Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 80747 

You can also get a copy by sending a 

request to the Federal Aviation 

Administration, Office of Rulemaking, 

ARM–1, 800 Independence Avenue, 

SW., Washington, DC 20591, or by 

calling (202) 267–9680. Make sure to 

identify the docket number or notice 

number of this proposal. 

Background 

The FAA has been asked to provide 

a legal interpretation regarding the 

application of 14 CFR 135.263 and 

135.267(d) to the following factual 

scenario. 

An operator plans a flight that is 

anticipated to be completed within a 

13.5-hour duty day. However, 

unanticipated delays (such as late 

passengers and late cargo) occur before 

the last leg of the flight, and these 

delays would extend the flight beyond 

a 14-hour duty day if the last leg is 

completed. The proposed interpretation 

would clarify whether the crew may 

take off on the last leg of the flight, 

knowing in advance that they will not 

receive the 10 hours of rest required in 

a 24-hour period by section 135.267(d). 

Discussion of the Proposal 

Section 135.267(d) of Title 14 of the 

Code of Federal Regulations requires 

that a flight assignment operating under 

section 135.267(b) and (c) must provide 

for at least 10 consecutive hours of rest 

during the 24-hour period that precedes 

the planned completion time of the 

assignment. Under this section, a duty 

day may not exceed 14 hours in a 24- 

hour period without infringing on the 

required rest time. However, section 

135.267(d) works in conjunction with 

14 CFR 135.263(d), which provides that: 

A flight crewmember is not considered to 

be assigned flight time in excess of flight time 

limitations if the flights to which he is 

assigned normally terminate within the 

limitations, but due to circumstances beyond 

the control of the certificate holder or flight 

crewmember (such as adverse weather 

conditions), are not at the time of departure 

expected to reach their destination within the 

planned flight time. 

In the 1990s, the FAA interpreted 

sections 135.263(d) and 135.267(d) to 

permit flight crewmembers to take off 

on flights that were scheduled to be 

completed within a 14-hour duty period 

even though circumstances beyond the 

crewmembers’ control extended the 

actual duty time beyond the permissible 

14-hour period. See, e.g., Aug. 30, 1993, 

Letter to Mr. Ross from Donald P. Byrne, 

Assistant Chief Counsel for Regulations 

and Enforcement; Mar. 30, 1992, Letter 

to Kevin Wilson from Donald P. Byrne. 

However, in 2000, the FAA issued a 

seminal interpretation of a section that 

is nearly identical to section 135.263(d). 

That section, 14 CFR 121.471(g), states 

that: 

A flight crewmember is not considered to 

be scheduled for flight time in excess of flight 

time limitations if the flights to which he is 

assigned are scheduled and normally 

terminate within the limitations, but due to 

circumstances beyond the control of the 

certificate holder (such as adverse weather 

conditions), are not at the time of departure 

expected to reach their destination within the 

scheduled time. 

The FAA’s 2000 interpretation stated 

that the language of section 121.471(g) 

created an exception to pilot flight time 

limitations, but did not provide an 

exception for pilot rest requirements. 

See Nov. 20, 2000, Letter to Captain 

Richard D. Rubin from James W. 

Whitlow, Deputy Chief Counsel 

(‘‘Whitlow Letter’’). The Whitlow 

Letter’s validity was subsequently 

upheld by the U.S. Court of Appeals for 

the DC Circuit, and since that time, the 

FAA has consistently applied the 

Whitlow Letter in its interpretations of 

section 121.471(g). See Air Transport 

Ass’n of America, Inc. v. F.A.A., 291 

F.3d 49 (DC Cir. 2002) (upholding the 

validity of the Whitlow Letter). See, e.g., 

Mar. 18, 2009, Letter to William E. 

Banks, Jr. from Rebecca B. MacPherson, 

Assistant Chief Counsel for Regulations 

(noting that section 121.471(g) does not 

provide an exception for rest 

requirements); Jan. 11, 2005, Letter to 

Jan Marcus from Rebecca B. 

MacPherson, Assistant Chief Counsel 

for Regulations (same). 

The FAA has determined that it is 

illogical that the nearly-identical 

regulatory language in sections 

121.471(g) and 135.263(d) is interpreted 

in two different ways. See Air Transport 

Ass’n, 291 F.3d at 51 n.1 (stating that 

‘‘[t]he substance of the rules in Parts 121 

and 135 is essentially the same and the 

rules are likewise interpreted’’). As such, 

the FAA proposes to apply the Whitlow 

Letter’s interpretation of 121.471(g) to 

sections 135.263(d) and 135.267(d). 

Because the Whitlow Letter and the 

subsequent interpretations based on the 

Whitlow Letter are more recent than the 

1990s interpretations of sections 

135.263(d) and 135.267(d), the Whitlow 

Letter line of interpretations best reflects 

the FAA’s current understanding of the 

pertinent regulatory language. As such, 

the proposed application of the Whitlow 

Letter to sections 135.263(d) and 

135.267(d) would supersede any 

contrary pre-Whitlow interpretations of 

these sections. 

Under the proposed interpretation, 

section 135.263(d) would not create an 

exception for flight crewmember rest 

requirements. As such, if a flight 

crewmember was to be aware at the time 

of departure on the last leg of the flight 

that he or she has not had the required 

rest, 14 CFR 135.267(d) would prohibit 

him or her from departing on the last leg 

of the flight. 

Issued in Washington, DC, on December 

17, 2010. 

Rebecca B. MacPherson, 

Assistant Chief Counsel for Regulations, 

AGC–200. 

[FR Doc. 2010–32234 Filed 12–22–10; 8:45 am] 

BILLING CODE 4910–13–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 39 

RIN 3038–AD10 

End-User Exception to Mandatory 

Clearing of Swaps 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘CFTC’’ or 

‘‘Commission’’) is proposing new 

requirements governing the elective 

exception to mandatory clearing of 

swaps available for swap counterparties 

meeting certain conditions under 

Section 2(h)(7) of the Commodity 

Exchange Act, as amended by the DoddFrank Wall Street Reform and Consumer 

Protection Act. The Commission is 

requesting comments on the proposed 

rule and related matters. 

DATES: Comments must be received on 

or before February 22, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AD10, 

by any of the following methods: 

• Agency Web site, via its Comments 

Online process: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow 

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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
80748 Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 

1 17 CFR 145.9. 

2 7 U.S.C. 1 et seq. 

3See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). 

4The Dodd-Frank Act amends the Securities 

Exchange Act of 1934 (‘‘Exchange Act’’) to provide 

for a similar regulatory framework for transactions 

in security-based swaps regulated by the Securities 

and Exchange Commission (‘‘SEC’’). 

5See Process for Review of Swaps for Mandatory 

Clearing, 75 FR 67277 (Nov. 2, 2010). 

6When entering into a swap with a swap dealer 

or a major swap participant, non-financial 

counterparties are granted a right to forgo the 

exception and require clearing for a swap subject 

to a clearing mandate from the Commission. Nonfinancial counterparties are granted a similar 

elective right regarding clearing where a swap has 

been listed for clearing, but is not the subject of a 

Commission clearing mandate. See CEA Section 

2(h)(7)(E). The choice to require or forgo clearing is 

solely at the nonfinancial counterparty’s discretion. 

See CEA Section 2(h)(7)(B). 

7CEA Section 2(h)(7)(A)(i) limits availability of 

the end-user clearing exception to counterparties to 

the swap that are not a financial entity. The term 

financial entity is defined in CEA Section 

2(h)(7)(C)(i), and includes the following eight 

entities: (i) A swap dealer; (ii) a security-based swap 

dealer; (iii) a major swap participant; (iv) a major 

security-based swap participant; (v) a commodity 

pool as defined in CEA Section 1a(10); (vi) a private 

fund as defined in section 202(a) of the Investment 

Advisers Act of 1940 (15 U.S.C. 80b-2(a)); (vii) an 

employee benefit plan as defined in paragraphs (3) 

and (32) of section 3 of the Employee Retirement 

Income Security Act of 1974 (29 U.S.C. 1002); or 

(viii) a person predominantly engaged in activities 

that are in the business of banking or financial in 

nature, as defined in section 4(k) of the Bank 

Holding Company Act of 1956 (12 U.S.C. 1843(k)). 

Four of these terms, ‘‘swap dealer’’, ‘‘major swap 

participant’’, ‘‘security-based swap dealer’’ and 

‘‘major security-based swap participant’’ are 

themselves the subject of current proposed joint 

rulemaking by the Commission and the SEC. See 

Further Definition of Swap Dealer, Security-Based 

Swap Dealer, Major Swap Participant, Major 

Security-Based Swap Participant and Eligible 

Contract Participant, approved by the Commission 

on December 1, 2010, to be published in the 

Federal Register on December 21, 2010. 

8See Swap Data Recordkeeping and Reporting 

Requirements, 75 FR 76573, December 8, 2010. The 

recordkeeping and reporting rules contemplate that 

this information may be delivered to the 

Commission directly in limited circumstances 

when an SDR is not available. When permitted, 

such delivery would also meet the end-user clearing 

exception notice requirement. 

available publicly. If you wish the 

Commission to consider information 

that is exempt from disclosure under the 

Freedom of Information Act, a petition 

or confidential treatment of the exempt 

information may be submitted according 

to the established procedures in § 145.9 

of the Commission’s regulations.1 The 

Commission reserves the right, but shall 

have no obligation, to review, prescreen, 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: Lee 

Ann Duffy, Assistant General Counsel, 

(202) 418–6763, lduffy@cftc.gov, or 

Mark Fajfar, Assistant General Counsel, 

(202) 418–6636, mfajfar@cftc.gov, Office 

of General Counsel, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: The 

Commission is proposing § 39.6 to 

govern the elective exception to 

mandatory clearing of swaps available 

to swap counterparties meeting certain 

conditions. The Commission is 

requesting comments on all aspects of 

the proposed rules and related matters. 

The Commission will carefully consider 

any comments received and will 

respond as necessary or appropriate. 

I. Introduction 

The Commodity Exchange Act (‘‘CEA’’ 

or ‘‘Act’’),2 as amended by Title VII of 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (‘‘Dodd-Frank 

Act’’ or ‘‘DFA’’),3 establishes a 

comprehensive new regulatory 

framework for swaps, security-based 

swaps, and related instruments. The 

Dodd-Frank Act was enacted 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 

Commission’s rulemaking and 

enforcement authorities over all 

registered entities and intermediaries 

subject to the Commission’s oversight. 

The Dodd-Frank Act amended the 

CEA to require that: (1) Swaps be 

cleared through a derivatives clearing 

organization (‘‘DCO’’) if they are of a 

type that the Commission determines 

must be cleared, unless an exception 

from mandatory clearing applies; (2) 

swaps be reported to a registered swap 

data repository (‘‘SDR’’) or the 

Commission; and (3) if a swap is subject 

to a clearing requirement, it be executed 

on a registered trading platform, i.e., a 

swap execution facility or a designated 

contract market (‘‘DCM’’), unless no 

facility or market is available for 

execution of such swap.4

CEA Section 2(h)(1) provides that it 

shall be unlawful for any person to 

engage in a swap unless that person 

submits such swap for clearing to a DCO 

if the swap is required to be cleared.5

However, Section 2(h)(7) of the CEA 

also provides that a swap otherwise 

subject to mandatory clearing is subject 

to an elective exception from clearing if 

one party to the swap is not a financial 

entity, is using swaps to hedge or 

mitigate commercial risk, and notifies 

the Commission, in a manner set forth 

by the Commission, how it generally 

meets its financial obligations 

associated with entering into noncleared swaps (the ‘‘end-user clearing 

exception’’).6

The Dodd-Frank Act provides the 

Commission with authority to adopt 

rules governing the end-user clearing 

exception and to prescribe rules, issue 

interpretations, or request information 

from persons claiming the end-user 

clearing exception necessary to prevent 

abuse of the exception. The Commission 

is also required to consider whether to 

except small banks, savings 

associations, farm credit system 

institutions, and credit unions from the 

definition of ‘‘financial entity’’ contained 

in CEA Section 2(h)(7)(C)(ii). 

The Commission is proposing § 39.6 

to specify requirements for electing to 

use, and facilitating compliance with, 

the exception to mandatory clearing of 

swaps established by CEA Section 

2(h)(7). The Commission is also 

requesting comments regarding the 

requirements that should apply to small 

banks, savings associations, farm credit 

system institutions, and credit unions 

that may wish to elect to use this 

clearing exception. 

II. Description of Proposed Rule 

A. Notification to the Commission 

A non-financial entity 7 that enters 

into a swap to hedge or mitigate 

commercial risk must notify the 

Commission how it generally meets its 

financial obligations associated with 

non-cleared swaps in order to use the 

end-user clearing exception. The CEA 

authorizes the Commission to establish 

the manner of notification and to 

prescribe such rules as may be 

necessary to prevent abuse of the enduser clearing exception. The 

Commission is proposing in § 39.6(b) to 

require non-financial entities to notify 

the Commission each time the end-user 

clearing exception is elected by 

delivering specified information to an 

SDR in the manner required by 

proposed rules for swaps data 

recordkeeping and reporting.8 The 

specified information would be 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 80749 

9See ‘‘ISDA Collateral Steering Committee, 

Market Review of OTC Derivative Bilateral 

Collateralization Practices (2.0)’’ (available at 

http://www.idsa.org/c_and_a/pdf/CollateralMarket-Review.pdf) (‘‘ISDA Collateralization 

Practices’’)(describing methods of risk mitigation 

used in connection with swaps and key legal 

foundations supporting collateralization). 

10See ISDA Collateralization Practices. See also 

‘‘ISDA Margin Survey 2010’’ (available at http:// 

www.isda.org/c_and_a/pdf/ISDA–Margin-Survey2010.pdf) (‘‘ISDA Margin Survey 2010’’) 

11See e.g. ISDA Margin Survey 2010 at 9 (noting 

types of non-ISDA collateral agreements used and 

frequency of use). 

12See ISDA Collateralization Practices at 20 

(identifying master cross-netting and crossguarantee structures as common credit risk 

mitigation practices). 

13For a variety of reasons one or both of the 

counterparties to some non-cleared swaps may 

choose not to mitigate credit risk and instead rely 

on the general creditworthiness of their opposite 

counterparty, given the circumstances and financial 

terms of the transaction. See, e.g. Office of the 

Comptroller of Currency ‘‘Risk Management of 

Financial Derivatives’’ Comptroller’s Handbook 

(Jan.1997) at 50 (available at http://www.occ.gov/ 

static/publications/handbook/deriv.pdf) 

(contemplating that evaluations of individual 

counterparty credit limits should aggregate limits 

for derivatives with credit limits established for 

other activities, including commercial lending). 

delivered to the SDR by the reporting 

counterparty defined in the swap data 

recordkeeping and reporting rules 

together with other information 

regarding the swap that is subject to the 

end-user clearing exception to form the 

central record of the swap held by the 

SDR. 

Under the approach set forth in 

proposed § 39.6(b), whenever the enduser clearing exception is elected, ten 

additional items of information would 

be required to be provided to the SDR. 

If the counterparty electing to use the 

end-user clearing exception is an issuer 

of securities under Exchange Act 

Section 12 or required to file periodic 

reports with the SEC under Exchange 

Act Section 15(d), two further items of 

information would be required: the 

electing counterparty’s SEC Central 

Index Key number, and whether the 

appropriate governing body of that 

counterparty has reviewed and 

approved the decision not to clear the 

swap. 

1. Meeting Financial Obligations 

A non-financial entity electing to use 

the end-user clearing exception must 

notify the Commission of ‘‘how it 

generally meets its financial obligations 

associated with non-cleared swaps’’ 

(‘‘Financial Obligation Notice’’). See 

CEA Section 2(h)(7)(A)(iii). A principal 

feature distinguishing cleared swaps 

from non-cleared swaps is that noncleared swaps do not have a uniform 

method of mitigating counterparty 

credit risk.9 Proposed § 39.6(b)(5) would 

require a person relying on the end-user 

clearing exception to provide additional 

information regarding the methods used 

to mitigate credit risk in connection 

with non-cleared swaps. If more than 

one method is used by the person 

electing to use the end-user clearing 

exception, information must be 

provided for each of the methods being 

used. 

a. Credit Support 

Proposed § 39.6(b)(5)(i) requires an 

indication of whether a written credit 

support agreement is being used with 

respect to the non-financial entity or 

entities in connection with the noncleared swap. For these purposes, the 

term credit support agreement may refer 

to any agreement, or annex, amendment 

or supplement to another agreement, 

which contemplates the periodic 

transfer of specified collateral to or from 

another party to support payment 

obligations associated with the swap or 

a related portfolio, basket or other 

combination of securities, swaps and 

other instruments. Agreements of this 

kind are frequently used to mitigate the 

counterparty credit risk of swaps and 

other instruments that are not centrally 

cleared, but the use of such 

arrangements may be more or less 

common among certain types of 

counterparties and for certain types of 

swaps.10 The proposed notification 

would provide the Commission with 

information regarding the extent to 

which credit support agreements are 

used by non-financial entities to support 

their meeting financial obligations 

associated with non-cleared swaps. 

b. Pledged or Segregated Assets 

Proposed Rule 39.6(b)(5)(ii) requires 

an indication of whether payment of all 

or any portion of the financial 

obligations associated with the noncleared swap are secured by collateral 

that has been pledged pursuant to a 

documented security arrangement not 

requiring the transfer of possession of 

collateral to the swap counterparty. 

Examples of this type of arrangement 

include, but are not limited to, 

agreements granting security interests 

over property of the non-financial 

entity, whether or not such security 

interests are perfected by the filing of a 

mortgage, financing statement or similar 

document, agreements to transfer assets 

to collateral agents or escrow agents 

acting pursuant to instructions agreed 

by both parties to a swap, or the posting 

or receiving of margin. While such 

arrangements may be somewhat less 

commonly used to mitigate credit risk 

associated with non-cleared swaps, the 

Commission preliminarily believes this 

method may have particular importance 

for certain categories of non-financial 

entities, such as enterprises with high 

levels of fixed assets relative to cash 

flows.11 Accordingly, the Commission 

considers it appropriate to separately 

categorize this information in the data 

being collected. 

c. Guarantee 

Proposed § 39.6(b)(5)(iii) requires an 

indication of whether all or any portion 

of the financial obligations associated 

with the non-cleared swap are 

guaranteed in writing by a person or 

entity other than the non-financial 

entity or entities that are party to the 

swap. The proposed notification would 

provide the Commission with 

information regarding the role that 

guarantees by third parties (such as 

parent companies, affiliated parties or 

others) play in meeting financial 

obligations associated with non-cleared 

swaps.12

d. Sole Reliance on Available Financial 

Resources 

Proposed Rule 39.6(b)(5)(iv) requires 

an indication of whether the nonfinancial entity or entities that are party 

to the swap intend(s) to meet the 

obligations associated with the swap 

solely by utilizing available financial 

resources.13 Financial resources 

available to meet obligations associated 

with non-cleared swaps may include 

various liquidity sources, including 

existing assets, investments and cash 

balances, cash flow from operations, 

short-term and long-term lines of credit, 

and capital market sources of funding. 

e. Other Means 

Proposed § 39.6(b)(5)(v) requires an 

indication of whether the non-financial 

entity or entities that are party to the 

swap intend(s) to employ means other 

than those described in proposed 

§ 39.6(b)(5)(i) through (iv) to meet the 

financial obligations associated with a 

swap. This item is intended to 

separately categorize all other methods 

that may be used in the markets today 

or that may develop in the future. The 

Commission anticipates many entities 

would meet their financial obligations 

through one of the specific methods 

listed in § 39.6(b)(5)(i) through (iv). The 

information collected pursuant to 

proposed § 39.6(b)(5)(v), however, 

together with other information 

collected, may allow the Commission to 

gain greater insight regarding whether 

additional data concerning methods 

used to mitigate credit risk should be 

collected in the future. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
80750 Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 

14CEA Section 2(h)(7)(D)(i) provides that 

affiliates of persons qualifying for the end-user 

clearing exception will also qualify for the end-user 

clearing exception if the affiliate (1) acts on behalf 

of the person and as agent, (2) uses the swap to 

hedge or mitigate commercial risk of that person or 

another affiliate of that person that is not a financial 

entity as defined in CEA Section 2(h)(7)(C)(i), and 

(3) is not itself one of seven entities defined in CEA 

Section 2(h)(7)(D)(ii). The seven entities are: (i) A 

swap dealer; (ii) a security-based swap dealer; (iii) 

a major swap participant; (iv) a major securitybased swap participant; (v) an issuer that would be 

an investment company, as defined in section 3 of 

the Investment Company Act of 1940 (15 U.S.C. 

80a–3), but for paragraph (1) or (7) of subsection c 

of that Act (15 U.S.C. 80a–3(c)); (vi) a commodity 

pool; or (vii) a bank holding company with over 

$50,000,000,000 in consolidated assets. See CEA 

Section 2(h)(7)(D)(ii). In addition, an affiliate, 

subsidiary, or wholly owned entity of a person that 

qualifies for an exception under CEA Section 

2(h)(7)(A) and which is predominantly engaged in 

providing financing for the purchase or lease of 

merchandise or manufactured goods of the person 

shall be excepted from both the margin 

requirements described in CEA Section 4s(e) and 

the clearing requirement in CEA Section 2(h)(1), 

provided that the swaps in question are entered into 

to mitigate the risk of the financing activities. See 

CEA Section 2(h)(7)(D)(iii). Finally, excluded from 

the definition of financial entity are those entities 

(1) whose primary business is providing financing, 

and (2) who are using derivatives to hedge 

underlying commercial risks related to interest rate 

and foreign currency exposures, if 90% or more of 

those risks arise from the finance or lease of 

products, and if 90% or more of those products are 

manufactured by the parent company or another 

subsidiary of the parent. See CEA Section 

2(h)(7)(C)(iii). 

15For these purposes, a counterparty electing to 

use the end-user clearing exception is considered to 

be an issuer of securities registered under Exchange 

Act Section 12 or required to file reports pursuant 

to Exchange Act Section 15(d) if it is controlled by 

a person that is an issuer of securities registered 

under Exchange Act Section 12 or required to file 

reports pursuant to Exchange Act Section 15(d). See 

Rule 1–02(x) of SEC Regulation S–X, 17 CFR 

§ 210.1–02(x) (defining subsidiary for purposes of 

the financial statements required to be filed as part 

of registration statements under Exchange Act 

Section 12, and annual and other reports under 

Exchange Act Sections 13 and 15(d)). 

16See CEA Section 2(j). For these purposes, the 

Commission considers a committee to be 

appropriate if it is specifically authorized to review 

and approve the issuer’s decisions to enter into 

swaps. 

17See Item 305 of SEC Regulation S–K, 17 CFR 

229.305. 

18For example, a board resolution or an 

amendment to a board committee’s charter could 

expressly authorize such committee to review and 

approve decisions of the electing person not to clear 

the swap being reported. In turn, such board 

committee could adopt policies and procedures to 

review and approve decisions not to clear swaps, 

on a periodic basis or subject to other conditions 

determined to be satisfactory to the board 

committee. 

2. Preventing Abuse of the End-User 

Clearing Exception 

The remaining items of information 

required by proposed § 39.6 are 

designed to confirm compliance with 

particular requirements of CEA Section 

2(h)(7) or otherwise produce 

information necessary or useful to aid 

the Commission in its efforts to prevent 

abuse of the end-user clearing exception 

as contemplated by CEA Section 

2(h)(7)(F). 

a. Person Electing to Use the End-User 

Clearing Exception 

Proposed § 39.6(b)(1) requires 

identification of which of the parties to 

the swap is electing to use the end-user 

clearing exception. 

b. Financial Entity Status 

Proposed § 39.6(b)(2) requires an 

indication of whether a person electing 

to use the end-user clearing exception is 

a financial entity as defined in CEA 

Section 2(h)(7)(C)(i). The exception to 

mandatory clearing of swaps under CEA 

Section 2(h)(7) is only available to 

persons that are not financial entities, or 

are affiliates of non-financial entities 

satisfying the requirements of CEA 

Sections 2(h)(7)(C)(iii) or 2(h)(7)(D). 

c. Finance Affiliate Status 

Proposed § 39.6(b)(3) requires an 

indication of whether a person electing 

to use the end-user clearing exception is 

an affiliate of another person qualifying 

for the exception under CEA Section 

2(h)(7), and satisfies the additional 

requirements of CEA Sections 

2(h)(7)(C)(iii) or 2(h)(7)(D). These 

sections of the CEA contain provisions 

specially designed for captive finance 

affiliates of persons qualifying for the 

end-user clearing exception.14 Given the 

nature of these provisions, the 

Commission preliminarily believes it is 

appropriate to separately categorize 

swaps transacted by such finance 

affiliates in particular. 

d. Hedging or Mitigating Commercial 

Risk 

Proposed § 39.6(b)(4) requires an 

indication of whether a person electing 

to use the end-user clearing exception is 

using the swap being reported to hedge 

or mitigate commercial risk. The 

exception to mandatory clearing of 

swaps under Section 2(h)(7) of the CEA 

is only available to persons that use 

such swaps to hedge or mitigate 

commercial risk. The definition of 

‘‘hedging or mitigating commercial risk’’ 

is discussed below in Section B. 

e. End-User Board Approval 

Proposed § 39.6(b)(6) requires all 

persons electing the end-user clearing 

exception to indicate whether they are 

an issuer of securities registered under 

Exchange Act Section 12 or required to 

file reports under Exchange Act Section 

15(d) (‘‘SEC Filer’’).15 Under CEA 

Section 2(j), the exception to mandatory 

clearing of swaps under CEA Section 

2(h)(7) is available to SEC Filers only if 

an appropriate committee of the issuer’s 

board or governing body has reviewed 

and approved the issuer’s decision to 

enter into swaps that are subject to the 

exception.16 When the person electing 

to use the end-user clearing exception is 

an SEC Filer, two additional items of 

information must be provided: 

• Proposed § 39.6(b)(6)(i) requires an 

SEC Filer electing to use the end-user 

clearing exception to specify its SEC 

Central Index Key number. Collection of 

this information will allow the CFTC to 

cross reference materials filed with the 

relevant SDR with information in 

periodic reports and other materials 

filed by the SEC Filer with the SEC.17

• Proposed § 39.6(b)(6)(ii) requires 

confirmation that an appropriately 

authorized committee of the board of 

directors or equivalent governing body 

of the SEC Filer has reviewed and 

approved the decision of the electing 

person not to clear the swap being 

reported, as required by CEA Section 

2(j).18

Given the requirements of CEA 

Section 2(j) and its relationship to the 

end-user clearing exception, the 

Commission preliminarily believes 

collection of this information is 

appropriate to promote compliance with 

the requirements of the end-user 

clearing exception. 

Request for Comment: 

The Commission generally requests 

comments on all aspects of the proposed 

rules. Additionally, the Commission 

requests comments on the following 

specific issues: 

• Is it sufficiently clear what 

information the Commission is 

requiring to be reported under proposed 

§ 39.6? If not, why not? Is it sufficiently 

clear how information would be 

reported under proposed § 39.6 if a 

swap is between two non-financial 

entities both seeking to elect to use the 

end-user clearing exception? If not, why 

not? Are there clarifications or 

instructions the Commission could 

adopt that are useful for parties seeking 

to elect to use the end-user clearing 

exception? If so, what are they and what 

would be the benefits of adopting them? 

• Would it be difficult or 

prohibitively expensive for persons to 

report the information required under 

the proposed § 39.6? If so, why? 

• Is the information the Commission 

proposes to collect in connection with 

the Financial Obligation Notice 

sufficient? Is other information needed 

to achieve the purposes of the DoddFrank Act? For example, is it necessary 

or appropriate for the Commission to 

collect: Additional general information 

on the credit support agreement and the 


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Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 80751 

19Proposed §§ 45.2 and 45.3 establish the 

recordkeeping and reporting requirements for 

swaps. See Swap Data Recordkeeping and 

Reporting Requirements, 75 FR 76573 (Dec. 8, 

2010). The information required under proposed 

Rule 39.6 would be in addition to these 

requirements but would be delivered to the SDR by 

the reporting counterparty in the same manner as 

required by the proposed swap data recordkeeping 

and reporting rules. 

20 In the case of non-cleared swaps, CEA Section 

21(c)(2) requires each SDR to confirm with both 

parties to the swap the accuracy of the data 

submitted to the SDR. CEA Section 4r(c) requires 

each party to a non-cleared swap to maintain 

records of the swaps held by such party in the form 

required by the Commission, and CEA Section 4r(d) 

provides that these records shall be in a form not 

less comprehensive than required to be collected by 

SDRs. These records are available for inspection by 

the Commission and other specified authorities 

under CEA Section 4r(c)(2). 

21See Swap Data Repositories, approved by the 

Commission on Novovember 19, 2010, to be 

published in a forthcoming issue of the Federal 

Register. 

collateral practices under the agreement, 

such as the level of margin collateral 

outstanding (e.g., less than or equal to 

a specified dollar amount, or greater 

than a series of progressively higher 

dollar amounts); the types of collateral 

provided (e.g., cash, government 

securities, other securities, other 

collateral), or the frequency of portfolio 

reconciliation? Additional general 

information on specific terms of the 

credit support agreement, such as 

whether the collateral requirements are 

unilateral or bilateral provisions and 

whether there are contractual terms 

triggered by changes in the credit rating 

or other financial circumstances of one 

or both of the counterparties? 

Additional general information about 

the guarantor, such as whether or not 

the guarantor is a parent or affiliate of 

the person electing to use the end-user 

clearing exception? Additional general 

information regarding the assets 

pledged, such as the type of security 

interest or the type of property being 

used as collateral? Additional general 

information regarding the segregation 

arrangements, such as the identity of the 

collateral agent or other third party 

involved in the arrangement, and 

information regarding whether the 

arrangement involves a custodian, triparty or different type of relationship? 

Additional general information 

regarding the adequacy of other means 

being used, or the adequacy of the 

financial resources available, to meet 

the financial obligations associated with 

the non-cleared swap? 

• Should the Commission provide 

additional clarity to the terms used in 

CEA Sections 2(h)(7)(C)(iii) and 

2(h)(7)(D) in proposed § 39.6 for 

affiliates electing to use the end-user 

clearing exception? Should the 

Commission adopt more specific 

requirements to implement the 

provisions of CEA Sections 

2(h)(7)(C)(iii) and 2(h)(7)(D)? Is there 

need for the Commission to address the 

factors to be taken into account or the 

manner of calculating the percentage 

standards established in CEA Section 

2(h)(7)(C)(iii)? Should the Commission 

provide further guidance on other terms 

used in these sections, such as the 

meaning of the term ‘‘predominantly 

engaged’’ in CEA Section 2(h)(7)(D)? If 

so, what specific rules or guidance 

should the Commission consider and 

what would be the benefits of adopting 

them? 

• Should the Commission provide 

additional clarity to the requirements of 

CEA Section 2(j) to facilitate compliance 

with proposed § 39.6 by parties electing 

to use the end-user clearing exception? 

Should the Commission adopt more 

specific requirements to implement the 

provisions of CEA Section 2(j)? If so, 

what specific rules should the 

Commission consider and what would 

be the benefits of adopting them? 

• Should the Commission provide 

additional guidance as to the meaning of 

the term ‘‘issuer of securities’’ as used in 

CEA Section 2(j)? 

• Should the Commission consider 

requiring parties electing to use the enduser clearing exception to report 

additional types of information, either 

in order to limit abuse of the exception 

or for other reasons? If so, what other 

information should be reported and 

what would be the benefit of requiring 

such information to be reported? What 

categories of information, if any, should 

not be required to be reported and why? 

• What does it mean to abuse the 

clearing exception under CEA Section 

2(h)(7)(F)? Will some types of swaps be 

more susceptible to such abuse than 

others? For example: Are large or small 

companies or other identifiable subcategories of swap users more or less 

likely to abuse the end-user clearing 

exception than other persons? Are there 

certain swap products or counterparties 

that the Commission should monitor for 

abuse more closely than others? 

• Are there different considerations 

for small companies or other 

identifiable categories of persons who 

may wish to elect to use the end-user 

clearing exception? If so, what are they 

and how should the Commission take 

these considerations into account? 

3. Form of Notice to the Commission 

Proposed Rule 39.6 provides that a 

person electing to use the end-user 

clearing exception for a swap shall 

satisfy the notice requirements of CEA 

Section 2(h)(7)(A)(iii) upon providing 

the information specified in proposed 

§ 39.6 to a registered SDR or, if no 

registered SDR is available, the 

Commission, in the form and manner 

generally required for delivery of 

information specified under proposed 

swap data recordkeeping and reporting 

rules.19 Under this approach, rather 

than collecting information through a 

separate process established by the 

Commission for these purposes, the 

information delivered in compliance 

with the requirements of proposed 

§ 39.6 and the proposed swap data 

recordkeeping and reporting rules 

would serve as the official notice of a 

swap covered by the end-user clearing 

exception. 

The CEA, as amended by the DoddFrank Act, requires all swaps (whether 

cleared or non-cleared) to be reported to 

a registered SDR or, if no registered SDR 

is available, the Commission. See CEA 

Sections 2(a)(13)(G) (reporting of swaps 

to SDRs) and 4r (reporting alternatives 

for non-cleared swaps). As centralized 

recordkeeping facilities of swaps, SDRs 

are intended to play a critical role in 

enhancing transparency in the swap 

markets. SDRs will enhance 

transparency by having complete 

records of swaps, maintaining the 

integrity of those records, and providing 

effective access to those records to 

relevant authorities and the public in 

line with their respective information 

needs.20 The Commission recently 

proposed a series of new rules relating 

to the SDR registration process, duties, 

and core principles to ensure that SDRs 

operate in the manner contemplated by 

the Dodd-Frank Act amendments to the 

CEA.21

The Commission is proposing to 

collect notice information for the enduser clearing exception through SDRs. 

This will permit detailed information on 

the use of the end-user clearing 

exception to be collected in conjunction 

with other swap information in a format 

well suited to analysis by the 

Commission and consistent with the 

development of straight-through 

processing for swaps. Using SDRs 

should also help to reduce the 

administrative burdens of the notice 

requirement because the information 

would be incorporated into a 

transaction record already required by 

the Dodd-Frank Act in connection with 

each swap and subject to standards 

designed to assure the accuracy of the 

information collected. The Commission 

anticipates that empirical data collected 

in this manner will aid its ability to 

evaluate how the end-user clearing 

exception is being used and encourage 

appropriate deliberation by 

counterparties prior to its use. The 


srobinson on DSKHWCL6B1PROD with PROPOSALS
80752 Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 

22The proposed notification method is supported 

by the recordkeeping requirements under CEA 

Section 4r, which will permit the Commission to 

review transaction information and take such action 

as may be necessary to prevent abuses of the enduser clearing exception. Such Commission action 

would be taken in a manner consistent with our 

review practices for other transaction information 

submitted to SDRs, rather than through a separate 

process developed for these purposes, thereby 

helping to maintain consistency of regulatory action 

in comparable areas. 

23The Commission preliminarily believes that 

swap positions that are held for the purpose of 

speculation or trading are, for example, those 

positions that are held primarily to take an outright 

view on the direction of the market, including 

positions held for short term resale, or to obtain 

arbitrage profits. Swap positions that hedge other 

positions that themselves are held for the purpose 

of speculation or trading are also speculative or 

trading positions. 

The Commission preliminarily believes that swap 

positions that are held for the purpose of investing 

are, for example, those positions that are held 

primarily to obtain an appreciation in value of the 

swap position itself, without regard to using the 

swap to hedge an underlying risk. In contrast, a 

swap position related to a non-swap investment 

(such as the purchase of an asset that a commercial 

enterprise will use to produce income or otherwise 

advance its commercial interests) may be a hedging 

position if it otherwise qualifies for the definition 

of hedging or mitigating commercial risk. 

24See Further Definition of Swap Dealer, 

Security-Based Swap Dealer, Major Swap 

Participant, Major Security-Based Swap Participant 

and Eligible Contract Participant, approved by the 

Commission on December 1, 2010, to be published 

in the Federal Register on December 21, 2010. 

Commission also preliminarily believes 

receiving notification and other 

information in connection with CEA 

Sections 2(h)(7)(A)(iii) and 2(h)(7)(F) 

through SDRs should allow monitoring 

for potentially abusive practices, and 

timely action to address abusive 

practices if they were to develop.22

Request for Comment: 

The Commission generally requests 

comments on all aspects of the proposed 

rules. Additionally, the Commission 

requests comments on the following 

specific issues: 

• Is it appropriate for the Commission 

to require notification regarding use of 

the end-user clearing exception to be 

made through SDRs? What are the 

advantages or disadvantages of the 

Commission’s proposal? 

• Does collecting Financial 

Obligation Notice information through 

SDRs provide sufficient assurance that 

the end-user clearing exception will be 

available to non-financial entities 

wishing to use the exception? Are SDRs 

reliable enough to be used for these 

purposes? 

• Is Financial Obligation Notice 

information different from other 

information collected by SDRs in any 

respect that makes use of SDRs for these 

purposes inappropriate? If so, how is 

the notice information different and 

why is it inappropriate to use SDRs to 

collect the information? 

• Is there a more feasible and cost 

effective way for the Commission to 

receive notification regarding the use of 

the end-user clearing exception? If so, 

what is the better alternative and in 

what ways is it better? 

• Do the CEA and the associated rules 

and proposed rules regulating SDRs and 

parties to swaps create sufficient 

assurance that notice information 

collected through SDRs will be 

accurate? Are there additional 

protections the Commission should 

establish to create greater assurance that 

the notice information collected will be 

accurate? If so, what are they and how 

will they improve the information 

collection process? 

• Would the person reporting 

information to the SDR be in a position 

to have or be able to obtain, in all cases, 

the information the Commission is 

requiring to be reported under proposed 

Rule 39.6. If not, why not? Are there 

special considerations in this regard 

when a swap is between two nonfinancial entities that are each seeking 

to elect to use this exception? Are 

representations and warranties and 

similar established market practices 

associated with documenting swaps 

adequate to ensure the person reporting 

information to the SDR can obtain such 

information when necessary? 

• How long would it be expected to 

take for the person reporting 

information to the SDR to gather the 

information required under proposed 

§ 39.6? Will the time needed to gather 

the required information disrupt the 

transaction process for swaps to any 

material extent? 

• Should the Commission require 

persons electing to use the end-user 

clearing exception to follow additional 

compliance practices in some 

circumstances? For example, should the 

Commission require electing persons to 

create a record of the means being used 

to mitigate the credit risk of the swap? 

Would such a requirement be redundant 

or duplicative of other proposed 

recordkeeping requirements? 

• Will collecting notice information 

together with other transaction 

information have the advantages 

expected by the Commission? For 

example, will it be useful to analyze 

information regarding use of the enduser clearing exception by product type 

and other transaction characteristics? 

Are there other advantages or 

disadvantages related to collecting 

notice information through SDRs that 

the Commission should consider? If so, 

what are they? 

• Is there reason to believe that 

collecting information through SDRs 

will make it more or less difficult for the 

Commission to take action to prevent 

abuse of the clearing exception? If so, 

what Commission actions might be 

more or less difficult and what 

alternatives should the Commission 

consider? 

• Does collecting notice information 

regarding use of the end-user clearing 

exception through SDRs create 

significantly greater burdens for some 

parties to swaps compared to others? 

For example, will parties who 

frequently enter into swaps face higher 

or lower burdens compared to parties 

that enter swaps less frequently? Will 

small companies face different burdens 

than large companies? Will nonfinancial entities that enter into swaps 

with other non-financial entities face 

different burdens? If so, what steps 

should the Commission consider taking 

to account for these differences? 

• Are there international or crossborder issues related to the end-user 

exception that the Commission should 

address? 

B. Hedging or Mitigating Commercial 

Risk 

To qualify to use the end-user clearing 

exception with respect to a particular 

swap, CEA Section 2(h)(7)(A)(ii) 

requires that a non-financial entity must 

be using the swap to hedge or mitigate 

commercial risk. The Commission’s 

proposal deems that the use of a swap 

is for hedging purposes in three 

circumstances. While the proposed 

definition in Proposed § 39.6(c) includes 

swaps that are recognized as hedges for 

accounting purposes or as bona fide 

hedging for purposes of an exemption 

from position limits under the CEA, the 

swaps included within the clearing 

exception are not limited to those two 

circumstances. See Proposed 

§ 39.6(c)(1)(ii) and (iii). The proposal 

also covers swaps used to hedge or 

mitigate any of a person’s business risks, 

as defined by six categories in the 

proposal, regardless of their status 

under accounting guidelines or the bona 

fide hedging exemption. See Proposed 

§ 39.6(c)(1)(i). Proposed § 39.6(c)(2) 

further provides, however, that a swap 

is disqualified from the clearing 

exception if it is held for a speculative, 

investing, or trading purpose,23 or if it 

hedges another swap unless that swap 

itself is held for hedging purposes. 

The phrase ‘‘hedging or mitigating 

commercial risk’’ is the subject of 

current joint rulemaking by the 

Commission and the SEC.24 Through 

this joint rulemaking exercise, the 

Commission is proposing a definition of 

‘‘hedging or mitigating commercial risk’’ 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 80753 

25The Commission notes that the major swap 

participant definitional rule does not contemplate 

applying the definition of hedging or mitigating 

commercial risk to affiliates. CEA Sections 

2(h)(7)(C)(iii) and 2(h)(7)(D) create certain 

additional requirements for affiliates of nonfinancial entities seeking to elect the end-user 

clearing exception, and these requirements must 

also be satisfied for the end-user clearing exception 

to be available. 

that would govern for purposes of the 

major swap participant definition under 

CEA Section 1a(33). The Commission 

has determined to propose nearly 

identical regulatory language in 

Proposed § 39.6(c) to define the meaning 

of the phrase ‘‘hedge or mitigate 

commercial risk’’ as found in CEA 

Section 2(a)(7)(A)(ii) for purposes of the 

elective end-user clearing exception. 

This parallel approach should allow 

consistency of interpretation across the 

CEA as a whole and help provide for 

fair and equivalent treatment for 

similarly situated parties.25

The Commission proposes an 

inclusive, multi-pronged definition that 

allows end users to qualify their 

hedging transactions in a manner that 

best fits their businesses. The 

Commission preliminarily believes that 

such an approach is appropriate, given 

the elective nature of this exception. 

While the line between speculation and 

hedging can at times be difficult to 

discern, the Dodd-Frank Act 

nonetheless requires such 

determinations to be made, and the 

Commission believes its rules proposal 

provides guidance and a measure of 

certainty in this regard. 

Proposed § 39.6(c)(1)(i) takes a 

narrative approach similar to that used 

in § 1.3(z) of the Commission’s 

regulations, which defines what 

activities qualify as hedging when used 

in futures markets, by enumerating 

specific risk shifting practices that are 

deemed to qualify for purposes of the 

clearing exception. Proposed 

§ 39.6(c)(1)(ii) and (iii) assure 

counterparties that if their swap 

qualifies for the bona fide hedge 

exemptions from positions limits, or if 

their swap qualifies for hedge 

accounting treatment under the FASB 

hedge accounting standards, the swap 

also qualifies for the clearing exception. 

As a general matter, the Commission 

preliminarily believes that whether a 

position is used to hedge or mitigate 

commercial risk should be determined 

by the facts and circumstances at the 

time the swap is entered into, and 

should take into account the person’s 

overall hedging and risk mitigation 

strategies. The Commission expects that 

a person’s overall hedging and risk 

management strategies will help inform 

whether or not a particular position is 

properly considered to hedge or mitigate 

commercial risk for purposes of the 

clearing exception. In this regard, the 

Commission preliminarily believes the 

question whether an activity is 

commercial should not be determined 

solely by an entity’s organizational 

status as a for-profit company, a nonprofit organization, or a governmental 

entity. Instead, the determinative factor 

should be whether the underlying 

activity to which the swap relates is 

commercial in nature. 

Request for Comment: 

The Commission generally requests 

comments on all aspects of the proposed 

rules. Additionally, the Commission 

requests comments on the following 

specific issues: 

• Should swaps qualifying as hedging 

or risk mitigating be limited to swaps 

where the underlying hedged item is a 

non-financial commodity? Commenters 

may also address whether swaps 

qualifying as hedging or risk mitigating 

should hedge or mitigate commercial 

risk on a single risk or an aggregate risk 

basis, and on a single entity or a 

consolidated basis. The Commission 

also invites comment on whether risks 

such as the foreign exchange, currency, 

or interest rate risk relating to offshore 

affiliates, should be covered; whether 

industry-specific rules on hedging, or 

rules that apply only to certain 

categories of commodity or asset classes, 

are appropriate at this time; whether 

swaps facilitating asset optimization or 

dynamic hedging should be included; 

and whether hedge effectiveness should 

be addressed. The Commission is 

interested in whether special 

considerations are warranted with 

respect to the use of non-cleared swaps 

by agricultural cooperatives as well as 

by non-profit, governmental, or 

municipal entities engaged in electric 

power or energy activities. Commenters 

are requested to discuss both the policy 

and legal bases underlying such 

comments. 

• Should the Commission consider 

adopting a definition of ‘‘hedge or 

mitigate commercial risk’’ in proposed 

§ 39.6(c) that is different from definition 

of ‘‘hedging or mitigating commercial 

risk’’ in the major swap participant 

definitions rule and is specifically 

designed to address the circumstances 

of the end-user clearing exception? If so, 

what are the specific considerations 

associated with the end-user clearing 

exception that make a separate 

definition desirable? What features 

would such a definition need in order 

to be effective and what would be the 

benefits of adopting them? 

• Should the Commission consider 

adopting a definition of ‘‘hedge or 

mitigate commercial risk’’ in proposed 

§ 39.6(c) that is different from definition 

of ‘‘hedging or mitigating commercial 

risk’’ in the major swap participant 

definitions rule and is specifically 

designed to address the circumstances 

of the end-user clearing exception? If so, 

what are the specific considerations 

associated with the end-user clearing 

exception that make a separate 

definition desirable? What features 

would such a definition need in order 

to be effective and what would be the 

benefits of adopting them? 

III. Consideration of a Clearing 

Exception for Small Banks, Savings 

Associations, Farm Credit System 

Institutions, and Credit Unions 

Pursuant to CEA Section 2(h)(7)(C)(ii), 

the Commission is considering whether 

to except small banks, savings 

associations, farm credit systems 

institutions, and credit unions from the 

Act’s definition of financial entity, 

including specifically those with total 

assets of $10,000,000,000 or less (‘‘Small 

Financial Institutions’’). This type of 

exception would permit Small Financial 

Institutions to use the end-user 

exception from the mandatory clearing 

requirement, which is otherwise 

unavailable to financial entities. 

To inform its consideration of 

whether it would be appropriate for the 

Commission to grant any exception for 

Small Financial Institutions, the 

Commission requests comments on the 

following specific issues: 

• Would such an exception be 

appropriate? If so, what terms and 

conditions should apply? Would it be 

better for the Commission to simply 

require Small Financial Institutions to 

follow the same practices as other 

financial institutions in the future? 

Would such an exception pose any risks 

to the swap markets or the financial 

system? Why or why not? 

• How should the Commission take 

into account the supervisory regimes to 

which Small Financial Institutions are 

currently subject, and whether those 

regulatory regimes adequately mitigate 

any risks associated with an exception? 

• Should the Commission consider 

treating different types of swaps 

differently when considering whether 

any exception should be available for 

Small Financial Institutions? If so, what 

specific distinctions should be 

considered by the Commission and 

what would be the benefits of adopting 

them? 

• Should the Commission consider 

limiting the availability of any end-user 

clearing exception to only some Small 

Financial Institutions? Are there 

differences between Small Financial 


srobinson on DSKHWCL6B1PROD with PROPOSALS
80754 Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 

Institutions that should lead to 

differences in the availability of the 

exception? If so, what specific 

distinctions should be considered by the 

Commission and what would be the 

benefits of adopting them? Would an 

across-the-board application of an 

exception to all Small Financial 

Institutions create any advantages or 

disadvantages for certain Small 

Financial Institutions? Would a 

differentiated application of an 

exception create any advantages or 

disadvantages? 

• In CEA Section 2(h)(7)(C)(ii), 

Congress directed the Commission to 

consider whether to exempt small 

banks, savings associations, farm credit 

institutions, and credit unions, 

including those with total assets of $10 

billion or less. The Commission invites 

public comment on the $10 billion total 

assets level. Are there measures other 

than total assets of $10 billion, such as 

financial risk or capital, which could be 

used for determining whether an entity 

qualifies for an exception, and if so, 

what are the advantages or 

disadvantages of utilizing the alternative 

measures? Would utilizing these 

alternative measures create additional 

risks, and if so, should the Commission 

consider additional measures to address 

them? 

IV. General Request for Comments 

The Commission is requesting 

comments from all members of the 

public. The Commission will carefully 

consider the comments that it receives. 

The Commission seeks comment 

generally on all aspects of the proposed 

rules. In addition, the Commission seeks 

comment on the following: 

• Should the Commission clarify or 

modify any of the definitions included 

in the proposed rules? If so, which 

definitions and what specific 

modifications are appropriate or 

necessary? 

• Are there aspects of the CEA, the 

Investment Advisers Act of 1940 (15 

U.S.C. 80), the Employee Retirement 

Income Security Act of 1974 (29 U.S.C. 

1002), or the Bank Holding Company 

Act of 1956 (12 U.S.C. 184) that are 

incorporated in the definition that may 

need to be taken into consideration by 

the Commission to ensure the end-user 

clearing exception is available in 

appropriate circumstances? If so, what 

specific changes should the Commission 

consider and what would be the benefits 

of adopting them? 

• Are the obligations in the proposed 

rules sufficiently clear? Is additional 

guidance from the Commission 

necessary? 

• What are the technological or 

administrative burdens of complying 

with the rules proposed by the 

Commission? 

• Should the Commission implement 

substantive requirements in addition to, 

or in place of, the policies and 

procedures required in the proposed 

rules? 

• If an entity is designated as a swap 

dealer or a major swap participant with 

respect to only certain of its swaps or 

activities, should it be treated as a 

financial entity under CEA Section 

2(h)(7)(C)(i) and thereby be disqualified 

from electing to use the end-user 

clearing exception with respect to its 

other swaps or activities? If so, why? If 

not, should the Commission require 

such an entity to separate those swaps 

or activities for which it is designated as 

a swap dealer or major swap participant 

from its other swaps or activities? If so, 

how? If not, why not? 

In addition, the Commission seeks 

commenters’ views regarding any 

potential impact of the proposals on 

non-financial entities expecting to elect 

to use the end-user clearing exception, 

SDRs, other market participants, and the 

public generally. The Commission seeks 

comments on the proposals as a whole, 

including their interaction with the 

other provisions of the Dodd-Frank Act. 

The Commission seeks comments on 

whether the proposals would help 

achieve the broader goals of increasing 

transparency and accountability in the 

swap market. 

The Commission requests comment 

generally on whether its proposed 

actions today to govern the elective 

exception to mandatory clearing of 

swaps available under CEA Section 

2(h)(7) are necessary or appropriate for 

those purposes. If commenters do not 

believe one or all such actions are 

necessary and appropriate, why not? 

What would be the preferred action? 

Title VII requires that the Commission 

consult and coordinate to the extent 

possible with the SEC for the purposes 

of assuring regulatory consistency and 

comparability, to the extent possible, 

and states that in adopting rules, the 

Commission and SEC shall treat 

functionally or economically similar 

products or entities in a similar manner. 

Specifically, do the regulatory 

approaches under the Commission’s 

proposed rulemaking under DFA 

Section 723(a) and the SEC’s proposed 

rulemaking under DFA Section 763(a) 

result in duplicative or inconsistent 

efforts on the part of market participants 

subject to both regulatory regimes or 

result in gaps between those regimes? If 

so, in what ways do commenters believe 

that such duplication, inconsistencies, 

or gaps should be minimized? Do 

commenters believe the approaches 

proposed by the Commission and the 

SEC to govern the elective exception to 

mandatory clearing of swaps and 

security-based swaps are comparable? If 

not, why? Do commenters believe there 

are approaches that would make the 

elective exception to mandatory clearing 

of swaps and security-based swaps more 

comparable? If so, what are they and 

what would be the benefits of adopting 

such approaches? Do commenters 

believe that it would be appropriate for 

us to adopt an approach proposed by 

the SEC that differs from our proposal? 

If so, which one? Are there further 

distinctions or clarifications that should 

be made by the Commission for 

purposes of the end-user clearing 

exception that are different from those 

being made in connection with the 

proposed joint rulemaking by the 

Commission and the SEC? If so, what 

are they and what would be the benefits 

of adopting them? 

Commenters should, whenever 

possible, provide the Commission with 

empirical data to support their views. 

Commenters suggesting alternative 

approaches should provide 

comprehensive proposals, including any 

conditions or limitations that they 

believe should apply, the reasons for 

their suggested approaches, and their 

analysis regarding why their suggested 

approaches would satisfy the statutory 

mandate contained in DFA Section 

723(a) governing the exception to 

mandatory clearing of swaps. 

V. Related Matters 

A. Cost-Benefit Analysis 

Section 15(a) of the Act requires that 

the Commission, before promulgating a 

regulation or issuing an order, consider 

the costs and benefits of its action. By 

its terms, CEA Section 15(a) does not 

require the Commission to quantify the 

costs and benefits of a new regulation or 

determine whether the benefits of the 

regulation outweigh its costs. Rather, 

CEA Section 15(a) simply requires the 

Commission to ‘‘consider the costs and 

benefits’’ of its action. 

CEA Section 15(a) specifies that costs 

and benefits shall be evaluated in light 

of the following considerations: (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. Accordingly, the 

Commission could, in its discretion, 

give greater weight to any of the five 

considerations and could, in its 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 80755 

26 5 U.S.C. 601 et seq. 27Under CEA Section 2(e), only ECPs are 

permitted to participate in a swap subject to the 

end-user clearing exception. 

28See Opting Out of Segregation, 66 FR 20740 at 

20743 (April 25, 2001). 

29See A New Regulatory Framework for Clearing 

Organizations, 66 FR 45604 at 45609 (Aug. 29, 

2001)(DCOs); Policy Statement and Establishment 

of Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618 at 18618– 

18619 (April 30, 1982)(DCMs). 

30 44 U.S.C. 3501 et seq. 

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 

Act. 

Costs 

Proposed § 39.6 specifies 

requirements for using the elective enduser exception to the mandatory 

clearing of swaps established by CEA 

Section 2(h)(7). The proposal calls for a 

user-friendly, check-the-box approach to 

the Dodd-Frank Act’s notification 

requirement. Proposed Rule 39.6 would 

simply require an indication of each 

method used to mitigate the credit risk 

associated with non-cleared swaps. 

Additional boxes would indicate 

whether finance affiliate or a SEC Filer 

is involved. The reporting counterparty 

would further be required to check a 

box in order to indicate whether the 

swap was being used to hedge or 

mitigate commercial risk, as defined by 

proposed § 39.6(c). These data elements 

would be provided as part of the overall 

package of swap-related information 

that must generally be submitted by 

reporting counterparties to SDRs under 

the Dodd-Frank Act. 

With respect to costs, the Commission 

has determined that the notification 

requirement imposed by the rule 

proposal will present an increased cost. 

Currently, there is no requirement to 

notify the Commission of how a swap 

counterparty generally meets its 

financial obligations associated with its 

non-cleared swaps; therefore, the new 

notification requirement necessarily 

introduces a new cost to the system. 

While the Commission must be notified 

each time an election to forgo clearing 

is made, the cost incurred should be 

minimal since only general information 

must be included in the notification. In 

most cases, this check-the-box 

notification process will be performed 

by the swap dealer or major swap 

participant for whom such notification 

will represent only a small added cost 

to the overall cost of complying with its 

general reporting and recordkeeping 

obligations for swaps under the DFA. 

End users will provide the notification 

only for those swaps that do not involve 

a swap dealer or a major swap 

participant. 

Benefits 

With respect to benefits, the 

Commission has determined that the 

rule proposal should enhance the level 

of transparency associated with the OTC 

swap activity of non-financial entities, 

grant the Commission new insights into 

the practices of non-financial entities, 

and help the Commission and other 

regulators in their efforts to reduce risk 

in the financial system. 

Proposed § 39.6’s collateralization 

reporting requirements should allow the 

Commission to identify the collateral 

activities of non-financial entities. The 

role of OTC swaps in the financial 

system came into focus in the aftermath 

of the financial crisis of 2007; instituting 

the proposed rule would strengthen the 

regulatory regime that governs OTC 

swaps, and provide a greater degree of 

transparency with regard to nonfinancial entities in general. 

When non-financial entities report 

that they use alternative methods to 

meet their financial obligations related 

to OTC swaps, they would provide the 

Commission with a valuable insight into 

the practices of non-financial entities of 

various types. Although the 

Commission expects that most 

transactions rely on one of the specific 

methods listed in § 39.6(b)(5)(i), (ii), 

(iii), or (iv), the reporting of the use of 

alternative methods should help the 

Commission determine whether 

additional data collection could be 

needed in the future. 

Finally, the rule proposal represents a 

more rigorous reporting regime, a stated 

goal of the Dodd-Frank Act. While the 

reporting requirements contained in the 

rule proposal might present increased 

costs to non-financial entities seeking to 

engage in OTC swaps, they provide the 

benefits of a greater body of information 

for the Commission to analyze. 

Summary 

In summary, the Commission, after 

considering the CEA Section 15(a) 

factors, finds that the incremental cost 

imposed by the proposed rules is 

outweighed by their expected benefit. 

Accordingly, the Commission has 

determined to propose the rules. The 

Commission invites public comment on 

its cost-benefit considerations. 

Commenters also are invited to submit 

any data or other information that they 

may have quantifying or qualifying the 

costs and benefits of the proposed rules. 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires federal agencies, in 

proposing regulations, to consider the 

impact of those regulations on ‘‘small 

entities.’’ 26 The proposed rules detailed 

in this release would affect 

organizations including eligible contract 

participants (‘‘ECPs’’) 27 and SDRs. The 

Commission has previously determined 

that ECPs are not ‘‘small entities’’ for 

purposes of the RFA.28 Since SDRs are 

new entities to be regulated by the 

Commission pursuant to the DoddFrank Act, the Commission has not 

previously determined whether they are 

small entities for the purpose of the 

RFA. The Commission therefore has 

determined that SDRs are not small 

entities for purposes of the RFA. 

Specifically, the Commission has 

determined that SDRs should not be 

considered small entities based on the 

central role they will play in the 

national regulatory scheme overseeing 

the trading of swaps, similarly to DCMs 

and DCOs, which the Commission has 

previously determined not to be small 

entities on the same grounds.29

Moreover, because they will be required 

to accept swaps across asset classes, 

SDRs will require significant 

operational resources. 

Accordingly, the Commission does 

not expect the proposed rules to have a 

significant 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 regulation 

would not have a significant economic 

impact on a substantial number of small 

entities. The Commission invites the 

public to comment on whether the 

entities covered by these proposed 

regulations should be considered small 

entities for purposes of the RFA. 

C. Paperwork Reduction Act 

1. Overview 

The Paperwork Reduction Act 

(‘‘PRA’’) 30 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 

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 ‘‘Rule 39.6 End-User NonCleared Swap Notification’’ (OMB 

control number [3038–NEW]). If 


srobinson on DSKHWCL6B1PROD with PROPOSALS
80756 Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 

31The Commission requests public comment on 

this estimate. 

32The Commission requests public comment on 

this estimate. 33 7 U.S.C. 12(a)(1). 

34See also Section 6 of the Dodd-Frank Act. 

35See Public Law 104–121 (March 29, 1996), as 

amended by Public Law 110–28 (May 25, 2007). 

The provisions governing congressional review of 

agency rulemaking are set forth in SBREFA Subtitle 

E, which is codified at 5 U.S.C. 801–808. 

36See 5 U.S.C. 804(2). 

adopted, responses to this collection of 

information would be mandatory. 

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. OMB has not yet 

assigned a control number to the new 

collection for proposed rule 39.6. The 

requirements of new rule 39.6 are not 

currently covered by any existing OMB 

control number. 

Proposed Rule 39.6 would require 

non-financial entities to notify the 

Commission each time the end-user 

clearing exception is elected by 

delivering specified information to a 

registered SDR or, if no registered SDR 

is available, the Commission in the 

manner required by the proposed part 

49 rules for swaps data recordkeeping 

and reporting. The notification will 

occur only once at the beginning of the 

swap life cycle. If one of the 

counterparties to the swap transaction is 

a swap dealer or a major swap 

participant, notification would be 

provided through that counterparty. The 

non-financial counterparty would 

provide notice only in the event its 

counterparty is not a swap dealer or a 

major swap participant. 

The Commission estimates that there 

are approximately 30,000 end users who 

are counterparties to a swap in a given 

year. Of these end users, the 

Commission estimates that the majority 

will not be required to report under 

proposed § 39.6 because their 

counterparty is a swap dealer or major 

swap participant. In that case, as 

described above, the swap dealer or 

major swap participant is required to 

make the report on behalf of the end 

user. Also, end users who are 

counterparties to a swap entered into in 

a previous year will presumably have 

already made the notification under 

proposed § 39.6 and therefore will not 

be required to make further notifications 

under the rule in subsequent years. 

Reducing the number of annual end 

users by these factors, the Commission 

estimates that there are approximately 

1,000 end users who must report in a 

given year.31 The Commission estimates 

that the report will require between 

approximately 10 minutes and one hour 

of burden, per end user per year.32 The 

number of burden hours per end user 

may vary depending on various factors, 

such as the number of swaps entered 

into by that end user in the given year. 

Therefore, the number of estimated 

aggregate annual burden hours is 

between approximately 167 and 1,000 

hours. 

2. Confidentiality 

The Commission protects proprietary 

information pursuant to the Freedom of 

Information Act and 17 CFR part 145, 

‘‘Commission Records and Information.’’ 

In addition, Section 8(a)(1) of the CEA 

prohibits the Commission, unless 

specifically authorized by the Act, from 

making public ‘‘data and information 

that would separately disclose the 

business transactions or market 

positions of any person and trade 

secrets or names of customers.’’ 33 The 

Commission also is required to protect 

certain information contained in a 

government system of records pursuant 

to the Privacy Act of 1974, 5 U.S.C. 

552a. 

3. Information Collection Comments 

The Commission invites the public 

and other federal agencies to comment 

on any aspect of the reporting burden 

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 would 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 (‘‘OIRA’’) in OMB, by 

fax at (202) 395–6566 or by e-mail at 

OIRAsubmissions@omb.eop.gov. 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 RegInfo.gov. 

D. Antitrust Considerations 

Section 15(b) of the CEA requires the 

Commission, before adopting a rule or 

issuing an order, to take into 

consideration the public interest 

protected by the antitrust laws and 

endeavor to take the least 

anticompetitive means of achieving the 

objectives of the Act, as well as the 

purposes and policies of the CEA.34 The 

Commission did not identify any means 

by which the proposed end-user 

exception could be implemented to 

achieve the objectives, purposes and 

policies of the CEA in a less 

anticompetitive manner. The 

Commission invites comments on all 

aspects of its rules proposal in this 

regard. 

E. Consideration of Impact on the 

Economy 

Under the Small Business 

Enforcement Fairness Act of 1996 

(‘‘SBREFA’’), federal agencies are called 

upon to advise the Administrator of the 

OIRA in the OMB whether their 

proposed rules constitute ‘‘major’’ 

rules.35 A rule is considered major 

where, if adopted, it results, or is likely 

to result, in: (1) An annual effect on the 

economy of $100 million or more (either 

in the form of an increase or a decrease); 

(2) a major increase in the costs or 

prices for consumers, individual 

industries, federal, state, or local 

government agencies, or geographic 

regions; or (3) significant adverse effects 

on competition, employment, 

investment, productivity, innovation, or 

on the ability of United States-based 

enterprises to compete with foreignbased enterprises in domestic and 

export markets.36 If a rule is ‘‘major,’’ its 

effectiveness will generally be delayed 

for 60 days pending Congressional 

review. 

The Commission requests comment 

on whether its proposed rule would, if 

adopted, constitute a major rule under 

SBREFA. Commenters are requested to 

provide empirical data and other factual 

support for their view to the extent 

possible. 

VI. Statutory Authority 

Pursuant to the CEA, and particularly 

Section 2(h)(7) thereof, the Commission 

proposes new Rule 39.6, as set forth 

below, governing the exception to 

mandatory clearing of swaps established 

by CEA Section 2(h)(7). 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 80757 

List of Subjects in 17 CFR Part 39 

Business and industry, Reporting 

requirements, Swaps. 

For the reasons stated in the 

preamble, the Commission proposes to 

amend 17 CFR part 39 as follows: 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

1. The authority citation for part 39 is 

revised to read as follows: 

Authority: 7 U.S.C. 2, 5, 6, 6d, 7a–1, 

7a–2, and 7b, as amended by the Dodd-Frank 

Wall Street Reform and Consumer Protection 

Act, Public Law 111–203, 124 Stat. 1376 

(2010). 

2. Section 39.6 is revised to read as 

follows: 

§ 39.6 Electing to use the end-user 

exception to mandatory swap clearing. 

(a) A counterparty to a swap (an 

‘‘electing counterparty’’) may elect to use 

the exception to mandatory clearing 

under section 2(h)(7)(A)(iii) of the Act if 

the electing counterparty is not a 

‘‘financial entity’’ as defined in section 

2(h)(7)(C)(i) of the Act, is using the swap 

to hedge or mitigate commercial risk as 

defined in § 39.6(c), and provides or 

causes to be provided to a registered 

swap data repository or, if no registered 

swap data repository is available, the 

Commission, the information specified 

in § 39.6(b). More than one counterparty 

to a swap may be an electing 

counterparty. If there is more than one 

electing counterparty to a swap, the 

information specified in § 39.6(b) shall 

be provided with respect to each of the 

electing counterparties. 

(b) When an electing counterparty to 

a swap elects to use the exception to 

mandatory clearing under section 

2(h)(7)(A)(iii) of the Act, one of the 

counterparties to the swap (the 

‘‘reporting counterparty’’) shall provide 

or cause to be provided the following 

information to a registered swap data 

repository or, if no registered swap data 

repository is available, the Commission, 

in the form and manner required for 

delivery of information specified under 

the Commission’s rules: 

(1) The identity of the electing 

counterparty to the swap; 

(2) Whether the electing counterparty 

is a ‘‘financial entity’’ as defined in 

section 2(h)(7)(C)(i) of the Act; 

(3) Whether the electing counterparty 

is a finance affiliate meeting the 

requirements described in sections 

2(h)(7)(C)(iii) or 2(h)(7)(D) of the Act; 

(4) Whether the swap is used by the 

electing counterparty to hedge or 

mitigate commercial risk as defined in 

§ 39.6(c) under the Act; 

(5) Whether the electing counterparty 

generally expects to meet its financial 

obligations associated with its noncleared swap by using: 

(i) A written credit support 

agreement; 

(ii) Pledged or segregated assets 

(including posting or receiving margin); 

(iii) A written third-party guarantee; 

(iv) Solely the electing counterparty’s 

available financial resources; or 

(v) Means other than those described 

in § 39.6(b)(5)(i), (ii), (iii) or (iv); and 

(6) Whether the electing counterparty 

is an entity that is an issuer of securities 

registered under section 12 of, or is 

required to file reports under 15(d) of, 

the Securities Exchange Act of 1934, 

and if so: 

(i) The relevant SEC Central Index 

Key number for that counterparty; and 

(ii) Whether an appropriate committee 

of the board of directors (or equivalent 

body) has reviewed and approved the 

decision not to clear the swap. 

(c) For purposes of section 

2(a)(7)(A)(ii) of the CEA and § 39.6(b)(4), 

a swap shall be deemed to be used to 

hedge or mitigate commercial risk 

when: 

(1) Such swap: 

(i) Is economically appropriate to the 

reduction of risks in the conduct and 

management of a commercial enterprise, 

where the risks arise from: 

(A) The potential change in the value 

of assets that a person owns, produces, 

manufactures, processes, or 

merchandises or reasonably anticipates 

owning, producing, manufacturing, 

processing, or merchandising in the 

ordinary course of business of the 

enterprise; 

(B) The potential change in the value 

of liabilities that a person has incurred 

or reasonably anticipates incurring in 

the ordinary course of business of the 

enterprise; or 

(C) The potential change in the value 

of services that a person provides, 

purchases, or reasonably anticipates 

providing or purchasing in the ordinary 

course of business of the enterprise; 

(D) The potential change in the value 

of assets, services, inputs, products, or 

commodities that a person owns, 

produces, manufactures, processes, 

merchandises, leases, or sells, or 

reasonably anticipates owning, 

producing, manufacturing, processing, 

merchandising, leasing, or selling in the 

ordinary course of business of the 

enterprise; 

(E) Any potential change in value 

related to any of the foregoing arising 

from foreign exchange rate movements 

associated with such assets, liabilities, 

services, inputs, products, or 

commodities; or 

(F) Any fluctuation in interest, 

currency, or foreign exchange rate 

exposures arising from a person’s 

current or anticipated assets or 

liabilities; or 

(ii) Qualifies as bona fide hedging for 

purposes of an exemption from position 

limits under the Act; or 

(iii) Qualifies for hedging treatment 

under Financial Accounting Standards 

Board Accounting Standards 

Codification Topic 815, Derivatives and 

Hedging (formerly known as Statement 

No. 133); and 

(2) Such swap is: 

(i) Not used for a purpose that is in 

the nature of speculation, investing, or 

trading; or 

(ii) Not used to hedge or mitigate the 

risk of another swap or securities-based 

swap, unless that other swap itself is 

used to hedge or mitigate commercial 

risk as defined by this rule or the 

equivalent definitional rule governing 

security-based swaps promulgated by 

the Securities and Exchange 

Commission under the Securities 

Exchange Act of 1934. 

Issued in Washington, DC, on December 9, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Appendices to End-User Exception to 

Mandatory Clearing of Swaps— 

Commission Voting Summary and 

Statements of Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Dunn and Chilton voted in 

the affirmative; Commissioners Sommers and 

O’Malia voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed rule on the end-user 

exception. Congress decided that nonfinancial entities hedging or mitigating 

commercial risk will have a choice of 

whether to submit their transactions to 

clearinghouse. 

In essence, the proposal says that, if a 

company is using a swap to hedge an asset, 

liability, input or service that it currently has 

or uses or anticipates having or using, it 

would qualify for the end-user exception. In 

addition, the proposal says that if the swap 

meets generally accepted accounting 

principles as a hedge or if it used for bona 

fide hedging, the transaction would qualify 

for the end-user exception. These nonfinancial entities would be able to hedge 

interest rate risk, currency risk, physical 

commodity risk or other types of risk. 

The proposed rule does, however, say that 

if an entity is taking a position to speculate, 


srobinson on DSKHWCL6B1PROD with PROPOSALS
80758 Federal Register / Vol. 75, No. 246 / Thursday, December 23, 2010 / Proposed Rules 

1The FERC Form No. 549B reporting 

requirements in 18 CFR 284.13(e) are approved by 

the Office of Management and Budget (OMB) under 

OMB Control No. 1902–0169. The Form No. 549 

reporting requirements in 18 CFR 284.126(c) are 

approved under OMB Control No. 1902–0089. 

2 15 U.S.C. 3372. 

3Section 1(c) of the NGA exempts from the 

Commission’s NGA jurisdiction those pipelines 

which transport gas in interstate commerce if (1) 

they receive natural gas at or within the boundary 

of a state, (2) all the gas is consumed within that 

state, and (3) the pipeline is regulated by a state 

Commission. This exemption is referred to as the 

Hinshaw exemption after the Congressman who 

introduced the bill amending the NGA to include 

section 1(c). See ANR Pipeline Co. v. Federal Energy 

Regulatory Comm’n, 71 F.3d 897, 898 (1995) 

(briefly summarizing the history of the Hinshaw 

exemption). 

4Pipeline Service Obligations and Revisions to 

Regulations Governing Self-Implementing 

Transportation; and Regulation of Natural Gas 

Pipelines After Partial Wellhead Decontrol, Order 

No. 636, FERC Stats. & Regs. ¶ 30,939, order on 

reh’g, Order No. 636–A, FERC Stats. & Regs. 

¶ 30,950, order on reh’g, Order No. 636–B, 61 FERC 

¶ 61,272 (1992), order on reh’g, 62 FERC ¶ 61,007 

(1993), aff’d in part and remanded in part sub nom. 

United Distribution Cos. v. FERC, 88 F.3d 1105 (DC 

Cir. 1996), order on remand, Order No. 636–C, 78 

FERC ¶ 61,186 (1997). 

the transaction would not qualify for the enduser exception. 

I also support the series of questions 

included in the proposal regarding small 

financial institutions. In the Dodd-Frank Act, 

Congress directed the commission to 

consider possible exemptions for small 

financial institutions. I look forward to 

hearing from the public on their views on 

this and what conditions would be 

appropriate for such exemptions. 

[FR Doc. 2010–31578 Filed 12–22–10; 8:45 am] 

BILLING CODE P 

DEPARTMENT OF ENERGY 

Federal Energy Regulatory 

Commission 

18 CFR Part 284 

[Docket No. RM11–4–000] 

Storage Reporting Requirements of 

Interstate and Intrastate Natural Gas 

Companies 

December 16, 2010. 

AGENCY: Federal Energy Regulatory 

Commission, DOE. 

ACTION: Notice of inquiry. 

SUMMARY: The Federal Energy 

Regulatory Commission is considering 

whether to revise regulations requiring 

interstate and intrastate natural gas 

pipelines to report semi-annually on 

their storage activities. This Notice of 

Inquiry will assist the Commission in 

determining what changes, if any, 

should be made to its regulations. 

DATES: Comment Date: Comments are 

due February 22, 2011. 

ADDRESSES: You may submit comments 

on the Notice of Inquiry, identified by 

Docket No. RM11–4–000, by one of the 

following methods: 

• Agency Web Site: Documents 

created electronically using word 

processing software should be filed in 

native applications or print-to-PDF 

format, and not in a scanned format, at 

http://www.ferc.gov/docs-filing/ 

efiling.asp. 

• Mail/Hand Delivery: Commenters 

unable to file comments electronically 

must mail or hand deliver an original 

copy of their comments to: Federal 

Energy Regulatory Commission, 

Secretary of the Commission, 888 First 

Street, NE., Washington, DC 20426. 

These requirements can be found on the 

Commission’s Web site; see, e.g., the 

‘‘Quick Reference Guide for Paper 

Submissions,’’ available at http:// 

www.ferc.gov/docs-filing/efiling.asp or 

via phone from FERC Online Support at 

202–502–6652 or toll-free at 1–866– 

208–3676. 

FOR FURTHER INFORMATION CONTACT: 

Vince Mareino (Legal Information), 

Office of the General Counsel, Federal 

Energy Regulatory Commission, 888 

First Street, NE., Washington, DC 

20426, (202) 502–6167, 

Vince.Mareino@ferc.gov. 

Kenneth Kohut (Technical Information), 

Office of Enforcement, Federal Energy 

Regulatory Commission, 888 First 

Street, NE., Washington, DC 20426, 

(202) 502–6342, 

Kenneth.Kohut@ferc.gov. 

Thomas Russo (Technical Information), 

Office of Enforcement, Federal Energy 

Regulatory Commission, 888 First 

Street, NE., Washington, DC 20426, 

(202) 502–8792, 

Thomas.Russo@ferc.gov. 

SUPPLEMENTARY INFORMATION: 

Notice of Inquiry 

December 16, 2010. 

1. In this Notice of Inquiry, the 

Federal Energy Regulatory Commission 

(Commission) seeks comments on 

whether the Commission should modify 

the semi-annual storage reports required 

of interstate and intrastate natural gas 

companies pursuant to 18 CFR 284.13(e) 

and 284.126(c) of the Commission’s 

regulations.1 In particular, the 

Commission is interested in exploring 

whether it should modify the 

information currently collected in the 

semi-annual storage reports, whether 

there should be a standardized 

electronic format for the reports, and 

whether the storage reports must be 

public. 

I. Background 

2. Section 284.13(e) of the 

Commission’s regulations requires 

interstate pipelines to file semi-annual 

storage reports at the end of each 

complete storage injection and 

withdrawal season. Section 284.126(c) 

requires similar reports by (1) intrastate 

natural gas pipelines providing 

interstate transportation service 

pursuant to section 311 of the Natural 

Gas Policy Act of 1978 (NGPA) 2 and (2) 

Hinshaw pipelines providing interstate 

service subject to the Commission’s 

Natural Gas Act (NGA) section 1(c) 

jurisdiction pursuant to blanket 

certificates issued under 18 CFR 

284.224.3 The reports by both sets of 

pipelines must include: 

(1) The identity of each customer injecting 

gas into storage and/or withdrawing gas from 

storage (including, for interstate pipelines, 

any affiliate relationship), 

(2) the rate schedule (for interstate 

pipelines) or docket number (for intrastate 

pipelines) authorizing the storage injection or 

withdrawal service, 

(3) the maximum storage quantity and 

maximum daily withdrawal quantity 

applicable to each storage customer, 

(4) for each storage customer, the volume 

of gas (in dekatherms) injected into and/or 

withdrawn from storage during the period, 

(5) the unit charge and total revenues 

received during the injection/withdrawal 

period from each storage customer 

(including, for interstate pipelines, any 

discounts), and 

(6) for intrastate pipelines, any related 

docket numbers under which the intrastate 

pipeline reported storage related injection/ 

withdrawal transportation services. 

The pipelines must file these reports 

within 30 days of the end of each 

complete storage injection and 

withdrawal season, and the reports must 

be signed under oath by a senior official. 

The Commission has not adopted any 

standardized electronic form for 

pipelines to submit the semi-annual 

storage reports. Nor has the Commission 

expressly required that the reports be 

public. 

3. The Commission adopted the 

existing semi-annual storage reporting 

requirements for both interstate and 

intrastate pipelines in their current form 

in 1992 as part of Order No. 636,4 and 

there have been only minor 

modifications in the semi-annual 

storage reporting requirements since 


srobinson on DSKHWCL6B1PROD with PROPOSALS