[Federal Register Volume 75, Number 225 (Tuesday, November 23, 2010)]
[Proposed Rules]
[Pages 71397-71408]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29009]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AC96


Regulations Establishing and Governing the Duties of Swap Dealers 
and Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission is proposing 
regulations to implement new statutory provisions enacted by Title VII 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The 
proposed regulations set forth certain duties imposed upon swap dealers 
and major swap participants registered with the Commission with regard 
to: Risk management procedures; monitoring of trading to prevent 
violations of applicable position limits; diligent supervision; 
business continuity and disaster recovery; disclosure and the ability 
of regulators to obtain general information; and antitrust 
considerations. The proposed regulations would implement the new 
statutory framework of section 4s(j) of the Commodity Exchange Act, 
added by section 731 of the Dodd-Frank Act, excepting regulations 
related to conflicts of interest pursuant to section 4s(j)(5), which 
will be addressed in a separate rulemaking. These regulations set forth 
certain duties with which swap dealers and major swap participants must 
comply to maintain registration as a swap dealer or major swap 
participant.

DATES: Submit comments on or before January 24, 2011.

ADDRESSES: You may submit comments, identified by RIN number 3038-AC96 
and Duties of Swap Dealers and Major Swap Participants, by any of the 
following methods:

[[Page 71398]]

    <bullet> Agency Web site, via its Comments Online process at http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
    <bullet> Mail: David 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 your comments using 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, a petition for confidential treatment of the exempt 
information may be submitted according to the procedures established in 
CFTC Regulation 145.9, 17 CFR 145.9.
    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 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Associate 
Director, 202-418-5684, <a href="/cdn-cgi/l/email-protection#0c7f66637f697c647f63624c6f6a786f226b637a"><span class="__cf_email__" data-cfemail="60130a0f13051008130f0e20030614034e070f16">[email protected]</span></a>; Frank N. Fisanich, Special 
Counsel, 202-418-5949, <a href="/cdn-cgi/l/email-protection#e88e8e819b8986818b80a88b8e9c8bc68f879e"><span class="__cf_email__" data-cfemail="93f5f5fae0f2fdfaf0fbd3f0f5e7f0bdf4fce5">[email protected]</span></a>; or Jocelyn Partridge, 
Special Counsel, 202-418-5926, <a href="/cdn-cgi/l/email-protection#fb918b9a898f89929f9c9ebb989d8f98d59c948d"><span class="__cf_email__" data-cfemail="2e445e4f5c5a5c474a494b6e4d485a4d00494158">[email protected]</span></a>; Division of 
Clearing and Intermediary Oversight, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act).\1\ Title VII of 
the Dodd-Frank Act \2\ amended the Commodity Exchange Act (CEA) \3\ 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 swap dealers and major swap participants; 
(2) imposing clearing and trade execution requirements on standardized 
derivative products; (3) creating rigorous recordkeeping and real-time 
reporting regimes; and (4) enhancing the rulemaking and enforcement 
authorities of the Commodity Futures Trading Commission (Commission or 
CFTC) with respect to all registered entities and intermediaries 
subject to the Commission's oversight.
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    \1\ 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.
    \2\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \3\ 7 U.S.C. 1 et seq.
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    Section 731 of the Dodd-Frank Act amends the CEA by inserting after 
section 4r a new section 4s that sets forth registration and regulatory 
requirements, including a variety of business conduct standards and 
duties, with which swap dealers and major swap participants must comply 
to maintain registration as a swap dealer or major swap participant.
    As part of an overall business conduct regime for swap dealers and 
major swap participants, section 4s(j) of the CEA sets forth certain 
duties for swap dealers and major swap participants, including the duty 
to: (1) Monitor trading to prevent violations of applicable position 
limits; (2) establish risk management procedures adequate for managing 
the day-to-day business of the swap dealer or major swap participant; 
(3) disclose to the Commission and to applicable prudential regulators 
\4\ general information relating to swaps trading, practices, and 
financial integrity; (4) establish and enforce internal systems and 
procedures to obtain information needed to perform all of the duties 
prescribed by Commission regulations; (5) implement conflict-of-
interest systems and procedures; \5\ and (6) refrain from taking any 
action that would result in an unreasonable restraint of trade or 
impose a material anticompetitive burden on trading or clearing. In 
this release, the Commission is proposing six regulations specifically 
addressing risk management, monitoring of positions limits, diligent 
supervision, business continuity and disaster recovery, the 
availability of general information, and antitrust considerations. The 
Commission would adopt these implementing regulations pursuant to 
authority granted under sections 4s(h)(1)(D), 4s(h)(3)(D), 4s(j)(7), 
and 8a(5) of the CEA.\6\ The Dodd-Frank Act requires the Commission to 
promulgate these provisions by July 15, 2011.
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    \4\ This term is defined for the purposes of this rulemaking and 
generally has the same meaning as section 1(a)(39) of the Commodity 
Exchange Act, which includes the Board of Governors of the Federal 
Reserve System, the Office of the Comptroller of the Currency, the 
Federal Deposit Insurance Corporation, the Farm Credit Association, 
and the Federal Housing Finance Agency.
    \5\ Conflicts of interest under section 4s(j)(5) of the CEA will 
be addressed in a separate rulemaking and the rules pertaining to 
conflicts of interest are not included in the following proposed 
rules.
    \6\ Section 8a(5) of the CEA authorizes the Commission, to 
promulgate such regulations as, in the judgement of the Commission, 
are reasonably necessary to effectuate any of the provisions or to 
accomplish any of the purposes of the CEA.
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    The proposed regulations reflect consultation with staff of the 
following agencies: (i) The Securities and Exchange Commission; (ii) 
the Board of Governors of the Federal Reserve System; (iii) the Office 
of the Comptroller of the Currency; and (iv) the Federal Deposit 
Insurance Corporation. Staff from each of these agencies has had the 
opportunity to provide oral and/or written comments to the proposal, 
and the proposed regulations incorporate elements of the comments 
provided.
    The Commission requests comment on all aspects of the proposed 
regulations, as well as comment on the specific provisions and issues 
highlighted in the discussion below. The Commission further requests 
comment on an appropriate effective date for final regulations, 
including comment on whether it would be appropriate to have staggered 
or delayed effective dates for some regulations based on the nature or 
characteristics of the activities or entities to which they apply. 
Moreover, the Commission recognizes that there will be differences in 
the size and scope of the business of particular swap dealers and major 
swap participants. Therefore, comments are solicited on whether certain 
provisions of the proposed regulations should be modified or adjusted 
to reflect the differences among swap dealers or major swap 
participants.

II. Proposed Regulations

A. Structure and Approach

    The proposed regulations set forth business conduct standards with 
which swap dealers and major swap participants must comply. Such duties

[[Page 71399]]

are outlined in section 4s(j) of the CEA and include: (1) Monitoring of 
trading; (2) risk management procedures; (3) disclosure of general 
information; (4) ability to obtain information; (5) conflicts of 
interest; and (6) antitrust considerations. Section 4s(j)(7) requires 
the Commission to prescribe rules implementing the enumerated duties.
    The proposed regulations will be grouped under a new subpart to 
part 23, chapter I, title 17 of the Code of Federal Regulations. The 
proposed regulations generally address monitoring of trading and risk 
management together in a single rule requiring each swap dealer and 
major swap participant to establish a comprehensive risk management 
program (rule 23.600). Although part of a comprehensive risk management 
program, monitoring of trading for compliance with applicable position 
limits (rule 23.601); diligent supervision of a swap dealer's or major 
swap participant's business (rule 23.602); and business continuity and 
disaster recovery requirements (rule 23.603) are addressed in separate 
rules for ease of reference. The availability for disclosure and 
inspection of general information (rule 23.606) and antitrust 
considerations (rule 23.607) also are addressed in separate rules. 
Conflicts of interest under section 4s(j)(5) of the CEA (rule 23.605) 
will be addressed in a separate notice of proposed rulemaking to be 
released at the same time as this proposal.

B. Risk Management

1. Overview
    Sections 4s(h)(1)(D), 4s(h)(3)(D), and 4s(j) of the CEA authorize 
the Commission to adopt those regulations regarding business conduct 
and risk management that the Commission deems necessary for the public 
interest and in furtherance of the CEA. Pursuant to this authority, the 
Commission is proposing regulation 23.600 to require swap dealers and 
major swap participants to establish a risk management program for 
monitoring and managing the risks associated with their business 
activities.
    The proposed risk management regulation contemplates that each 
legal entity that falls within the definition of swap dealer or major 
swap participant under the CEA and Commission regulations would be 
required to establish a risk management program and risk management 
unit. However, the Commission recognizes that the business activities 
engaged in and risks faced by one affiliate may increase the risk 
exposure or alter overall risk profile of another affiliate or the 
entity as a whole, and that, to be effective, a risk management program 
must protect against the risks resulting from the activities of 
interconnected or otherwise related entities. Accordingly, the proposed 
regulations would require each swap dealer and major swap participant 
to be able to demonstrate that, to the extent possible, it is taking an 
integrated approach to risk management at the consolidated entity 
level.
    Participants in the swap markets are exposed to various risks, 
including, but not limited to: (1) Market risk; \7\ (2) credit risk; 
\8\ (3) liquidity risk; \9\ (4) foreign currency risk; \10\ (5) legal 
risk; \11\ (6) operational risk; \12\ and (7) settlement risk.\13\ 
Managing all relevant risks should be integrated into the swap dealer 
and major swap participant's overall risk management structure. The 
Commission believes this approach is particularly warranted given that 
swap dealers and major swap participants may hold positions in a 
variety of financial instruments.
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    \7\ Market risk includes the risk that prices or rates will 
adversely change due to economic forces. This risk includes, among 
other things, changes in correlations between or among products 
(including all types of basis risk), volatility of market prices, 
and the sensitivity of option positions to other market factors.
    \8\ Credit risk includes the risk that a counterparty will be 
unable to meet fully its financial obligations when due or at any 
time in the future.
    \9\ Liquidity risk includes the risk that a firm will not be 
able to settle its obligations when due and/or without adverse price 
changes.
    \10\ Foreign currency risk is the risk arising from movements of 
foreign exchange rates.
    \11\ Legal risk includes risk of loss due to an unenforceable 
contract, an ultra vires act of a counterparty, or failure to comply 
with applicable law.
    \12\ Operational risk includes the risk of loss due to 
deficiencies in information systems, internal processes and 
staffing, or disruptions from external events that result in the 
reduction, deterioration, or breakdown in services or controls 
within the firm.
    \13\ Settlement risk includes the risk of loss arising when a 
party meets its payment obligation under a contract before its 
counterparty meets its payment obligation. Settlement risk lasts 
from the time an outgoing payment instruction can no longer be 
canceled unilaterally until the time the incoming payment is 
received with finality and reconciled.
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    Some of these risks are due, in part, to the characteristics of 
swap products and the way swap markets have evolved over time. For 
example, some swaps are customized or designed with unique 
characteristics that may present previously unforeseen or unpredictable 
risks. Also, for swaps not accepted for clearing, market participants 
face risks associated with the financial and legal ability of 
counterparties to perform under the terms of specific transactions. As 
part of a risk management program, risk managers must carefully review 
any unique product characteristics that may pose unusual risks and take 
steps to manage potential risks before trading commences.
    In the past, the importance of risk management has been highlighted 
by significant losses experienced by several large financial firms. 
Some of these losses were caused by unauthorized and undisclosed 
employee trading. In each case, these losses went virtually undetected 
by management because of the lack of proper internal procedures, 
including the separation of responsibility for recording the trades on 
the firms' books from the personnel responsible for trading. Internal 
risk management policies and procedures promote the stability, safety, 
and soundness of firms by reducing the risk of significant losses, 
which, in turn, may reduce the risk that spreading losses would cause 
defaults by multiple firms, thereby undermining markets as a whole.
    The Commission recognizes that an individual firm must have the 
flexibility to implement specific policies and procedures unique to its 
circumstances. The Commission's rule has been designed such that the 
specific elements of a risk management program will vary depending on 
the size and complexity of a swap dealer's or major swap participant's 
business operations. Risk management policies are expected to provide 
for appropriate risk measurement methodologies, compliance monitoring 
and reporting, and on-going testing and assessment of the overall 
effectiveness of the program. Consequently, proposed regulations 
23.600, 23.601, 23.602, and 23.603 would establish the general 
parameters for the design, implementation, review, and testing of a 
swap dealer's or major swap participant's risk management program, as 
well as a limited number of additional elements that the Commission 
believes are essential to an appropriate risk management program.
    The proposed rules would require a swap dealer or major swap 
participant to adopt policies and procedures to monitor and manage its 
risks, assess the effectiveness of those policies and procedures, and 
modify or update them, as necessary, from time to time. In addition, 
the proposed rule would require certain elements to be included in each 
swap dealer and major swap participant's risk management program to 
ensure that internal systems protect against universal risks. For 
example, to ensure the independence of the risk management process, the 
unit at the firm responsible for monitoring risk must be independent 
from the business trading unit whose activities create the risks. In 
addition, to ensure that trading

[[Page 71400]]

losses cannot be hidden, personnel responsible for recording 
transactions in the books of the swap dealer or major swap participant 
cannot be the same as those responsible for executing transactions. 
Similarly, all accounts, including suspense accounts, must be 
monitored.
    Finally, the swap dealer's or major swap participant's management 
must periodically review the firm's business activities for consistency 
with established risk management policies. This will ensure that 
personnel are operating within the scope of activity that management 
has determined to be permissible.
2. Risk Management Program
    Proposed regulation 23.600(b) provides a general requirement that a 
swap dealer or major swap participant establish and maintain a risk 
management program reasonably designed to monitor and manage the risks 
associated with its business as a swap dealer or major swap 
participant. It further provides (1) That such risk management program 
consist of written policies and procedures; (2) that such policies and 
procedures be approved by the governing body of the swap dealer or 
major swap participant and be furnished to the Commission; and (3) that 
a risk management unit that is independent from the business trading 
unit be established to administer the risk management program.
    The proposed regulations would require swap dealers and major swap 
participants to provide copies of the risk management policies and 
procedures to the Commission in order to allow the Commission to 
monitor the status of risk management practices among swap dealers and 
major swap participants. Submission of such policies and procedures to 
the Commission without further comment or action by the Commission or 
Commission staff should not be construed as an endorsement of the 
completeness or effectiveness of the risk management policies and 
procedures and no swap dealer or major swap participant should make a 
representation to the contrary. The Commission invites comments on the 
submission of risk management policies and procedures and, more 
generally, on whether the provisions of 23.600 have achieved a 
sufficient level of detail for the purposes of designing a 
comprehensive risk management program.
    Proposed regulation 23.600(c) would provide a non-exclusive list of 
the elements that must be a part of the risk management program of a 
swap dealer or major swap participant. Such policies and procedures 
should include: (1) Identifying risks and setting of risk tolerance 
limits; (2) providing periodic risk exposure reports to senior 
management and the governing body; (3) establishing a new product 
policy; and (4) establishing a risk management program that takes into 
account market risk, credit risk, liquidity risk, foreign currency 
risk, legal risk, operational risk, and settlement risk, including a 
process for evaluating and addressing risks associated with the use of 
models to derive market valuations or otherwise calculate or evaluate 
risk exposures. The regulation also would establish requirements for 
supervision of the business unit of a swap dealer or major swap 
participant, including monitoring of limits on individual traders and 
establishing procedures governing the use, supervision, and testing of 
any algorithmic trading program. The objective is to ensure that those 
capable of committing the capital of the swap dealer or major swap 
participant are properly supervised and subject to approved limits. 
Additionally, the risk management program should set forth requirements 
for compliance with Commission regulations related to capital and 
margin and for monitoring overall compliance with the risk management 
program. The rule also would require that swap dealers and major swap 
participants establish policies and procedures (1) to require the use 
of central counterparties for clearing where clearing is required 
pursuant to Commission regulation or order, and (2) to use central 
clearing as a means of mitigating counterparty credit risk.
    To ensure the continued effectiveness of a risk management program, 
proposed regulation 23.600(e) would require quarterly review and 
testing of the adequacy of each swap dealer and major swap 
participant's risk management program by internal audit staff or a 
qualified external, third party service. The Commission requests 
comment on these proposed audit and review requirements.

C. Monitoring of Position Limits

    Proposed regulation 23.601 would require swap dealers and major 
swap participants to establish policies and procedures to monitor, 
detect, and prevent violations of applicable position limits 
established by the Commission, a designated contract market, or a swap 
execution facility. This rule implements section 4s(j)(1) of the CEA, 
which requires each swap dealer and major swap participant to monitor 
its trading in swaps to prevent violations of applicable position 
limits. In order to prevent violations, each swap dealer and major swap 
participant would be required to provide training to all relevant 
employees on applicable position limits, actively monitor trading, 
implement an early warning system, test the effectiveness of its 
policies and procedures, and report quarterly to its senior management 
and governing body on compliance with applicable position limits. The 
Commission requests comment on how much time would be needed for swap 
dealers and major swap participants to come into compliance with new 
position limits that may be imposed.

D. Diligent Supervision

    Proposed regulation 23.602 implements section 4s(h)(1)(B) of the 
CEA, which requires each swap dealer and major swap participant to 
conform with Commission regulations related to diligent supervision of 
the business of the swap dealer and major swap participant. The 
proposed regulation provides (1) a requirement for diligent supervision 
reasonably designed to achieve compliance with the CEA and Commission 
regulations, and (2) requirements for qualification of supervisors and 
grants of appropriate supervisory authority.

E. Business Continuity and Disaster Recovery

    Given the observed interconnectedness of the current swap market, 
and as part of a comprehensive risk management program, the Commission 
believes that each swap dealer and major swap participant should be 
required to establish and maintain a business continuity and disaster 
recovery plan that is reasonably designed to minimize any disruption to 
the financial markets in the event of an emergency or a disruption of a 
swap dealer's or major swap participant's business operations. Proposed 
regulation 23.603 would require swap dealers and major swap 
participants to establish and maintain a business continuity and 
disaster recovery plan designed to enable the swap dealer or major swap 
participant to resume normal operations within one business day of an 
emergency or other disruption.
    To accomplish this task, swap dealers and major swap participants 
would be required to provide the Commission with emergency contacts; 
identify essential documents, data, facilities, infrastructure, and 
personnel, and maintain sufficient back-up facilities in a reasonably 
separate geographic location; design a plan for communicating with 
persons essential

[[Page 71401]]

for recovery; and annually test the business continuity and disaster 
recovery plan's effectiveness.
    The Commission invites comments regarding whether a comprehensive 
business continuity and disaster recovery plan is necessary for all 
entities that may register with the Commission as swap dealers or major 
swap participants and whether one business day is sufficient time for 
recovery of essential business operations. The Commission also invites 
comments regarding an appropriate effective date for this regulation 
given the amount of time and cost that may be necessary for 
implementation of a comprehensive business continuity and disaster 
recovery plan.

F. Disclosure and Ability To Obtain Information

    In order to carry out its oversight and examination 
responsibilities, the Commission would require access to certain 
information of swap dealers and major swap participants.\14\ Sections 
4s(j)(3) and 4s(j)(4) of the CEA require a swap dealer or major swap 
participant to (1) disclose to the Commission and to the swap dealer's 
or major swap participant's prudential regulator information regarding 
the terms and conditions of its swaps, its swap trading operations, 
mechanisms, and practices; its financial integrity protections relating 
to swaps, and other information relevant to its trading in swaps; and 
(2) establish internal systems to obtain necessary information to 
perform any of the functions described in section 4s and for disclosure 
of information to the Commission or prudential regulator upon request. 
Proposed regulation 23.606 would implement these requirements.
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    \14\ The oversight, supervision, and examination regimes for 
swap dealers and major swap participants remain under consideration 
by the Commission. The Commission is considering whether it will 
directly handle oversight, whether it may delegate authority to 
perform oversight to one or more self-regulatory organizations 
(SROs), or whether a combination of Commission and SRO oversight 
would be the optimal approach.
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    Proposed regulation 23.606(a) requires that swap dealers and major 
swap participants make available for disclosure and inspection all 
information required by the Commission, including those items listed in 
section 4s(j)(3). This information would be required to be disclosed 
promptly to the Commission or applicable prudential regulator in the 
manner and frequency as set forth in the relevant regulation. Proposed 
regulation 23.606(b) would require a swap dealer or major swap 
participant to establish and maintain adequate internal systems that 
will permit it to obtain any information required to satisfy its duties 
under section 4s(j) of the CEA.

G. Antitrust Considerations

    Section 4s(j)(6) of the CEA prohibits a swap dealer or major swap 
participant from adopting any process or taking any action that results 
in any unreasonable restraint of trade or imposes any material 
anticompetitive burden on trading or clearing, unless necessary or 
appropriate to achieve the purposes of the CEA. Proposed regulation 
23.607 would implement these prohibitions by requiring that the swap 
dealer or major swap participant adopt policies and procedures that 
would prevent unreasonable restraint of trade or the imposition of a 
material anticompetitive burden on trading or clearing.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that agencies 
consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities.\15\ The 
Commission previously has 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.\16\ The 
proposed rules would affect swap dealers and major swap participants.
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    \15\ 5 U.S.C. 601 et seq.
    \16\ 47 FR 18618, Apr. 30, 1982.
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    Swap dealers and major swap participants 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. However, the Commission previously has determined 
that futures commission merchants should not be considered to be small 
entities for purposes of the RFA.\17\ The Commission's determination 
was based, in part, upon the obligation of futures commission merchants 
to meet the minimum financial requirements established by the 
Commission to enhance the protection of customers' segregated funds and 
protect the financial condition of futures commission merchants 
generally.\18\ Like futures commission merchants, swap dealers 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 swap dealer designation 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 swap dealers not be considered ``small entities'' for 
essentially the same reasons that futures commission merchants have 
previously been determined not to be small entities and in light of the 
exemption from the definition of swap dealer for those engaging in a de 
minimis level of swap dealing.
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    \17\ Id. at 18619.
    \18\ Id.
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    The Commission has also previously determined that large traders 
are not ``small entities'' for RFA purposes.\19\ In that determination, 
the Commission considered that a large trading position was indicative 
of the size of the business. Major swap participants, 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 major swap participants not be 
considered ``small entities'' for essentially the same reasons that 
large traders have previously been determined not to be small entities.
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    \19\ Id. at 18620.
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    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 risks presented by swap dealers and swap market 
participants 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 rules will not have a significant 
economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \20\ imposes certain requirements 
on Federal agencies in connection with their conducting or sponsoring 
any collection of information as defined by the PRA. This proposed 
rulemaking would result in new collection of

[[Page 71402]]

information requirements within the meaning of the PRA. The Commission 
therefore is submitting this proposal to the Office of Management and 
Budget (OMB) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. The title for this collection of information is ``Regulations 
Establishing and Governing the Duties of Swap Dealers and Major Swap 
Participants.'' The OMB has not yet assigned this collection a control 
number. 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.
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    \20\ 44 U.S.C. 3501 et seq.
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    The collection of information under these proposed rules is 
necessary to implement certain provisions of the CEA, as amended by the 
Dodd-Frank Act. Specifically, it is essential to ensuring that swap 
dealers and major swap participants maintain risk management programs, 
business continuity and disaster recovery plans, procedures to ensure 
compliance with position limits, and antitrust procedures. Commission 
staff would use the information when conducting the Commission's 
examination and oversight program to evaluate the completeness and 
effectiveness of the procedures adopted by the registrants.
    If the proposed regulations are adopted, responses to this 
collection of information would be mandatory. The Commission will 
protect proprietary information according to the Freedom of Information 
Act and 17 CFR part 145, ``Commission Records and Information.'' In 
addition, section 8(a)(1) of the CEA strictly prohibits the Commission, 
unless specifically authorized by the CEA, from making public ``data 
and information that would separately disclose the business 
transactions or market positions of any person and trade secrets or 
names of customers.'' The Commission is also required to protect 
certain information contained in a government system of records 
according to the Privacy Act of 1974, 5 U.S.C. 552a.
1. Information Provided by Reporting Entities/Persons
    The proposed regulation would require each swap dealer and major 
swap participant to establish a risk management program (including 
specific policies for compliance with position limits and to ensure 
business continuity and disaster recovery); establish policies to 
prevent unreasonable restraints of trade and anticompetitive burdens; 
establish systems to diligently supervise the activities relating to 
its business; and make certain information available for disclosure and 
inspection by the Commission. These requirements may impose PRA 
burdens. The burden associated with the proposed regulation per 
registrant is estimated to be 204.5 hours per year, at an annual cost 
of $20,450. For purposes of the PRA, the term ``burden'' means the 
``time, effort, or financial resources expended by persons to generate, 
maintain, or provide information to or for a Federal Agency.'' \21\ 
This burden will result from the development of the required policies 
and procedures, satisfaction of various reporting obligations and the 
documentation of required testing.
---------------------------------------------------------------------------

    \21\ 44 U.S.C. 3502(2).
---------------------------------------------------------------------------

    It is not currently known how many swap dealers and major swap 
participants will become subject to these rules, and this will not be 
known to the Commission until the registration requirements for these 
entities become effective after July 16, 2011, the date on which the 
Dodd-Frank Act becomes effective. While the Commission believes that 
there may likely be approximately 200 swap dealers and 50 major swap 
participants, it has taken a conservative approach, for PRA purposes, 
in estimating that there will be a combined number of 300 swap dealers 
and major swap participants who will be required to establish and 
implement risk management policies and procedures under the proposed 
rules. The Commission estimated the number of affected entities based 
on industry data.
    According to recent Bureau of Labor Statistics, the mean hourly 
wage of an employee under occupation code 11-3031, ``Financial 
Managers,'' (which includes financial risk managers) that is employed 
by the ``Securities and Commodity Contracts Intermediation and 
Brokerage'' industry is $74.41.\22\ Because swap dealers and major swap 
participants include large financial institutions whose risk management 
employees' salaries may exceed the mean wage, the Commission has 
estimated the cost burden of these proposed regulations based upon an 
average salary of $100 per hour. Accordingly, the estimated burden was 
calculated as follows:
---------------------------------------------------------------------------

    \22\ http://www.bls.gov/oes/current/oes113031.htm.
---------------------------------------------------------------------------

Drafting, Filing, Updating and Distributing Risk Management Program 
(Including Position Limit Procedures and Business Continuity and 
Disaster Recovery Plan)
    Number of registrants: 300.
    Estimated number of responses: 300.
    Estimated total annual burden per registrant: 160 hours.
    Frequency of collection: One-time filing with the Commission, 
annual distribution, updating as needed.
    Total annual burden: 48,000 burden hours [300 registrants x 160 
hours].
Quarterly Risk Exposure Reports
    Number of registrants: 300.
    Estimated number of responses: 1,200 [300 registrants x 4 reports].
    Estimated total annual burden per registrant: 32 hours.
    Frequency of collection: Quarterly.
    Total annual burden: 9,600 burden hours [300 registrants x 32 
hours].
Quarterly Documentation of Risk Management Testing
    Number of registrants: 300.
    Estimated number of responses: 1,200 [300 registrants x 4 tests].
    Estimated total annual burden per registrant: 4 hours.
    Frequency of collection: Quarterly.
    Total annual burden: 1,200 hours [300 registrants x 4 hours].
Documentation of Annual Position Limit Compliance Training and Audit
    Number of registrants: 300.
    Estimated number of responses: 300.
    Estimated total annual burden per registrant: 2 hours.
    Frequency of collection: Annually.
    Total annual burden: 600 hours [300 registrants x 2 hours].
Quarterly Documentation of Position Limit Compliance
    Number of registrants: 300.
    Estimated number of responses: 1,200 [300 registrants x 4 reports].
    Estimated total annual burden per registrant: 2 hours.
    Frequency of collection: Quarterly.
    Total annual burden: 600 hours [300 registrants x 2 hours].
Documentation of Position Limit Violations
    Number of registrants: 300.
    Estimated number of responses: 600 [300 registrants x 2 documents].
    Estimated total annual burden per registrant: .5.
    Frequency of collection: As needed.
    Total annual burden: 150 hours [300 registrants x .5 hours].
Filing Emergency Contact Information and Annual Documentation of 
Business Continuity Testing
    Number of registrants: 300.
    Estimated number of responses: 300.
    Estimated total annual burden per registrant: 1 hour.
    Frequency of collection: Annual.
    Total annual burden: 300 hours.

[[Page 71403]]

Documentation of Risk Assessment of New Products
    Number of registrants: 300.
    Estimated number of responses: 1,500 [300 registrants x 5 
documents].
    Estimated total annual burden per registrant: 3 hours.
    Frequency of collection: As needed.
    Total annual burden: 900 hours [300 registrants x 3 hours].
    Based upon the above, the aggregate cost for all registrants is 
61,350 burden hours and $6,135,000 [61,350 x $100 per hour].
2. Information Collection Comments
    The Commission invites the public and other federal agencies to 
comment on any aspect of the reporting and recordkeeping burdens 
discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission 
solicits comments in order to: (i) Evaluate whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the Commission, including whether the information will 
have practical utility; (ii) evaluate the accuracy of the Commission's 
estimate of the burden of the proposed collection of information; (iii) 
determine whether there are ways to enhance the quality, utility, and 
clarity of the information to be collected; and (iv) minimize the 
burden of the collection of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at 
<a href="/cdn-cgi/l/email-protection#a1eee8f3e0d2d4c3ccc8d2d2c8cecfd2e1ceccc38fc4ced18fc6ced7"><span class="__cf_email__" data-cfemail="db9492899aa8aeb9b6b2a8a8b2b4b5a89bb4b6b9f5beb4abf5bcb4ad">[email protected]</span></a>. Please provide the Commission with a copy 
of submitted comments so that all comments can be summarized and 
addressed in the final rule preamble. Refer to the Addresses section of 
this notice of proposed rulemaking for comment submission instructions 
to the Commission. A copy of the supporting statements for the 
collections of information discussed above may be obtained by visiting 
http://www.RegInfo.gov. OMB is required to make a decision concerning 
the collection of information between 30 and 60 days after publication 
of this document in the Federal Register. Therefore, a comment is best 
assured of having its full effect if OMB (and the Commission) receives 
it within 30 days of publication.

C. Cost-Benefit Analysis

    Section 15(a) of the CEA \23\ 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 new regulation or to determine 
whether the benefits of the rule outweigh its costs; rather, it 
requires that the Commission ``consider'' the costs and benefits of its 
actions.
---------------------------------------------------------------------------

    \23\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    Section 15(a) further specifies that costs and benefits of a 
proposed rulemaking 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 considerations and could, in its discretion, determine that, 
notwithstanding its costs, a particular regulation was 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 
implement certain provisions of section 731 of the Dodd-Frank Act, 
which adds a new section 4s(j) to the Commodity Exchange Act. The 
proposed regulations would set forth certain duties imposed upon swap 
dealers and major swap participants registered with the Commission with 
regard to: (1) Risk management procedures; (2) monitoring of trading to 
prevent violations of applicable position limits; (3) diligent 
supervision; (4) business continuity and disaster recovery; (5) 
disclosure and the ability of regulators to obtain general information; 
and (6) antitrust considerations.
    Costs. With respect to costs, the Commission has determined that 
for swap dealers and major swap participants, costs to institute risk 
management systems and personnel in order to satisfy the new regulatory 
requirements are far outweighed by the benefits to the financial system 
as a whole. The proposed rules would require a swap dealer or major 
swap participant to consider a number of issues affecting its business 
environment when creating its risk management system. For example, a 
swap dealer or major swap participant would need to consider, among 
other things, the experience and qualifications of relevant risk 
management personnel, as well as the separation of duties among 
personnel in the business unit, when designing and implementing its 
risk management policies and procedures. These considerations would 
help facilitate the development of a risk management program that 
appropriately addresses the risks posed by the swap dealer's or major 
swap participant's business and the environment in which such business 
is being conducted. In addition, these considerations would guide a 
swap dealer or major swap participant in the implementation of specific 
policies and procedures unique to its circumstances.
    It is estimated that the average amount of time a swap dealer or 
major swap participant would spend annually implementing its 
comprehensive risk management program would be 204.5 hours. Based on an 
hourly wage rate of $100, Commission staff estimates that each 
registrant could expend up to $20,450 annually to comply with the 
proposed rules. This would result in an aggregated cost of $6,135,000 
annually (300 registrants x $20,450).
    Most swap dealers and major swap participants have adequate 
resources and existing risk management structures that are capable of 
adjusting to the new regulatory framework without material diversion of 
resources away from commercial operations.
    Benefits. With respect to benefits, the proposed regulations would 
require swap dealers and major swap participants to assess and monitor 
the adequacy of their risk management under standards established by 
the Commission. This would further the goal of avoiding market 
disruptions and financial losses to market participants and the general 
public. The proposed regulations also would promote prudent risk 
management, oversight and stability, thereby fostering efficiency and a 
greater ability to compete in the broader financial markets. The 
proposed regulations would reward efficiency insofar as swap dealers 
and major swap participants that operate efficiently would have lower 
operating costs and thus would require fewer resources to comply with 
the regulations. Finally, the proposed regulations are designed to 
ensure that swap dealers and major swap participants can sustain their 
market operations and meet their financial obligations to market 
participants, thus contributing to the integrity of the financial 
markets. Therefore, the Commission believes it is prudent to require 
risk management

[[Page 71404]]

requirements for swap dealers and major swap participants.
    Public Comment. The Commission invites public comment on its cost-
benefit considerations. Commenters are also invited to submit any data 
or other information that they may have quantifying or qualifying the 
costs and benefits of the proposed rules with their comment letters.

List of Subjects in 17 CFR Part 23

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

    For the reasons stated in this release, the Commission proposes to 
amend 17 CFR part 23 (as proposed in a separate proposed rule published 
elsewhere in this issue of the Federal Register) as follows:

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

Authority and Issuance

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

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

    2. Subpart J is added to read as follows:
Subpart J--Duties of Swap Dealers and Major Swap Participants
Sec.
23.600 Risk Management Program for swap dealers and major swap 
participants.
23.601 Monitoring of position limits.
23.602 Diligent supervision.
23.603 Business continuity and disaster recovery.
23.604 [Reserved]
23.605 [Reserved]
23.606 General information: Availability for disclosure and 
inspection.
23.607 Antitrust considerations.

Subpart J--Duties of Swap Dealers and Major Swap Participants


Sec.  23.600  Risk Management Program for swap dealers and major swap 
participants.

    (a) Definitions. For purposes of this subpart J, the following 
terms shall be defined as provided.
    (1) Affiliate. This term means, with respect to any person, a 
person controlling, controlled by, or under common control with, such 
person.
    (2) Business trading unit. This term means any department, 
division, group, or personnel of a swap dealer or major swap 
participant or any of its affiliates, whether or not identified as 
such, that performs or is involved in any pricing, trading, sales, 
marketing, advertising, solicitation, structuring, or brokerage 
activities on behalf of a registrant.
    (3) Clearing unit. This term means any department, division, group, 
or personnel of a registrant or any of its affiliates, whether or not 
identified as such, that performs any proprietary or customer clearing 
activities on behalf of a registrant.
    (4) Governing body. This term typically means, with respect to:
    (i) A sole proprietorship, the proprietor;
    (ii) A corporation, its board of directors;
    (iii) A partnership, any general partner;
    (iv) A limited liability company or limited liability partnership, 
the manager, managing member or those members vested with management 
authority; or
    (v) Any other person, the body or person with ultimate decision-
making authority over the activities of such person.
    (5) Prudential regulator. This term has the same meaning as section 
1a(39) of the Commodity Exchange Act and includes the Board of 
Governors of the Federal Reserve System, the Office of the Comptroller 
of the Currency, the Federal Deposit Insurance Corporation, the Farm 
Credit Association, and the Federal Housing Finance Agency, as 
applicable to the swap dealer or major swap participant. The term also 
includes the Federal Deposit Insurance Corporation, with respect to any 
financial company as defined in section 201 of under the Dodd-Frank 
Wall Street Reform and Consumer Protection Act or any insured 
depository institution under the Federal Deposit Insurance Act, and 
with respect to each affiliate of any such company or institution.
    (6) Senior management. This term means, with respect to a 
registrant, such registrant's chief executive officer and any officer 
with supervisory duties who reports directly to the chief executive 
officer.
    (b) Risk management program. (1) Purpose. Each swap dealer and 
major swap participant shall establish, document, maintain, and enforce 
a system of risk management policies and procedures designed to monitor 
and manage the risks associated with the business of the swap dealer or 
major swap participant. For purposes of this regulation, such policies 
and procedures shall be referred to collectively as a ``Risk Management 
Program.''
    (2) Written policies and procedures. Each swap dealer and major 
swap participant shall maintain written policies and procedures that 
describe the Risk Management Program of the swap dealer or major swap 
participant.
    (3) Approval by governing body. The Risk Management Program and the 
written risk management policies and procedures shall be approved, in 
writing, by the governing body of the swap dealer or major swap 
participant.
    (4) Furnishing to the Commission. Each swap dealer and major swap 
participant shall furnish a copy of its written risk management 
policies and procedures to the Commission upon application for 
registration. Where there is a material change in the risk management 
policies and procedures, updated risk management policies and 
procedures reflecting that change shall be furnished to the Commission 
within sixty (60) calendar days after the end of the fiscal quarter in 
which the change occurred.
    (5) Risk management unit. As part of its Risk Management Program, 
each swap dealer and major swap participant shall establish and 
maintain a risk management unit with sufficient authority; qualified 
personnel; and financial, operational, and other resources to carry out 
the risk management program established pursuant to this regulation. 
The risk management unit shall report directly to senior management and 
shall be independent from the business trading unit.
    (c) Elements of the Risk Management Program. The Risk Management 
Program of each swap dealer and major swap participant shall include, 
at a minimum, the following elements:
    (1) Identification of risks and risk tolerance limits. (i) The Risk 
Management Program should take into account market, credit, liquidity, 
foreign currency, legal, operational, settlement, and any other 
applicable risks together with a description of the risk tolerance 
limits set by the swap dealer or major swap participant and the 
underlying methodology. The risk tolerance limits shall be reviewed and 
approved quarterly by senior management and annually by the governing 
body. Exceptions to risk tolerance limits shall require prior approval 
of, at a minimum, a supervisor in the risk management unit.
    (ii) The Risk Management Program shall take into account risks 
posed by affiliates and take an integrated approach to risk management 
at the consolidated entity level.
    (iii) The Risk Management Program shall include policies and 
procedures for detecting breaches of risk tolerance limits set by the 
swap dealer or major swap participant, and alerting supervisors within 
the risk management unit and senior management, as appropriate.

[[Page 71405]]

    (2) Periodic Risk Exposure Reports. (i) The risk management unit of 
each swap dealer and major swap participant shall provide to senior 
management and to its governing body quarterly written reports setting 
forth the market, credit, liquidity, foreign currency, legal, 
operational, settlement, and any other applicable risk exposures of the 
swap dealer or major swap participant; any recommended changes to the 
Risk Management Program; the recommended time frame for implementing 
those changes; and the status of any incomplete implementation of 
previously recommended changes to the Risk Management Program. For 
purposes of this regulation, such reports shall be referred to as 
``Risk Exposure Reports.'' The Risk Exposure Reports also shall be 
provided to the senior management and the governing body immediately 
upon detection of any material change in the risk exposure of the swap 
dealer or major swap participant.
    (ii) Furnishing to the Commission. Each swap dealer and major swap 
participant shall furnish copies of its Risk Exposure Reports to the 
Commission within five (5) business days of providing such reports to 
its senior management.
    (3) New product policy. The Risk Management Program of each swap 
dealer and major swap participant shall include a new product policy 
that is designed to identify and take into account the risks of any new 
product prior to engaging in transactions involving the new product. 
The new product policy should include the following elements:
    (i) Consideration of the type of counterparty with which the new 
product will be transacted; the product's characteristics and economic 
function; and whether the product requires a novel pricing methodology 
or presents novel legal and regulatory issues.
    (ii) Identification and analysis of the relevant risks of the new 
product and how they will be managed. The risk analysis should include 
an assessment of any product, market, credit, liquidity, foreign 
currency, legal, operational, settlement, and any other risks 
associated with the new product. Product risk characteristics may 
include, but are not limited to, volatility, non-linear price 
characteristics, jump-to-default risk, and any correlation between the 
value of the product and the counterparty's creditworthiness.
    (iii) An assessment, signed by a supervisor in the risk management 
unit, as to whether the new product would materially alter the overall 
entity-wide risk profile of the swap dealer or major swap participant. 
If the new product would materially alter the overall risk profile of 
the swap dealer or major swap participant, the new product must be pre-
approved by the governing body before any transactions are effectuated.
    (iv) A requirement that the risk management unit review the risk 
analysis to identify any necessary modifications to the Risk Management 
Program and implement such modifications prior to engaging in 
transactions involving the new product.
    (4) Specific risk management considerations. The Risk Management 
Program of each swap dealer and major swap participant shall include, 
but not be limited to, policies and procedures necessary to monitor and 
manage the following risks:
    (i) Market risk. Market risk policies and procedures shall take 
into account, among other things:
    (A) Daily measurement of market exposure, including exposure due to 
unique product characteristics, volatility of prices, basis and 
correlation risks, leverage, sensitivity of option positions, and 
position concentration, to comply with market risk tolerance limits;
    (B) Timely and reliable valuation data derived from, or verified 
by, sources that are independent of the business trading unit, and if 
derived from pricing models, that the models have been independently 
validated by qualified, independent persons; and
    (C) Reconciliation of profits and losses resulting from valuations 
with the general ledger at least once each business day.
    (ii) Credit risk. Credit risk policies and procedures shall take 
into account, among other things:
    (A) Daily measurement of overall credit exposure to comply with 
counterparty credit limits;
    (B) Monitoring and reporting of violations of counterparty credit 
limits performed by personnel that are independent of the business 
trading unit; and
    (C) Regular valuation of collateral used to cover credit exposures 
and safeguarding of collateral to prevent loss, disposal, 
rehypothecation, or use unless appropriately authorized.
    (iii) Liquidity risk. Liquidity risk policies and procedures shall 
take into account, among other things:
    (A) Daily measurement of liquidity needs;
    (B) Testing of procedures to liquidate all non-cash collateral in a 
timely manner and without significant effect on price; and
    (C) Application of appropriate collateral haircuts that accurately 
reflect market and credit risk.
    (iv) Foreign currency risk. Foreign currency risk policies and 
procedures shall take into account, among other things:
    (A) Daily measurement of the amount of capital exposed to 
fluctuations in the value of foreign currency to comply with applicable 
limits; and
    (B) Establishment of safeguards against adverse currency 
fluctuations.
    (v) Legal risk. Legal risk policies and procedures shall take into 
account, among other things:
    (A) Determinations that transactions and netting arrangements 
entered into have a sound legal basis; and
    (B) Establishment of documentation tracking procedures designed to 
ensure the completeness of relevant documentation and to resolve any 
documentation exceptions on a timely basis.
    (vi) Operational risk. Operational risk policies and procedures 
shall take into account, among other things:
    (A) Secure and reliable operating and information systems with 
adequate, scalable capacity, and independence from the business trading 
unit;
    (B) Safeguards to detect, identify, and promptly correct 
deficiencies in operating and information systems; and
    (C) Reconciliation of all operating and information systems.
    (vii) Settlement risk. Settlement risk policies and procedures 
shall take into account, among other things:
    (A) Establishment of standard settlement instructions with each 
counterparty;
    (B) Procedures to track outstanding settlement items and aging 
information in all accounts, including nostro and suspense accounts; 
and
    (C) Procedures to ensure timely payments to counterparties and to 
resolve any late payments.
    (5) Use of central counterparties. Each swap dealer and major swap 
participant shall establish policies and procedures relating to its use 
of central counterparties. Such policies and procedures shall:
    (i) Require the use of central counterparties where clearing is 
required pursuant to Commission regulation or order, unless the 
counterparty has properly invoked a clearing exemption under Commission 
regulations;
    (ii) Set forth the conditions for use of central counterparties for 
clearing when available as a means of mitigating counterparty credit 
risk; and
    (iii) Require diligent investigation into the adequacy of the 
financial resources

[[Page 71406]]

and risk management procedures of any central counterparty through 
which the swap dealer or major swap participant clears.
    (6) Compliance with margin and capital requirements. Each swap 
dealer and major swap participant shall satisfy all capital and margin 
requirements established by the Commission or prudential regulator, as 
applicable.
    (7) Monitoring of compliance with Risk Management Program. Each 
swap dealer and major swap participant shall establish policies and 
procedures to detect violations of the Risk Management Program; to 
encourage employees to report such violations to senior management, 
without fear of retaliation; and to take specified disciplinary action 
against employees who violate the Risk Management Program.
    (d) Business trading unit. Each swap dealer and major swap 
participant shall establish policies and procedures that, at a minimum:
    (1) Require all trading policies be approved by the governing body 
of the swap dealer or major swap participant;
    (2) Require that traders execute transactions only with 
counterparties for whom credit limits have been established;
    (3) Provide specific quantitative or qualitative limits for traders 
and personnel able to commit the capital of the swap dealer or major 
swap participant;
    (4) Monitor each trader throughout the trading day to prevent the 
trader from exceeding any limit to which the trader is subject, or from 
otherwise incurring undue risk;
    (5) Require each trader to follow established policies and 
procedures for executing and confirming all transactions;
    (6) Establish means to detect unauthorized trading activities or 
any other violation of policies and procedures;
    (7) Ensure that trade discrepancies are brought to the immediate 
attention of management of the business trading unit and are 
documented;
    (8) Ensure that the risk management unit reviews brokers' 
statements, reconciles brokers' charges to estimates, reviews and 
monitors broker's commissions, and initiates payment to brokers;
    (9) Ensure that use of algorithmic trading programs is subject to 
policies and procedures governing the use, supervision, maintenance, 
testing, and inspection of the program; and
    (10) Require the separation of personnel in the business trading 
unit from personnel in the risk management unit.
    (e) Review and testing. (1) Risk Management Programs shall be 
reviewed and tested on at least a quarterly basis, or upon any material 
change in the business of the swap dealer or major swap participant 
that is reasonably likely to alter the risk profile of the swap dealer 
or major swap participant.
    (2) The quarterly reviews of the Risk Management Program shall 
include an analysis of adherence to, and the effectiveness of, the risk 
management policies and procedures, and any recommendations for 
modifications to the Risk Management Program. The quarterly testing 
shall be performed by qualified internal audit staff that are 
independent of the business trading unit being audited or by a 
qualified third party audit service reporting to staff that are 
independent of the business trading unit. The results of the quarterly 
reviews of the Risk Management Program shall be promptly reported to 
and reviewed by, the chief compliance officer, senior management, and 
governing body of the swap dealer or major swap participant.
    (3) Each swap dealer and major swap participant shall document all 
internal and external reviews and testing of its Risk Management 
Program and written risk management policies and procedures including 
the date of the review or test; the results; any deficiencies 
identified; the corrective action taken; and the date that corrective 
action was taken. Such documentation shall be provided to Commission 
staff, upon request.
    (f) Distribution of risk management policies and procedures. The 
Risk Management Program shall include procedures for the timely 
distribution of its written risk management policies and procedures to 
relevant supervisory personnel. Each swap dealer and major swap 
participant shall maintain records of the persons to whom the risk 
management policies and procedures were distributed and when they were 
distributed.
    (g) Recordkeeping. (1) Each swap dealer and major swap participant 
shall maintain copies of all written approvals required by this 
section.
    (2) All records or reports that a swap dealer or major swap 
participant is required to maintain pursuant to this regulation shall 
be maintained in accordance with 17 CFR 1.31 and shall be made 
available promptly upon request to representatives of the Commission 
and to representatives of applicable prudential regulators.


Sec.  23.601  Monitoring of position limits.

    (a) Each swap dealer and major swap participant shall establish and 
enforce written policies and procedures that are designed to monitor 
for and prevent violations of applicable position limits established by 
the Commission, a designated contract market, or a swap execution 
facility, and to monitor for and prevent improper reliance upon any 
exemptions or exclusions from such position limits. For purposes of 
this regulation, such policies and procedures shall be referred to as 
``Position Limit Procedures.'' The Position Limit Procedures shall be 
incorporated into the Risk Management Program of the swap dealer or 
major swap participant.
    (b) For purposes of the Position Limit Procedures, each swap dealer 
and major swap participant shall convert all swap positions into 
equivalent futures positions using the methodology set forth in 
Commission regulations.
    (c) Each swap dealer and major swap participant shall provide 
training to all relevant personnel on applicable position limits on an 
annual basis and promptly upon any change to applicable position 
limits. Each swap dealer and major swap participant shall maintain 
records of such training including the substance of the training and 
the identity of those receiving training.
    (d) Each swap dealer and major swap participant shall diligently 
monitor its trading activities and diligently supervise the actions of 
its partners, officers, employees, and agents to ensure compliance with 
the Position Limit Procedures of the swap dealer or major swap 
participant.
    (e) The Position Limit Procedures of each swap dealer and major 
swap participant shall implement an early warning system designed to 
detect and alert its senior management when position limits are in 
danger of being breached (such as when trading has reached a percentage 
threshold of the applicable position limit, and when position limits 
have been exceeded). Any detected violation of applicable position 
limits shall be reported promptly to the firm's governing body and to 
the Commission. Each swap dealer and major swap participant shall 
maintain a record of any early warning received, any position limit 
violation detected, any action taken as a result of either, and the 
date action was taken.
    (f) Each swap dealer and major swap participant shall test its 
Position Limit Procedures for adequacy and effectiveness each month and 
maintain records of such monthly tests; the results thereof; any action 
that is taken as a result thereof including, without limitation, any 
recommendations for

[[Page 71407]]

modifications to the firm's Position Limit Procedures; and the date 
action was taken.
    (g) Each swap dealer and major swap participant shall document its 
compliance with applicable position limits established by the 
Commission, a designated contract market, or a swap execution facility 
in a written report on a quarterly basis. Such report shall be promptly 
reported to and reviewed by the chief compliance officer, senior 
management, and governing body of the swap dealer or major swap 
participant, and shall include, without limitation, a list of all early 
warnings received, all position limit violations, the action taken in 
response, the results of the monthly position limit testing required by 
this regulation, any deficiencies in the Position Limit Procedures, the 
status of any pending amendments to the Position Limit Procedures, and 
any action taken to amend the Position Limit Procedures to ensure 
compliance with all applicable position limits. Each swap dealer and 
major swap participant shall retain a copy of this report.
    (h) On an annual basis, each swap dealer and major swap participant 
shall audit its Position Limit Procedures as part of the audit of its 
Risk Management Program required by Commission regulations.
    (i) All records required to be maintained pursuant to these 
regulations shall be maintained in accordance with 17 CFR 1.31 and 
shall be made available promptly upon request to representatives of the 
Commission and to representatives of applicable prudential regulators.


Sec.  23.602  Diligent supervision.

    (a) Supervision. Each swap dealer and major swap participant shall 
establish and maintain a system to supervise, and shall diligently 
supervise, all activities relating to its business performed by its 
partners, members, officers, employees, and agents (or persons 
occupying a similar status or performing a similar function). Such 
system shall be reasonably designed to achieve compliance with the 
requirements of the Commodity Exchange Act and Commission regulations.
    (b) Supervisory System. Such supervisory system shall provide, at a 
minimum, for the following:
    (1) The designation, where applicable, of a person with authority 
to carry out the supervisory responsibilities of the swap dealer or 
major swap participant for all activities relating to its business as a 
swap dealer or major swap participant.
    (2) The use of reasonable efforts to determine that all supervisors 
are qualified and meet such standards of training, experience, 
competence, and such other qualification standards as the Commission 
finds necessary or appropriate.


Sec.  23.603  Business continuity and disaster recovery.

    (a) Business continuity and disaster recovery plan required. Each 
swap dealer and major swap participant shall establish and maintain a 
written business continuity and disaster recovery plan that outlines 
the procedures to be followed in the event of an emergency or other 
disruption of its normal business activities. The business continuity 
and disaster recovery plan shall be designed to enable the swap dealer 
or major swap participant to continue or to resume any operations by 
the next business day with minimal disturbance to its counterparties 
and the market, and to recover all documentation and data required to 
be maintained by applicable law and regulation.
    (b) Essential components. The business continuity and disaster 
recovery plan of a swap dealer or major swap participant shall include 
the following components:
    (1) Identification of the documents, data, facilities, 
infrastructure, personnel and competencies essential to the continued 
operations of the swap dealer or major swap participant and to fulfill 
the obligations of the swap dealer or major swap participant.
    (2) Identification of the supervisory personnel responsible for 
implementing each aspect of the business continuity and disaster 
recovery plan and the emergency contacts required to be provided 
pursuant to this regulation.
    (3) A plan to communicate with the following persons in the event 
of an emergency or other disruption, to the extent applicable to the 
operations of the swap dealer or major swap participant: Employees; 
counterparties; swap data repositories; execution facilities; trading 
facilities; clearing facilities; regulatory authorities; data, 
communications and infrastructure providers and other vendors; disaster 
recovery specialists and other persons essential to the recovery of 
documentation and data, the resumption of operations, and compliance 
with the Commodity Exchange Act and Commission regulations.
    (4) Procedures for, and the maintenance of, back-up facilities, 
systems, infrastructure, personnel and other resources to achieve the 
timely recovery of data and documentation and to resume operations as 
soon as reasonably possible and generally within the next business day.
    (5) Maintenance of back-up facilities, systems, infrastructure and 
personnel in one or more areas that are geographically separate from 
the swap dealer's or major swap participant's primary facilities, 
systems, infrastructure and personnel (which may include contractual 
arrangements for the use of facilities, systems and infrastructure 
provided by third parties).
    (6) Back-up or copying, with sufficient frequency, of documents and 
data essential to the operations of the swap dealer or major swap 
participant or to fulfill the regulatory obligations of the swap dealer 
or major swap participant and storing the information off-site in 
either hard-copy or electronic format.
    (7) Identification of potential business interruptions encountered 
by third parties that are necessary to the continued operations of the 
swap dealer or major swap participant and a plan to minimize the impact 
of such disruptions.
    (c) Distribution to employees. Each swap dealer and major swap 
participant shall distribute a copy of its business continuity and 
disaster recovery plan to relevant employees and promptly provide any 
significant revision thereto. Each swap dealer and major swap 
participant shall maintain copies of the business continuity and 
disaster recovery plan at one or more accessible off-site locations. 
Each swap dealer and major swap participant shall train relevant 
employees on applicable components of the business continuity and 
disaster recovery plan.
    (d) Commission notification. Each swap dealer and major swap 
participant shall promptly notify the Commission of any emergency or 
other disruption that may affect the ability of the swap dealer or 
major swap participant to fulfill its regulatory obligations or would 
have a significant adverse effect on the swap dealer or major swap 
participant, its counterparties, or the market.
    (e) Emergency contacts. Each swap dealer and major swap participant 
shall provide to the Commission the name and contact information of two 
employees who the Commission can contact in the event of an emergency 
or other disruption. The individuals identified shall be authorized to 
make key decisions on behalf of the swap dealer or major swap 
participant and have knowledge of the firm's business continuity and 
disaster recovery plan. The swap dealer or major swap participant shall 
provide the Commission with any updates to this information promptly.

[[Page 71408]]

    (f) Review and modification. A member of the senior management of 
each swap dealer and major swap participant shall review the business 
continuity and disaster recovery plan annually or upon any material 
change to the business. Any deficiencies found or corrective action 
taken shall be documented.
    (g) Testing. Each business continuity and disaster recovery plan 
shall be tested annually by qualified, independent internal audit 
personnel or a qualified third party audit service. The date the 
testing was performed shall be documented, together with the nature and 
scope of the testing, any deficiencies found, any corrective action 
taken, and the date that corrective action was taken.
    (h) Business continuity and disaster recovery plans required by 
other regulatory authorities. A swap dealer or major swap participant 
shall comply with the requirements of this regulation in addition to 
any business continuity and disaster recovery requirements that are 
imposed upon the swap dealer or major swap participant by its 
prudential regulator or any other regulatory or self-regulatory 
authority.
    (i) Recordkeeping. The business continuity and disaster recovery 
plan of the swap dealer and major swap participant and all other 
records required to be maintained pursuant to this section shall be 
maintained in accordance with Commission Regulation Sec.  1.31 and 
shall be made available promptly upon request to representatives of the 
Commission and to representatives of applicable prudential regulators.


Sec.  23.604  [Reserved]


Sec.  23.605  [Reserved]


Sec.  23.606  General information: Availability for disclosure and 
inspection.

    (a) Disclosure of information. (1) Each swap dealer and major swap 
participant shall make available for disclosure to and inspection by 
the Commission and its prudential regulator, as applicable, all 
information required by, or related to, the Commodity Exchange Act and 
Commission regulations, including:
    (i) The terms and condition of its swaps;
    (ii) Its swaps trading operations, mechanisms, and practices;
    (iii) Financial integrity and risk management protections relating 
to swaps; and
    (iv) Any other information relevant to its trading in swaps.
    (2) Such information shall be made available promptly, upon 
request, to Commission staff and the staff of the applicable prudential 
regulator, at such frequency and in such manner as is set forth in the 
Commodity Exchange Act, Commission regulations, or the regulations of 
the applicable prudential regulator.
    (b) Ability to provide information. (1) Each swap dealer and major 
swap participant shall establish and maintain reliable internal data 
capture, processing, storage, and other operational systems sufficient 
to capture, process, record, store, and produce all information 
necessary to satisfy its duties under the Commodity Exchange Act and 
Commission regulations. Such systems shall be designed to produce the 
information within the time frames set forth in the Commodity Exchange 
Act and Commission regulations or upon request, as applicable.
    (2) Each swap dealer and major swap participant shall establish, 
implement, maintain, and enforce written procedures for the capture, 
processing, recording, storage, and production of all information 
necessary to satisfy its duties under the Commodity Exchange Act and 
Commission regulations.
    (c) Record retention. All records or reports that a swap dealer or 
major swap participant is required to maintain pursuant to this 
regulation shall be maintained in accordance with 17 CFR 1.31 and shall 
be made available promptly upon request to representatives of the 
Commission and to representatives of applicable prudential regulators.


Sec.  23.607  Antitrust considerations.

    (a) No swap dealer or major swap participant shall adopt any 
process or take any action that results in any unreasonable restraint 
of trade, or impose any material anticompetitive burden on trading or 
clearing, unless necessary or appropriate to achieve the purposes of 
the Commodity Exchange Act.
    (b) Consistent with its obligations under paragraph (a) of this 
section, each swap dealer and major swap participant shall adopt 
policies and procedures to prevent actions that result in unreasonable 
restraint of trade, or impose any material anticompetitive burden on 
trading or clearing.


    Issued in Washington, DC, on November 10, 2010, by the 
Commission.
David A. Stawick,
Secretary of the Commission.

Statement of Chairman Gary Gensler

Regulations Establishing and Governing the Duties of Swap Dealers and 
Major Swap Participants

    I support the proposed business conduct standards rulemaking 
that establishes risk management policies for swap dealers and major 
swap participants. One of the primary goals of the Dodd-Frank Act 
was to bring swap dealers and major swap participants under 
comprehensive regulation to reduce risk to the financial system and 
to the economy as a whole. The proposed rules are consistent with 
the Congressional requirement that swap dealers and major swap 
participants: (1) Monitor trading to prevent violations of position 
limits; (2) establish risk management procedures for managing their 
day-to-day business; (3) disclose to the Commission and to 
applicable prudential regulators general information relating to 
trading practices and financial integrity of swaps; (4) establish 
and enforce internal systems and procedures to obtain information 
needed to perform all of the duties prescribed; (5) implement 
conflicts of interest systems and procedures; and (6) refrain from 
unreasonably restraining trade or imposing an anticompetitive burden 
on trading or clearing.

[FR Doc. 2010-29009 Filed 11-22-10; 8:45 am]
BILLING CODE 6351-01-P


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