whether another descriptive 
term or phrase, such as ``within a reasonable period of time'' or ``as 
soon as practicable'' would better convey the intended meaning. The 
Commission is not proposing that a specific time frame be included in 
Sec.  39.15(d) because as technology evolves, it is likely that the 
transfer of customer positions and related funds can be accomplished 
more quickly and with greater operational efficiency. The Commission 
requests comment on the proposed time frame and possible alternative 
standards that could be applied.
    As noted above, the Commission believes that the transfer of 
cleared customer swap positions can be processed in the same manner as 
futures positions. The Commission requests comment on whether there are 
distinctions between futures and cleared swaps positions that would 
require a different type of processing such that the cleared swaps 
positions would have to be closed out and re-booked prior to transfer 
from the carrying clearing member to another clearing member.
    The proposed regulation places an obligation on the DCO to promptly 
transfer customer positions and related funds, and the Commission 
requests comment on whether the regulation also should require that a 
DCO adopt rules that would require its clearing members to facilitate 
prompt transfer of customer accounts.

III. Related Matters

A. Regulatory Flexibility Act

1. Swap Dealers and Major Swap Participants
    The Regulatory Flexibility Act (RFA) requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities.\42\ The 
Commission previously has established certain definitions of ``small 
entities'' to be used in evaluating the impact of its regulations on 
small entities in accordance with the RFA.\43\ The proposed regulations 
would affect SDs and MSPs.
---------------------------------------------------------------------------

    \42\ 5 U.S.C. 601 et seq.
    \43\ 47 FR 18618, Apr. 30, 1982.
---------------------------------------------------------------------------

    SDs and MSPs are new categories of registrants. Accordingly, the 
Commission has not previously addressed the question of whether such 
persons are, in fact, small entities for purposes of the RFA. The 
Commission previously has determined, however, that futures commission 
merchants (FCMs) should not be considered to be small entities for 
purposes of the RFA.\44\ The Commission's determination was based, in 
part, upon the obligation of FCMs to meet the minimum financial 
requirements established by the Commission to enhance the protection of 
customers' segregated funds and protect the financial condition of FCMs 
generally.\45\ Like FCMs, SDs will be subject to minimum capital and 
margin requirements and are expected to comprise the largest global 
financial firms. The Commission is required to exempt from SD 
registration any entities that engage in a de minimis level of swaps 
dealing in connection with transactions with or on behalf of customers. 
The Commission anticipates that this exemption would tend to exclude 
small entities from registration. Accordingly, for purposes of the RFA 
for this rulemaking, the Commission is hereby proposing that SDs not be 
considered ``small entities'' for essentially the same reasons that 
FCMs have previously been determined not to be small entities and in 
light of the exemption from the definition of SD for those engaging in 
a de minimis level of swap dealing.
---------------------------------------------------------------------------

    \44\ Id. at 18619.
    \45\ Id.
---------------------------------------------------------------------------

    The Commission also has previously determined that large traders 
are not ``small entities'' for RFA purposes.\46\ In that determination, 
the Commission considered that a large trading position was indicative 
of the size of the business. MSPs, by statutory definition, maintain 
substantial positions in swaps or maintain outstanding swap positions 
that create substantial counterparty exposure that could have serious 
adverse effects on the financial stability of the United States banking 
system or financial markets. Accordingly, for purposes of the RFA for 
this rulemaking, the Commission is hereby proposing that MSPs not be 
considered ``small entities'' for essentially the same reasons that 
large traders have previously been determined not to be small entities.
---------------------------------------------------------------------------

    \46\ Id. at 18620.
---------------------------------------------------------------------------

    Moreover, the Commission is carrying out Congressional mandates by 
proposing this regulation. Specifically, the Commission is proposing 
these regulations to comply with the Dodd-Frank Act, the aim of which 
is to reduce systemic risk presented by SDs and MSPs through 
comprehensive regulation. The Commission does not believe that there 
are regulatory alternatives to those being proposed that would be 
consistent with the statutory mandate. Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) 
that the proposed regulations will not have a significant economic 
impact on a substantial number of small entities.
    The Commission invites the public to comment on whether SDs and 
MSPs should be considered small entities for purposes of the RFA.

[[Page 13108]]

2. Swap Execution Facilities
    As noted above, the RFA requires that agencies consider whether the 
regulations they propose will have a significant economic impact on a 
substantial number of small entities. The Commission previously has 
established certain definitions of ``small entities'' to be used in 
evaluating the impact of its regulations on small entities in 
accordance with the RFA.
    The regulations adopted herein will affect SEFs. While SEFs are new 
entities to be regulated by the Commission pursuant to the Dodd-Frank 
Act, in a recent rulemaking proposal,\47\ the Commission proposed that 
SEFs should not be considered as small entities for the purpose of the 
RFA. The Dodd-Frank Act defines a SEF to mean ``a trading system or 
platform in which multiple participants have the ability to execute or 
trade swaps by accepting bids and offers made by multiple participants 
in the facility or system, through any means of interstate commerce, 
including any trading facility, that--(A) facilitates the execution of 
swaps between persons; and (B) is not a designated contract market.'' 
\48\
---------------------------------------------------------------------------

    \47\ 75 FR 63745-46 (Oct. 18, 2010).
    \48\ See section 1a(50) of the CEA. In addition, the Commission 
proposed regulations regarding the types of entities that must 
register as SEFs. See 76 FR 1214. The Commission does not believe 
that such proposals would alter its determination that a SEF is not 
a ``small entity'' for purposes of the RFA.
---------------------------------------------------------------------------

    In such rulemaking, the Commission proposed that SEFs not be 
considered to be ``small entities'' for essentially the same reasons 
that DCMs and DCOs have previously been determined not to be small 
entities. These reasons include the fact that the Commission designates 
a DCM or registers a DCO only when it meets specific criteria including 
the expenditure of sufficient resources to establish and maintain 
adequate self-regulatory programs. Likewise, the Commission will 
register an entity as a SEF only after it has met specific criteria 
including the expenditure of sufficient resources to establish and 
maintain an adequate self-regulatory program.\49\ Once registered, a 
SEF will be required to comply with the additional requirements set 
forth in the final form of the proposed Part 37 rulemaking.\50\ Under 
such rulemaking, the Commission proposed that SEFs should also not be 
considered small entities based on, among other things, the central 
role SEFs will play in the national regulatory scheme overseeing the 
trading of swaps.\51\ Not only will SEFs play a vital role in the 
national economy, but they will be subject to Commission oversight with 
statutory duties to enforce the regulations adopted by their own 
governing bodies.
---------------------------------------------------------------------------

    \49\ See 76 FR 1214.
    \50\ Id.
    \51\ Id. at 1235.
---------------------------------------------------------------------------

    Accordingly, the Commission does not expect the regulations, as 
proposed herein, to have a significant economic impact on a substantial 
number of small entities. Therefore, the Chairman, on behalf of the 
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the 
proposed regulations will not have a significant economic impact on a 
substantial number of small entities.
    The Commission invites the public to comment on whether SEFs should 
be considered small entities for purposes of the RFA.
3. Designated Contract Markets and Derivatives Clearing Organizations
    The regulations proposed by the Commission will affect DCMs and 
DCOs (some of which will be designated as systemically important DCOs). 
As noted above, the Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its regulations on small entities in 
accordance with the RFA. The Commission has previously determined that 
DCMs and DCOs are not small entities for the purpose of the RFA.\52\ 
Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations 
will not have a significant economic impact on a substantial number of 
small entities.
---------------------------------------------------------------------------

    \52\ See 47 FR 18618, 18621, Apr. 30, 1982 (DCM determination); 
66 FR 45605, 45609, Aug. 29, 2001 (DCO determination).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \53\ imposes certain requirements 
on Federal agencies in connection with their conducting or sponsoring 
any collection of information as defined by the PRA. Under the PRA, an 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid control number from the Office of Management and Budget (OMB). 
The Commission believes that these proposed regulations will not impose 
any new information collection requirements that require approval of 
OMB under the PRA.
---------------------------------------------------------------------------

    \53\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

C. Cost-Benefit Analysis

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before issuing a rulemaking under the 
CEA. By its terms, Section 15(a) does not require the Commission to 
quantify the costs and benefits of a regulation or to determine whether 
the benefits of the rulemaking outweigh its costs; rather, it requires 
that the Commission ``consider'' the costs and benefits of its action.
    Section 15(a) further specifies that the costs and benefits shall 
be evaluated in light of five broad areas of market and public concern: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission may in its discretion give 
greater weight to any one of the five enumerated areas and could in its 
discretion determine that, notwithstanding its costs, a particular 
regulation is necessary or appropriate to protect the public interest 
or to effectuate any of the provisions or to accomplish any of the 
purposes of the CEA.
    Summary of proposed requirements. The proposed regulations would 
establish the time frame for SDs, MSPs, FCMs, DCMs, and SEFs to submit 
contracts, agreements, or transactions to a DCO for clearing. The 
proposed regulations would implement new section 4s(i) of the CEA by 
establishing standards for SDs and MSPs related to the timely 
processing and clearing of swaps. The proposed regulations also would 
implement SEF Core Principle 7 (Financial Integrity of Transactions) 
and DCM Core Principle 11 (Financial Integrity of Transactions), 
requiring coordination with DCOs in the development of rules and 
procedures to facilitate clearing. Additionally, the proposed 
regulations would facilitate compliance with DCO Core Principle C 
(Participant and Product Eligibility) in connection with the prompt and 
efficient processing of all contracts, agreements, and transactions 
submitted for clearing. Finally, the proposed regulations would 
implement DCO Core Principle F (Treatment of Funds), requiring a DCO, 
upon customer request, to promptly transfer customer positions and 
related funds from one clearing member to another, without requiring 
the close-out and re-booking of the positions.
    Costs. The Commission has determined that the costs borne by SDs, 
MSPs, FCMs, SEFs, DCMs, and DCOs to implement the new timing 
requirements for processing and clearing positions and for transferring 
customer positions and related funds, may be limited and far outweighed 
by the accrual of benefits to the financial system as a result of the

[[Page 13109]]

regulations' implementation. Indeed, as discussed in Section I.B.2., 
the timely transfer of futures positions and funds is currently 
practiced; thus, the additional costs of similar processes for swaps 
may not be too significant. Rather, timely transfers of positions and 
funds between clearing members would reduce economic and operational 
obstacles. Moreover, the Commission has determined that the costs of 
implementing new timing requirements for clearing would not be 
significantly burdensome to a DCO given that immediate processing and 
clearing of futures contracts is the current industry standard. 
Furthermore, the clearing delays in the swaps market (as discussed in 
Sections I.B.1, above) creates a credit risk because the value of 
position may change between execution and novation, thereby allowing 
financial exposure to accumulate in the absence of daily mark-to-
market, and additionally can have negative effects on liquidity and the 
market's price discovery function.
    Benefits. The Commission has determined that the benefits of the 
proposed regulations are considerable. Through this proposed 
rulemaking, market access will be expanded by requiring and 
establishing uniform standards for, prompt processing and clearing of 
swaps eligible for clearing by DCOs. Other benefits of timely clearing 
include the promotion of centralized trading and clearing; increased 
financial and legal certainty; and the timely notice of information so 
that parties and market participants can gauge risk exposure, 
liquidity, and market integrity. Timely clearing increases liquidity, 
enhances price discovery for traders, and reduces risk to markets by 
informing market participants of margin concerns and whether safeguards 
should be triggered. Significantly, the Commission notes that these 
regulations would aid market participants in fully complying with Dodd-
Frank's overarching mandate to promote clearing of swaps. The proposed 
new regulation regarding a DCO's timely transfer of swaps positions and 
related funds would benefit market participants by eliminating economic 
or operational obstacles to customer transfers between clearing 
members. In addition, the standardization of swaps clearing and 
procedures for customer account transfer will be more akin to valuable 
practices used in the futures market. The Commission believes it is 
prudent to employ similar practices in the swaps markets.

List of Subjects

17 CFR Part 23

    Antitrust, Commodity futures, Conduct standards, Conflicts of 
interests, Major swap participants, Reporting and recordkeeping, Swap 
dealers, Swaps.

17 CFR Part 37

    Swaps, Swap execution facilities, Registration application, 
Registered entities, Reporting and recordkeeping requirements.

17 CFR Part 38

    Block transaction, Commodity futures, Designated contract markets, 
Reporting and recordkeeping requirements, Transactions off the 
centralized market.

17 CFR Part 39

    Commodity futures, Participant and product eligibility, Risk 
management, Swaps.

    In light of the foregoing, the Commission hereby proposes to amend 
part 23, as proposed to be added at 75 FR 71390, November 23, 2010, and 
further amended at 75 FR 81530, December 28, 2010; part 37, as proposed 
to be revised at 76 FR 1237, January 7, 2011; part 38, as proposed to 
be amended at 75 FR 80606, December 22, 2010; and part 39, as proposed 
to be amended at 76 FR 3717, January 20, 2011, of Title 17 of the Code 
of Federal Regulations as follows:

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

    1. The authority citation for part 23 is revised to read as 
follows:

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

    2. Revise the table of contents for part 23, subpart I to read as 
follows:

Subpart I--Swap Documentation

Sec.
23.500 Definitions.
23.501 Swap confirmation.
23.502 Portfolio reconciliation.
23.503 Portfolio compression.
23.504 Swap trading relationship documentation.
23.505 End user exception documentation.
23.506 Swap processing and clearing.

    3. Add Sec.  23.506 to part 23, subpart I, to read as follows:


Sec.  23.506  Swap processing and clearing.

    (a) Swap processing. (1) Each swap dealer and major swap 
participant shall ensure that it has the capacity to route swap 
transactions not executed on a swap execution facility or designated 
contract market to a derivatives clearing organization in a manner 
acceptable to the derivatives clearing organization for the purposes of 
risk management; and
    (2) Each swap dealer and major swap participant shall coordinate 
with each derivatives clearing organization to which the swap dealer, 
major swap participant, or its clearing member, submits transactions 
for clearing, to facilitate prompt and efficient swap transaction 
processing in accordance with the requirements of Sec.  39.12(b)(7) of 
this chapter.
    (b) Swap clearing. With respect to each swap that is not executed 
on a swap execution facility or a designated contract market, each swap 
dealer and major swap participant shall:
    (1) If such swap is subject to a mandatory clearing requirement 
pursuant to section 2(h)(1) of the Act and an exception pursuant to 
2(h)(7) is not applicable, submit such swap for clearing to a 
derivatives clearing organization as soon as technologically 
practicable after execution of the swap, but no later than the close of 
business on the day of execution; or
    (2) If such swap is not subject to a mandatory clearing requirement 
pursuant to section 2(h)(1) of the Act but is accepted for clearing by 
any derivatives clearing organization and the swap dealer or major swap 
participant and its counterparty agree that such swap will be submitted 
for clearing, submit such swap for clearing not later than the next 
business day after execution of the swap, or the agreement to clear, if 
later than execution.

PART 37--SWAP EXECUTION FACILITIES

    4. Revise the authority citation for part 37 to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a-2, 7b-3 and 12a, as 
amended by the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376.

Subpart H--Financial Integrity of Transactions

    5. Amend Sec.  37.702 by revising paragraph (b) to read as follows:


Sec.  37.702  General financial integrity.

* * * * *
    (b) For transactions cleared by a derivatives clearing 
organization:
    (1) By ensuring that the swap execution facility has the capacity 
to route transactions to the derivative clearing organization in a 
manner acceptable to the derivatives clearing organization for purposes 
of risk management; and

[[Page 13110]]

    (2) By coordinating with each derivatives clearing organization to 
which it submits transactions for clearing, in the development of rules 
and procedures to facilitate prompt and efficient transaction 
processing in accordance with the requirements of Sec.  39.12(b)(7) of 
this chapter.
* * * * *

PART 38--DESIGNATED CONTRACT MARKETS

    6. Revise the authority citation for part 38 to read as follows:

    Authority:  7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 6f, 6g, 6i, 6j, 
6k, 6l, 6m, 6n, 7, 7a-2, 7b, 7b-1, 7b-3, 8, 9, 15, and 21, as 
amended by the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376.

Subpart L--Financial Integrity of Transactions

    7. Revise Sec.  38.601 to read as follows:


Sec.  38.601  Mandatory clearing.

    (a) Transactions executed on or through the designated contract 
market, other than transactions in security futures products, must be 
cleared through a Commission-registered derivatives clearing 
organization, in accordance with the provisions of part 39 of this 
chapter.
    (b) A designated contract market must coordinate with each 
derivatives clearing organization to which it submits transactions for 
clearing, in the development of rules and procedures to facilitate 
prompt and efficient transaction processing in accordance with the 
requirements of Sec.  39.12(b)(7) of this chapter.

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    8. Revise the authority citation for part 39 to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6d, 7a-1, 7a-2, and 7b as 
amended by the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376.

Subpart B--Compliance With Core Principles

    9. Amend Sec.  39.12 by revising paragraphs (b)(2) through (b)(4), 
and adding paragraphs (b)(5) through (b)(7), to read as follows:


Sec.  39.12  Participant and product eligibility.

    (a) * * *
    (b) * * *
    (2) A derivatives clearing organization shall adopt rules providing 
that all swaps with the same terms and conditions, as defined by 
templates established under derivatives clearing organization rules, 
submitted to the derivatives clearing organization for clearing are 
economically equivalent within the derivatives clearing organization 
and may be offset with each other within the derivatives clearing 
organization.
    (3) A derivatives clearing organization shall provide for non-
discriminatory clearing of a swap executed bilaterally or on or subject 
to the rules of an unaffiliated swap execution facility or designated 
contract market.
    (4) A derivatives clearing organization shall not require that one 
of the original executing parties must be a clearing member in order 
for a contract, agreement, or transaction to be eligible for clearing.
    (5) A derivatives clearing organization shall select contract unit 
sizes and other terms and conditions that maximize liquidity, 
facilitate transparency in pricing, promote open access, and allow for 
effective risk management. To the extent appropriate to further these 
objectives, a derivatives clearing organization shall select contract 
units for clearing purposes that are smaller than the contract units in 
which trades submitted for clearing were executed.
    (6) A derivatives clearing organization that clears swaps shall 
have rules providing that, upon acceptance of a swap by the derivatives 
clearing organization for clearing:
    (i) The original swap is extinguished;
    (ii) The original swap is replaced by equal and opposite swaps 
between clearing members and the derivatives clearing organization;
    (iii) All terms of the cleared swaps must conform to templates 
established under derivatives clearing organization rules; and
    (iv) If a swap is cleared by a clearing member on behalf of a 
customer, all terms of the swap, as carried in the customer account on 
the books of the clearing member, must conform to the terms of the 
cleared swap established under the derivatives clearing organization's 
rules.
    (7) Time frame for clearing. (i) General. Each derivatives clearing 
organization shall coordinate with each swap execution facility and 
designated contract market that lists for trading a product that is 
cleared by the derivatives clearing organization, in developing rules 
and procedures to facilitate prompt and efficient processing of all 
contracts, agreements, and transactions submitted to the derivatives 
clearing organization for clearing.
    (ii) Transactions executed on or subject to the rules of a swap 
execution facility or designated contract market. A derivatives 
clearing organization shall have rules that provide that the 
derivatives clearing organization will accept for clearing, immediately 
upon execution, all contracts, agreements, and transactions that are 
listed for clearing by the derivatives clearing organization and
    (A) That are entered into on a swap execution facility or 
designated contract market;
    (B) For which the executing parties have clearing arrangements in 
place with clearing members of the derivatives clearing organization; 
and
    (C) For which the executing parties identify the derivatives 
clearing organization as the intended clearinghouse.
    (iii) Swaps not executed on or subject to the rules of a swap 
execution facility or a designated contract market and subject to 
mandatory clearing. A derivatives clearing organization shall have 
rules that provide that the derivatives clearing organization will 
accept for clearing, upon submission to the derivatives clearing 
organization, all swaps that are listed for clearing by the derivatives 
clearing organization and
    (A) That are not executed on a swap execution facility or a 
designated contract market;
    (B) That are subject to mandatory clearing pursuant to section 2(h) 
of the Act;
    (C) That are submitted by the parties to the derivatives clearing 
organization, in accordance with Sec.  23.506 of this chapter;
    (D) For which the executing parties have clearing arrangements in 
place with clearing members of the derivatives clearing organization; 
and
    (E) For which the executing parties identify the derivatives 
clearing organization as the intended clearinghouse.
    (iv) Swaps not executed on or subject to the rules of a swap 
execution facility or a designated contract market and not subject to 
mandatory clearing. A derivatives clearing organization shall have 
rules that provide that the derivatives clearing organization will 
accept for clearing, no later than the close of business on the day of 
submission to the derivatives clearing organization, all swaps that are 
listed for clearing by the derivatives clearing organization and
    (A) That are not executed on a swap execution facility or a 
designated contract market;
    (B) That are not subject to mandatory clearing pursuant to section 
2(h) of the Act;

[[Page 13111]]

    (C) That are submitted by the parties to the derivatives clearing 
organization, in accordance with Sec.  23.506 of this chapter;
    (D) For which the executing parties have clearing arrangements in 
place with clearing members of the derivatives clearing organization; 
and
    (E) For which the executing parties identify the derivatives 
clearing organization as the intended clearinghouse.
    (v) All swaps not executed on a swap execution facility or a 
designated contract market and submitted for clearing. A derivatives 
clearing organization shall have rules that provide that all swaps 
submitted to the derivatives clearing organization for clearing shall 
include written documentation that memorializes all of the terms of the 
transaction and legally supersedes any previous agreement. The 
confirmation of all terms of the transaction shall take place at the 
same time as the swap is accepted for clearing.
    10. Amend Sec.  39.15 by revising paragraph (d) and adding 
paragraph (e) to read as follows:


Sec.  39.15  Treatment of funds.

* * * * *
    (d) Transfer of customer positions. A derivatives clearing 
organization shall have rules providing that, upon the request of a 
customer and subject to the consent of the receiving clearing member, 
the derivatives clearing organization will promptly transfer all or a 
portion of such customer's portfolio of positions and related funds 
from the carrying clearing member of the derivatives clearing 
organization to another clearing member of the derivatives clearing 
organization, without requiring the close-out and re-booking of the 
positions prior to the requested transfer.
    (e) Permitted investments. Funds and assets belonging to clearing 
members and their customers that are invested by a derivatives clearing 
organization shall be held in instruments with minimal credit, market, 
and liquidity risks. Any investment of customer funds or assets by a 
derivatives clearing organization shall comply with Sec.  1.25 of this 
part, as if all such funds and assets comprise customer funds subject 
to segregation pursuant to section 4d(a) of the Act and Commission 
regulations thereunder.

    Issued in Washington, DC, on February 24, 2011, by the 
Commission.
David A. Stawick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations

Appendices to Requirements for Processing, Clearing and Transfer of 
Customer Positions--Commission Voting Summary and Statements of 
Commissioners

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, 
Sommers, Chilton and O'Malia voted in the affirmative; no 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rulemaking regarding straight-through 
processing because it furthers the goal of expanding access to and 
strengthening the financial integrity of the swap markets. These 
proposed regulations would require and establish uniform standards 
for prompt processing, submission and acceptance for clearing of 
swaps eligible for clearing. Such uniform standards, similar to the 
practices in the futures markets, lower risk because they allow 
market participants to get the prompt benefit of clearing rather 
than having to first enter into a bilateral transaction that would 
subsequently be moved into a clearinghouse.
    In addition, I support the requirement for prompt and efficient 
transfer of customer positions from a carrying clearing member of a 
clearinghouse to another clearing member of the clearinghouse, upon 
a customer's request. This would promote efficiency and avoid 
unnecessary delay and market disruption. Furthermore, users of 
derivatives could get the benefit of greater competition amongst 
clearing members.

[FR Doc. 2011-4707 Filed 3-9-11; 8:45 am]
BILLING CODE P


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