79992 Federal Register / Vol. 75, No. 244 / Tuesday, December 21, 2010 / Proposed Rules 

1The Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. No. 111–203, 124 

Stat. 1376 (2010). 

2See Public Law 111–203, Preamble. 

3Section 712(d) of the Dodd-Frank Act provides 

that the Commission and the CFTC, in consultation 

FAA AD Differences 

Note: This AD differs from the MCAI and/ 

or service information as follows: No 

differences. 

Other FAA AD Provisions 

(g) The following provisions also apply to 

this AD: 

(1) Alternative Methods of Compliance 

(AMOCs): The Manager, Standards Office, 

FAA, has the authority to approve AMOCs 

for this AD, if requested using the procedures 

found in 14 CFR 39.19. Send information to 

ATTN: Taylor Martin, Aerospace Engineer, 

FAA, Small Airplane Directorate, 901 Locust, 

Room 301, Kansas City, Missouri 64106; 

telephone: (816) 329–4138; fax: (816) 329– 

4090. Before using any approved AMOC on 

any airplane to which the AMOC applies, 

notify your appropriate principal inspector 

(PI) in the FAA Flight Standards District 

Office (FSDO), or lacking a PI, your local 

FSDO. 

(2) Airworthy Product: For any 

requirement in this AD to obtain corrective 

actions from a manufacturer or other source, 

use these actions if they are FAA-approved. 

Corrective actions are considered FAAapproved if they are approved by the State 

of Design Authority (or their delegated 

agent). You are required to assure the product 

is airworthy before it is returned to service. 

(3) Reporting Requirements: For any 

reporting requirement in this AD, a federal 

agency may not conduct or sponsor, and a 

person is not required to respond to, nor 

shall a person be subject to a penalty for 

failure to comply with a collection of 

information subject to the requirements of 

the Paperwork Reduction Act unless that 

collection of information displays a current 

valid OMB Control Number. The OMB 

Control Number for this information 

collection is 2120–0056. Public reporting for 

this collection of information is estimated to 

be approximately 5 minutes per response, 

including the time for reviewing instructions, 

completing and reviewing the collection of 

information. All responses to this collection 

of information are mandatory. Comments 

concerning the accuracy of this burden and 

suggestions for reducing the burden should 

be directed to the FAA at: 800 Independence 

Ave., SW., Washington, DC 20591, Attn: 

Information Collection Clearance Officer, 

AES–200. 

Related Information 

(h) Refer to MCAI EASA AD No.: 2009– 

0105R2, dated March 9, 2010; BrittenNorman Aircraft Limited Service Bulletin 

Number BN–2/SB 313, Issue 3, dated 

February 24, 2009, Britten-Norman Ltd. 

Drawing NB–31–235, Issue 13; BrittenNorman Ltd. Drawing NB–31–873, Issue 2; 

and Britten-Norman Ltd. Drawing NB–31– 

0906, Issue 3. For service information related 

to this AD, contact Airworthiness, BrittenNorman Aircraft Ltd., Bembridge Airport, Isle 

of Wight, PO35 5PR, United Kingdom; 

telephone: +44(0) 20 3371 4000; fax: +44(0) 

20 3371 4001; e-mail: 

jim.roberts@bnaircraft.com. You may review 

copies of the referenced service information 

at the FAA, Small Airplane Directorate, 901 

Locust, Kansas City, Missouri 64106. For 

information on the availability of this 

material at the FAA, call 816–329–4148. 

Issued in Kansas City, Missouri, on 

December 14, 2010. 

William J. Timberlake, 

Acting Manager, Small Airplane Directorate, 

Aircraft Certification Service. 

[FR Doc. 2010–31983 Filed 12–20–10; 8:45 am] 

BILLING CODE 4910–13–P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–63556; File No. S7–43–10] 

RIN 3235–AK88 

End-User Exception to Mandatory 

Clearing of Security-Based Swaps 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: In accordance with the DoddFrank Wall Street Reform and Consumer 

Protection Act of 2010 (‘‘Dodd-Frank 

Act’’), the Securities and Exchange 

Commission (‘‘Commission’’) is 

proposing new Rule 3Cg–1 under the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’) governing the 

exception to mandatory clearing of 

security-based swaps available for 

counterparties meeting certain 

conditions. The Commission is 

requesting comments on the proposed 

rule and related matters. 

DATES: Comments must be received on 

or before February 4, 2011. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

No. S7–43–10 on the subject line; or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File No. 

S7–43–10. This file number should be 

included on the subject line if e-mail is 

used. To help us process and review 

your comments more efficiently, please 

use only one method. The Commission 

will post all comments on the 

Commission’s Internet Web site (http:// 

www.sec.gov/rules/proposed.shtml). 

Comments are also available for Web 

site viewing and printing in the 

Commission’s Public Reference Room, 

100 F Street, NE., Washington, DC 

20549 on official business days between 

the hours of 10 a.m. and 3 p.m. All 

comments received will be posted 

without change; we do not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. 

FOR FURTHER INFORMATION CONTACT: 

Peter Curley, Attorney Fellow, at (202) 

551–5696, or Andrew Blake, Special 

Counsel, at (202) 551–5846, Division of 

Trading and Markets, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–7010. 

SUPPLEMENTARY INFORMATION: In 

accordance with Section 763(a) of Title 

VII (‘‘Title VII’’) of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act of 2010, the Commission is 

proposing Rule 3Cg–1 under the 

Exchange Act to govern the exception to 

mandatory clearing of security-based 

swaps available to counterparties to 

security-based swaps meeting certain 

conditions. The Commission is 

soliciting comments on all aspects of the 

proposed rule and alternative rule 

language and will carefully consider any 

comments received. 

I. Introduction 

On July 21, 2010, the President signed 

the Dodd-Frank Act into law.1 The 

Dodd-Frank Act was enacted to, among 

other purposes, promote the financial 

stability of the United States by 

improving accountability and 

transparency in the financial system.2

Title VII of the Dodd-Frank Act provides 

the Commission and the Commodity 

Futures Trading Commission (‘‘CFTC’’) 

with the authority to regulate over-thecounter (‘‘OTC’’) derivatives in light of 

the recent financial crisis, which 

demonstrated the need for enhanced 

regulation in the OTC derivatives 

market. 

The Dodd-Frank Act provides that the 

CFTC will regulate ‘‘swaps,’’ the 

Commission will regulate ‘‘securitybased swaps,’’ and the CFTC and the 

Commission will jointly regulate ‘‘mixed 

swaps.’’ 3 The Dodd-Frank Act amends 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 244 / Tuesday, December 21, 2010 / Proposed Rules 79993 

with the Board of Governors of the Federal Reserve 

System (‘‘Federal Reserve’’), shall jointly further 

define the terms ‘‘swap,’’ ‘‘security-based swap,’’ 

‘‘swap dealer,’’ ‘‘security-based swap dealer,’’ ‘‘major 

swap participant,’’ ‘‘major security-based swap 

participant,’’ ‘‘eligible contract participant,’’ and 

‘‘security-based swap agreement.’’ These terms are 

defined in Sections 721 and 761 of the Dodd-Frank 

Act and, with respect to the term ‘‘eligible contract 

participant,’’ in Section 1a(18) of the Commodity 

Exchange Act (‘‘CEA’’), 7 U.S.C. 1a(18), as redesignated and amended by Section 721 of the 

Dodd-Frank Act. See Exchange Act Release Nos. 

62717 (Aug. 13, 2010), 75 FR 51429 (Aug. 20, 2010) 

(File No. S7–16–10) (advance joint notice of 

proposed rulemaking regarding definitions 

contained in Title VII of the Dodd-Frank Act) 

(‘‘Definitions Release’’); 63452 (Dec. 7, 2010) 

(‘‘Definitions Proposing Release’’). 

4All references to the Exchange Act contained in 

this release refer to the Securities Exchange Act of 

1934, as amended by the Dodd-Frank Act. 

5See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C). 

6See Public Law 111–203, sec. 763(i) and sec. 

766(a) (adding Exchange Act Sections 13(m)(1)(G) 

and 13A(A)(1), respectively). 

7See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C). See also Public Law 

111–203, sec. 761 (adding Exchange Act Section 

3(a)(77) (defining the term ‘‘security-based swap 

execution facility’’). 

8See, e.g., Report of the Senate Committee on 

Banking, Housing, and Urban Affairs regarding The 

Restoring American Financial Stability Act of 2010, 

S. Rep. No. 111–176 at 34 (stating that ‘‘[s]ome parts 

of the OTC market may not be suitable for clearing 

and exchange trading due to individual business 

needs of certain users. Those users should retain 

the ability to engage in customized, uncleared 

contracts while bringing in as much of the OTC 

market under the centrally cleared and exchangetraded framework as possible.’’). 

9See Exchange Act Release No. 63557 (Dec. 15, 

2010) (‘‘Mandatory Clearing Release’’). 

10See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)). This clearing 

exception is elective. When trading with a securitybased swap dealer and a major security-based swap 

participant, counterparties that are not swap 

dealers, security-based swap dealers, major swap 

participants or major security-based swap 

participants have the right to forgo the end-user 

clearing exception and require clearing for a 

security-based swap that is subject to a Commission 

clearing mandate. These counterparties are granted 

a similar right when a security-based swap has been 

listed for clearing, but is not the subject of a 

Commission clearing mandate. See Public Law 111– 

203, sec. 763(a) (adding Exchange Act Section 

3C(g)(5)). The choice to require or forgo clearing is 

solely at the non-financial counterparty’s 

discretion. See Public Law 111–203, sec. 763(a) 

(adding Exchange Act Section 3C(g)(2)). 

11Burdens that may rest upon non-financial endusers arising from central clearing could include 

clearing fees and the requirement to post initial and 

variation margin. The net cost of these burdens to 

non-financial end-users is expected to vary. In 

particular, the final net cost to non-financial endusers would also need to account for the fees and 

charges of dealers and other counterparties to 

security-based swaps with non-financial end-users 

and for any bilateral margin or other collateral 

requirements established in connection with such 

transactions. As a result, it is possible that the costs 

for an end-user to engage in a centrally cleared 

transaction may be less than for comparable 

bilateral transactions in some circumstances. The 

Commission is requesting comments on the costs 

experienced by non-financial end-users in 

connection with both cleared and non-cleared 

security-based swaps. 

12See Public Law 111–203, sec. 712(f). See also 

Pub. L. No. 111–203, sec. 763(a) (adding Exchange 

Act Section 3C(g)(6)). 

13Exchange Act Section 3C(g)(1)(A) limits 

availability of the end-user clearing exception to 

circumstances when one of the counterparties to the 

security-based swap is not a financial entity. The 

term financial entity is defined in Section 

3C(g)(3)(A) of the Exchange Act, 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 

section 1a(10) of the Commodity Exchange Act; (vi) 

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

Investment Advisers Act of 1940 (15 U.S.C. 80–b– 

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. Four of these 

terms, ‘‘swap dealer’’, ‘‘major swap participant’’, 

‘‘security-based swap dealer’’ and ‘‘major securitybased swap participant’’ are themselves the subject 

of current proposed joint rulemaking by the 

Commission and the CFTC. Definitions Proposing 

Release, supra note 3. 

14See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)(1)(C)). 

the Exchange Act 4 to require, among 

other things, the following: (1) 

Transactions in security-based swaps 

must be cleared through a clearing 

agency if they are of a type that the 

Commission determines must be 

cleared, unless an exemption from 

mandatory clearing applies; 5 (2) 

transactions in security-based swaps 

must be reported to a registered 

security-based swap data repository 

(‘‘SDR’’) or the Commission; 6 and (3) if 

a security-based swap is subject to a 

clearing requirement, it must be traded 

on a registered exchange or a registered 

or exempt security-based swap 

execution facility, unless no facility 

makes such security-based swap 

available for trading.7

The Dodd-Frank Act seeks to ensure 

that, wherever possible and appropriate, 

derivatives contracts formerly traded 

exclusively in the OTC market be 

cleared.8 One key way in which the 

Dodd-Frank Act promotes clearing of 

such contracts is by setting forth a 

process by which the Commission 

would determine whether a securitybased swap is required to be cleared; if 

the Commission makes a determination 

that a security-based swap is required to 

be cleared, then parties may not engage 

in such security-based swap without 

submitting it for clearing unless an 

exception applies. 

Standards for mandatory clearing of 

security-based swaps are established by 

Exchange Act Section 3C(a)(1).9 The 

purpose of mandatory clearing of 

security-based swap products is to 

centralize individual counterparty risks 

through a clearing agency acting as a 

central counterparty that distributes risk 

among the clearing agency’s 

participants. Exchange Act Section 

3C(g) provides that a security-based 

swap otherwise subject to mandatory 

clearing is not required to be cleared if 

one party to the security-based swap is 

not a financial entity, is using securitybased 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 non-cleared security-based 

swaps (the ‘‘end-user clearing 

exception’’).10 Though beneficial for 

reasons such as those described above, 

mandatory clearing of security-based 

swaps may also alter the burdens on 

non-financial end-users of derivatives 

relative to bilateral transactions, and 

thereby possibly affect their risk 

management practices.11 Exchange Act 

Section 3C(g) is designed to permit nonfinancial end-users that meet the 

specified conditions to elect not to 

centrally clear security-based swaps and 

retain flexibility to use both cleared and 

non-cleared security-based swaps in 

their risk management activities. 

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.12 The 

Commission is also required to consider 

whether to exempt small banks, savings 

associations, farm credit system 

institutions and credit unions from the 

definition of ‘‘financial entity’’ contained 

in Exchange Act Section 3C(g)(3)(A). 

The Commission is proposing Rule 3Cg– 

1 under the Exchange Act to specify 

requirements for using the exception to 

mandatory clearing of security-based 

swaps established by Exchange Act 

Section 3C(g), together with proposed 

alternative language to provide an 

exemption for small banks, savings 

associations, farm credit system 

institutions and credit unions. 

II. Description of Proposed Rule 

A. Notification to the Commission 

In order to qualify for the end-user 

clearing exception, a non-financial 

entity 13 that uses security-based swaps 

to hedge or mitigate commercial risk 

must notify the Commission how it 

generally meets its financial obligations 

associated with non-cleared securitybased swaps.14 The Exchange Act 

authorizes the Commission to establish 

rules regarding such notification as well 

as to prescribe rules as may be necessary 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
79994 Federal Register / Vol. 75, No. 244 / Tuesday, December 21, 2010 / Proposed Rules 

15See Public Law 111–203, sec. 712(f) and sec. 

763(a) (adding Exchange Act Sections 3C(g)(1)(C) 

and 3C(g)(6)). 

16See Exchange Act Release No. 63346 (Nov. 18, 

2010), 75 FR 75208 (Dec. 2, 2010) (‘‘Regulation 

SBSR Proposing Release’’). Regulation SBSR 

contemplates that information may be delivered to 

the Commission directly in limited circumstances 

when an SDR is not available. When permitted by 

Regulation SBSR, such delivery would also meet 

the end-user clearing exception notice requirement. 

Persons wishing to comment on the requirements 

of proposed Regulation SBSR should submit 

comments pursuant to the Regulation SBSR 

Proposing Release. 

17Proposed Exchange Act Rule 901(a) under 

Regulation SBSR defines which of the parties to a 

security-based swap will be designated the 

Reporting Party for these purposes. See id. 

18See id. (proposed Rules 901(h) and 907(a)(2) of 

proposed Regulation SBSR). 

19See id. (proposed Rule 901(d)(2) of proposed 

Regulation SBSR). 

20See id. (for each security-based swap 

transaction made in reliance on the end-user 

clearing exception, proposed Rule 901(d)(1)(ix) 

under Regulation SBSR requires parties to a 

security-based swap to indicate whether or not the 

end-user clearing exception is being invoked when 

reporting transaction information to an SDR as 

required by Exchange Act Section 13(m)(1)(F). The 

information required under proposed Exchange Act 

Rule 3Cg–1 is separate from these requirements but 

would be delivered to the SDR by the Reporting 

Party in the same manner as required by proposed 

Regulation SBSR). 

21See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)(1)(C)). 

22See ISDA Collateral Steering Committee, 

Market Review of OTC Derivative Bilateral 

Collateralization Practices (2.0), (March 1, 2010) 

(available at http://www.isda.org/c_and_a/pdf/ 

Collateral-Market-Review.pdf) (‘‘ISDA 

Collateralization Practices’’) (explaining credit risk, 

methods of risk mitigation and the context for 

collateralization as a risk reduction technique). 

23See 156 Cong. Rec. S6192 (daily ed. July 22, 

2010) (letter from Sen. Dodd and Sen. Lincoln to 

Rep. Frank and Rep. Peterson (the ‘‘Dodd-Lincoln 

Letter’’)). 

24See ISDA Collateralization Practices, supra 

note 22 (describing methods of risk mitigation used 

in connection with OTC Derivatives and key legal 

foundations supporting collateralization). 

25See ISDA Collateralization Practices, supra 

note 22. See also ISDA, ISDA Margin Survey 2010 

(available at http://www.isda.org/c_and_a/pdf/ 

ISDA-Margin-Survey-2010.pdf) (‘‘ISDA Margin 

Survey 2010’’) (describing collateralization levels 

for derivatives transactions by counterparty type, 

product type and types of collateral received). 

to prevent abuse of the end-user clearing 

exception.15 The Commission is 

proposing Rule 3Cg–1 to require nonfinancial entities to notify the 

Commission each time the end-user 

clearing exception is used by delivering 

certain information to an SDR in the 

manner required by proposed Exchange 

Act Regulation SBSR.16 The 

Commission believes that receiving a 

notification for each transaction may 

provide for a more complete picture 

regarding how end-users meet their 

financial obligations based on the 

transactions in which they engage. The 

specified additional information would 

be delivered to the SDR by the reporting 

party defined in proposed Regulation 

SBSR (the ‘‘Reporting Party’’) 17 together 

with other information regarding the 

security-based swap separately required 

by proposed Regulation SBSR. Under 

the applicable requirements of proposed 

Regulation SBSR, the additional 

information required by proposed Rule 

3Cg–1 would be delivered to the SDR in 

the same electronic format established 

by the SDR for purposes of proposed 

Regulation SBSR,18 promptly after the 

security-based swap transaction is 

executed, which for information of this 

kind would be no later than: 

• 15 minutes after the time of 

execution for a security-based swap that 

is executed and confirmed 

electronically; 

• 30 minutes after the time of 

execution for a security-based swap that 

is confirmed electronically but not 

executed electronically; or 

• 24 hours after execution for a 

security-based swap that is not executed 

or confirmed electronically.19

The information delivered to the SDR 

pursuant to Rule 3Cg–1 would need to 

be accurate as of the date and time the 

information is delivered to the SDR.20

The Commission believes that this 

requirement should improve transaction 

efficiency by allowing notification to be 

made in a manner consistent with other 

transaction reporting requirements 

being developed pursuant to the DoddFrank Act. The timing requirements 

should also ensure the Commission has 

up to date information as of the time of 

submission. 

1. Meeting Financial Obligations 

A non-financial entity invoking the 

end-user clearing exception must notify 

the Commission of ‘‘how it generally 

meets its financial obligations 

associated with non-cleared securitybased swaps’’ (‘‘Financial Obligation 

Notice’’).21 Under existing market 

practices, counterparties to securitybased swaps regularly use forms of 

collateral support both to create 

incentives for obligors to meet their 

financial obligations under the 

agreements and to provide themselves 

with access to some asset of value that 

can be sold or the value of which can 

be applied in the event of default.22

Though not required by Exchange Act 

Section 3C(g), such individualized 

credit arrangements between 

counterparties in bilateral securitybased swap transactions can be 

important components of risk 

management consistent with the policy 

rationale of ensuring that the end-user 

clearing exception is reasonably 

available to non-financial entities 

hedging or mitigating commercial 

risks.23

However, a principal feature 

distinguishing cleared security-based 

swaps from non-cleared security-based 

swaps is that non-cleared security-based 

swaps do not provide a uniform method 

of mitigating such counterparty credit 

risk.24 Given this lack of uniformity, 

proposed Rule 3Cg–1(a)(5) would 

require a counterparty relying on the 

end-user clearing exception to provide 

certain information as part of its 

notification to the Commission 

regarding the methods used to mitigate 

credit risk in connection with noncleared security-based swaps. If more 

than one method is used then 

information must be provided regarding 

each applicable method. Notification of 

all methods, as proposed in proposed 

Rule 3Cg–1(a)(5), would provide the 

Commission with more complete 

information regarding the risk 

characteristics of non-cleared securitybased swaps used by non-financial 

entities to hedge or mitigate commercial 

risk. 

Proposed Rule 3Cg–1(a)(5)(i) requires 

notification to the Commission 

regarding whether a credit support 

agreement is being used in connection 

with the non-cleared security-based 

swap. For these purposes, the term 

credit support agreement refers 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 securitybased swap. Agreements of this kind are 

frequently used to mitigate the 

counterparty credit risk of securitybased swaps and other derivatives 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 

security-based swaps.25 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 financial 

obligations associated with non-cleared 

security-based swaps. 

Proposed Rule 3Cg–1(a)(5)(ii) requires 

notification to the Commission 

regarding whether the financial 

obligations associated with the noncleared security-based swap are secured 

by collateral pledged under a written 

security arrangement not requiring the 

transfer of possession of collateral to 

either of the security-based swap 

counterparties. Examples of this type of 


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Federal Register / Vol. 75, No. 244 / Tuesday, December 21, 2010 / Proposed Rules 79995 

26See ISDA Margin Survey 2010, supra note 25, 

at 9 (noting types of non-ISDA collateral agreements 

used and frequency of use). 

27See ISDA Collateralization Practices, supra 

note 22, at 20 (identifying master cross-netting and 

cross-guarantee structures as common credit risk 

mitigation practices); see also ISDA 2002 Master 

Agreement, Multicurrency—Cross Border Schedule, 

Part 4(f) (contemplating bank letters of credit and 

third party guarantees as credit support 

documents). 

28For a variety of reasons one or both of the 

counterparties to some non-cleared security-based 

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, 

at 50 (Jan. 1997) (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). 

29See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)(6)). See also Public Law 

111–203, sec. 764 (adding Exchange Act Section 

15F of the Exchange Act creating new business 

conduct standards applicable to interactions of 

security-based swap dealers and major securitybased swap participants with other counterparties). 

30See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)(3)). 

31See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)(4)). 

32Exchange Act Section 3C(g)(4)(A) 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 securitybased 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 Exchange Act 

Section 3C(g)(3), and (3) is not itself one of seven 

entities defined in Exchange Act Section 

3C(g)(4)(B). See Public Law 111–203, sec. 763(a) 

(adding Exchange Act Section 3C(g)(4)(A)). The 

Continued 

arrangement include, but are not limited 

to, (i) agreements granting security 

interests over property of the reporting 

person, whether or not such security 

interests are perfected by the filing of a 

mortgage, financing statements or 

similar documents, and (ii) agreements 

to transfer assets to collateral agents or 

escrow agents acting pursuant to 

instructions agreed by both parties to a 

security-based swap. While such 

arrangements may be somewhat less 

commonly used to mitigate credit risk 

associated with non-cleared securitybased swaps, the Commission 

preliminarily believes these methods 

may have particular importance for 

certain categories of non-financial 

entities, such as enterprises with high 

levels of fixed assets relative to cash 

flows.26 Accordingly, the Commission 

preliminarily considers it appropriate to 

separately categorize this information in 

the data proposed to be collected. 

Proposed Rule 3Cg–1(a)(5)(iii) 

requires notification to the Commission 

regarding whether the financial 

obligations associated with the noncleared security-based swap are 

guaranteed by a person or entity other 

than the counterparty invoking the enduser clearing exception. The proposed 

notification would provide the 

Commission with information regarding 

the manner in which financial 

obligations are met by providing 

information regarding the use of 

guarantees by third parties (such as 

parent companies, affiliated parties or 

others) in meeting financial obligations 

associated with non-cleared securitybased swaps.27

Proposed Rule 3Cg–1(a)(5)(iv) 

requires notification to the Commission 

regarding whether the counterparty 

invoking the end-user clearing 

exception intends to meet its obligations 

associated with the security-based swap 

solely by utilizing available financial 

resources (i.e., its general 

creditworthiness).28 Financial resources 

that might be available to meet 

obligations associated with non-cleared 

security-based swaps may include any 

number of 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. 

Proposed Rule 3Cg–1(a)(5)(v) requires 

notification to the Commission 

regarding whether the counterparty 

invoking the end-user clearing 

exception intends to employ means 

other than those described in proposed 

Rules 3Cg–1(a)(5)(i), (ii), (iii), or (iv) to 

meet its financial obligations associated 

with a security-based 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 for meeting obligations 

associated with non-cleared securitybased swaps relying on the end-user 

clearing exception to provide a clearer 

picture of the manner in which an enduser is meeting its financial obligations. 

The Commission anticipates many 

entities would meet their financial 

obligations through one of the specific 

methods listed in Rule 3Cg–1(a)(5)(i), 

(ii), (iii), or (iv). The information 

collected pursuant to proposed Rule 

3Cg–1(a)(5)(v), however, may allow the 

Commission to gain greater insight 

regarding the potential existence of 

other means for meeting financial 

obligations, as well as whether there is 

a significant number of transactions that 

would justify more granular rules 

concerning the manner in which endusers are meeting their financial 

obligations in the future with respect to 

whether and how end-users are using 

other credit risk mitigating 

methodologies to support meeting their 

financial obligations associated with 

non-cleared security-based swaps. 

2. Preventing Abuse of the End-User 

Clearing Exception 

The remaining items of information 

required by proposed Rule 3Cg–1, 

specifically proposed Rules 3Cg–1(a)(1), 

(2), (3), (4) and (6), are designed to 

affirm compliance with particular 

requirements of Exchange Act Section 

3C(g) or otherwise produce information 

necessary to aid the Commission in its 

efforts to prevent abuse of the end-user 

clearing exception as contemplated by 

Exchange Act Section 3C(g)(6).29

Proposed Rule 3Cg–1(a)(1) requires 

identifying which of the counterparties 

to the security-based swap is invoking 

the end-user clearing exception. At least 

one counterparty must be identified for 

each security-based swap that will rely 

on the end-user clearing exception. 

When both counterparties to a securitybased swap are non-financial entities 

and meet the other requirements of the 

end-user clearing exception, both 

parties may choose to use the exception 

and provide the required information to 

the SDR. 

Proposed Rule 3Cg–1(a)(2) requires 

information to be provided regarding 

the status of the counterparty invoking 

the end-user clearing exception as a 

non-financial entity under Section 

3C(g)(3) of the Act.30 This information is 

being solicited because the exception to 

mandatory clearing of security-based 

swaps under Exchange Act Section 

3C(g) is only available to persons that 

are not financial entities, or are affiliates 

of non-financial entities satisfying the 

requirements of Exchange Act Section 

3C(g)(4). 

Proposed Rule 3Cg–1(a)(3) requires 

information to be provided regarding 

whether the counterparty invoking the 

end-user clearing exception is an 

affiliate of another person qualifying for 

the exception under Exchange Act 

Section 3C(g), and satisfies the 

additional requirements of Exchange 

Act Section 3C(g)(4).31 Section 3C(g)(4) 

of the Exchange Act contains a number 

of provisions specially designed for 

finance affiliates of persons qualifying 

for the end-user clearing exception, and 

among other things does not permit 

finance affiliates that are themselves 

swap dealers, security-based swap 

dealers, major swap participants, major 

security-based swap participants or 

certain other defined categories of 

entities to use the end-user clearing 

exception as an agent for another entity 

in any circumstances.32 Given these 


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seven entities are: (i) A swap dealer; (ii) a securitybased swap dealer; (iii) a major swap participant; 

(iv) a major security-based 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 Public Law 111–203, sec. 

763(a) (adding Exchange Act Section 3C(g)(4)(B)). In 

addition, an affiliate, subsidiary, or wholly owned 

entity of a person that qualifies for an exception 

under Exchange Act Section 3C(g)(4)(A) and which 

is predominantly engaged in providing financing 

for the purchase or lease of merchandise or 

manufactured goods of the person shall be exempt 

from both the margin requirements described in 

Exchange Act Section 15F(e) and the clearing 

requirement in Exchange Act Section 3C(a), 

provided that the security-based swaps in question 

are entered into to mitigate the risk of the financing 

activities. See Public Law 111–203, sec. 763(a) 

(adding Exchange Act Section 3C(g)(4)(C)). 

33See infra notes 49–51 and accompanying text. 

34For these purposes, a counterparty invoking the 

end-user clearing exception is considered by the 

Commission 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 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 Section 

12, and annual and other reports under Exchange 

Act Sections 13 and 15(d)). 

35See Public Law 111–203, § 763(a) (adding 

Exchange Act Section 3C(i). 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 

security-based swaps). 

36Exchange Act Section 3C(i) contemplates board 

review and approval of the decision to enter into 

the swap that is subject to the exemption. See Item 

305 of Regulation S–K, 17 CFR 229.305. 

37For 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 reporting person not to 

clear the security-based swap being reported. In 

turn, such board committee also could adopt 

policies and procedures regarding the review and 

approval required by Exchange Act Section 3C(i), 

which may include periodic consideration of the 

relative costs, risk management characteristics and 

other features of cleared and non-cleared securitybased swaps. 

additional features, the Commission 

preliminarily believes it is appropriate 

to separately categorize security-based 

swaps transacted by finance affiliates in 

particular in order to aid the 

Commission in its efforts to prevent 

abuse of the end-user clearing exception 

by being able to readily identify entities 

that qualify as financial entities and are 

participating in the use of the exception. 

Proposed Rule 3Cg–1(a)(4) requires 

information to be provided regarding 

whether the counterparty invoking the 

end-user clearing exception uses the 

security-based swap being reported to 

hedge or mitigate commercial risk. The 

exception to mandatory clearing of 

security-based swaps pursuant to 

Section 3C(g) of the Exchange Act is 

only available to persons that use 

security-based swaps to hedge or 

mitigate commercial risk. The 

Commission has proposed to adopt 

Exchange Act Rule 3a67–4 to define the 

meaning of hedging or mitigating 

commercial risk for these purposes.33

Proposed Rule 3Cg–1(a)(6) requires all 

counterparties invoking 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 pursuant to 

Exchange Act Section 15(d) (‘‘SEC 

Filer’’).34 Under Exchange Act Section 

3C(i), the exception to mandatory 

clearing of security-based swaps 

pursuant to Exchange Act Section 3C(g) 

is available to SEC Filers only if an 

appropriate committee of the issuer’s 

board of directors or governing body has 

reviewed and approved the issuer’s 

decision to enter into security-based 

swaps that are subject to the 

exception.35 When the counterparty 

invoking the end-user clearing 

exception is an SEC Filer, two 

additional items of information must be 

provided: 

• Proposed Rule 3Cg–1(a)(6)(i) 

requires an SEC Filer invoking the enduser clearing exception to specify its 

SEC Central Index Key number. 

Collection of this information will allow 

the Commission to cross reference 

materials filed with the relevant SDR 

with information in periodic reports and 

other materials filed by the SEC Filer 

with the Commission.36

• Proposed Rule 3Cg–1(a)(6)(ii) 

requires confirmation that an 

appropriately authorized committee of 

the board of directors or equivalent 

governing body of the SEC Filer 

invoking the clearing exception has 

reviewed and approved the decision to 

enter the security-based swap subject to 

the end-user clearing exception.37 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 proposed 

Rule 3Cg–1. 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 

Rule 3Cg–1? If not, why not? Are there 

clarifications or instructions the 

Commission could adopt that would be 

useful for parties seeking to invoke 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 

counterparties to report the information 

required under the proposed Rule 3Cg– 

1? If so, why? 

• Should the Commission require 

more or less frequent notifications to the 

Commission than are currently 

contemplated by proposed Rule 3Cg–1? 

What other types of notifications should 

the Commission consider and what 

would be the potential frequency 

associated with such notifications? Are 

the requirements that the information 

provided under the proposal be accurate 

as of the date and time the information 

is provided to the SDR appropriate? 

Should the Commission consider any 

other time frame for accuracy of 

information? If so, what time frame 

should the Commission consider and 

what would be the advantages or 

disadvantages of such time frame? 

• Should the Commission consider 

collecting more or less information than 

it has proposed to collect in connection 

with the Financial Obligation Notice? Is 

other information needed to achieve the 

purposes of the Dodd-Frank Act with 

respect to how an end-user meets its 

financial obligations or in order to 

prevent evasion of the end-user clearing 

exception? For example, is it necessary 

or appropriate for the Commission to 

collect: 

Æ Additional information from that 

proposed regarding the credit support 

agreement and the 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) or 

the frequency of portfolio 

reconciliation? 

Æ Additional information from that 

proposed regarding the types of 

collateral provided (e.g., cash, 

government securities, other securities, 

other collateral) by an end-user and the 

effect of the liquidity of such collateral 

on the ability of the end-user to meet its 

financial obligations? 

Æ Additional information from that 

proposed regarding 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? 

Æ Additional information from that 

proposed about the guarantor, such as 

whether or not the guarantor is a parent 


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Federal Register / Vol. 75, No. 244 / Tuesday, December 21, 2010 / Proposed Rules 79997 

38Cf., 17 CFR 270.17a–7(e) (Rule 17a–7(e) under 

the Investment Company Act of 1940). 

39See Regulation SBSR Proposing Release, supra 

note 16. For each security-based swap transaction 

made in reliance on the end-user clearing 

exception, proposed Rule 901(d)(1)(ix) under 

Regulation SBSR requires parties to a security-based 

swap to indicate whether or not the end-user 

clearing exception is being invoked when reporting 

transaction information to an SDR as required by 

Exchange Act Section 13(m)(1)(F). Proposed 

Exchange Act Rule 901(a) under Regulation SBSR 

defines which of the parties to a security-based 

swap will be designated the Reporting Party for 

these purposes. The information required under 

proposed Exchange Act Rule 3Cg–1 would be in 

addition to these requirements but would be 

delivered to the SDR by the Reporting Party in the 

same manner as required by proposed Regulation 

SBSR. Regulation SBSR contemplates that 

information may be delivered to the Commission 

directly in limited circumstances when an SDR is 

not available. When permitted by Regulation SBSR, 

such delivery would also meet the end-user clearing 

exception notice requirement. 

40See Regulation SBSR Proposing Release, at 

Section V., supra note 16, discussing public 

dissemination of security-based swap transaction 

information generally, including Exchange Act 

Section 13(m)(1)(B) (authorizing the Commission to 

make security-based swap transaction data available 

to the public to enhance price discovery) and 

Exchange Act Section 13(m)(1)(E)(iv) (requiring the 

Commission to consider whether public disclosure 

of security-based swap transaction data will 

materially reduce market liquidity). The 

Commission preliminarily believes information 

collected pursuant to proposed Rule 3Cg–1 would 

not be required to be publicly disseminated, but is 

Continued 

or affiliate of the person invoking the 

end-user clearing exception? 

Æ Additional information from that 

proposed regarding the assets pledged, 

such as the type of security interest or 

the type of property being used as 

collateral? 

Æ Additional information from that 

proposed 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 custodial, triparty or different type of relationship? 

Æ Additional information from that 

proposed 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 security-based 

swap? 

Æ Additional information from that 

proposed regarding the review and 

approval by the appropriate committee 

of the SEC Filer’s board or governing 

body of the issuer’s decision to enter 

into the security-based swap subject to 

the end-user clearing exception, such as 

information provided to the committee 

and/or a summary of the policies and 

procedures used by the committee in 

practice? 

• Are each of the terms used in 

Exchange Act Section 3C(g)(4) 

sufficiently clear to permit compliance 

with proposed Rule 3Cg–1 by affiliates 

invoking the end-user clearing 

exception? Should the Commission 

adopt more specific requirements to 

implement the provisions of Exchange 

Act 3C(g)(4)? Should the Commission 

provide further guidance on terms used 

in Exchange Act Section 3C(g)(4), such 

as the meaning of the term 

‘‘predominantly engaged’’? If so, what 

specific rules or guidance should the 

Commission consider and what would 

be the benefits of adopting them? 

• Are the requirements of Exchange 

Act Section 3C(i) sufficiently clear to 

permit compliance with proposed Rule 

3Cg–1 by parties invoking the end-user 

clearing exception? Should the 

Commission adopt more specific 

requirements to implement the 

provisions of Exchange Act 3C(i)? For 

example, should the Commission adopt 

provisions to specify the membership or 

other characteristics of the board 

committee, such as that a majority of the 

committee, or the entire committee, 

consist of independent directors? 

Should the Commission adopt 

provisions to clarify the steps that 

should be taken by board committees 

reviewing and approving an SEC Filer’s 

decision to enter into security-based 

swaps subject to the end-user clearing 

exception? If so, what specific rules 

should the Commission consider and 

what would be the benefits or 

disadvantages of adopting them? Should 

the review and approval contemplated 

by Exchange Act Section 3C(i) include 

a review and approval of the SEC Filer’s 

decisions by a board committee (1) 

Composed of a majority of independent 

directors, (2) that has adopted 

procedures pursuant to which securitybased swap transactions that are subject 

to the end-user clearing exception may 

be entered into by the company, which 

are reasonably designed to facilitate a 

risk management policy that has been 

approved by the board or an appropriate 

committee, (3) that makes and approves 

such changes to the policy as the 

committee deems necessary, and (4) 

determines no less frequently than 

quarterly that all security-based swap 

transactions entered into during the 

preceding quarter subject to the enduser clearing exception were effected in 

compliance with such procedures? 38

Are there other Commission rules 

concerning board approvals that may be 

useful models for the review and 

approval contemplated by Exchange Act 

Section 3C(i)? 

• Is the meaning of the term ‘‘issuer 

of securities’’ as used in Exchange Act 

Section 3C(i) sufficiently clear? Is there 

a better alternative that the Commission 

should consider? 

• Should the Commission consider 

requiring parties invoking the end-user 

clearing exception to report additional 

types of information, to limit the 

possibility for the exception to be 

abused 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? 

• Will some types of security-based 

swaps be more susceptible to abuse than 

others? For example: 

Æ Are persons more or less likely to 

abuse the end-user clearing exception in 

connection with credit default swaps or 

equity swaps or when the underlying 

reference credit or security has certain 

characteristics? 

Æ Are large or small companies or 

other identifiable sub-categories of 

counterparties to security-based swaps 

more or less likely to abuse the end-user 

clearing exception than other persons? 

Æ Are there certain security-based 

swap products or counterparties that the 

Commission should monitor for abuse 

more closely than others? 

If so, why? 

• Are there different considerations 

for small companies or other 

identifiable categories of persons who 

may wish to invoke the end-user 

clearing exception? If so, what are they 

and how should the Commission take 

these considerations into account? 

• Should the Commission consider 

requiring that a narrative statement be 

provided when an end-user employs 

means other than those described in 

proposed Rules 3Cg–1(a)(5)(i), (ii), (iii), 

or (iv) to meet its financial obligations? 

3. Form of Notice to the Commission 

Proposed Rule 3Cg–1(a) provides that 

a counterparty to a security-based swap 

that invokes the end-user clearing 

exception shall satisfy the notice 

requirements of Exchange Act Section 

3C(g)(1)(C) by delivering or causing to 

be delivered the additional information 

specified in proposed Rule 3Cg–1(a) to 

a registered SDR or the Commission in 

the form and manner required for 

delivery of the information separately 

specified under proposed Rule 901(d) of 

Regulation SBSR.39 Delivery of such 

information would also allow the 

information submitted pursuant to 

proposed Rule 3Cg–1(a) by the 

counterparty invoking the end-user 

clearing exception to be made available 

to the public by the SDR, to the extent 

required by proposed Regulation 

SBSR.40 Under this approach, rather 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
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requesting comments on this point. See infra note 

47 and accompanying text. 

41See Public Law 111–203, sec. 763(i) and sec. 

766(a) (adding Exchange Act Sections 13(m)(1)(G) 

and 13A(A)(1), respectively). 

42 In the case of non-cleared security-based 

swaps, each SDR is required to confirm with both 

parties to the security-based swap the accuracy of 

the data submitted to the SDR pursuant to Exchange 

Act Section 13(n)(5)(B), and both the parties to the 

security-based swap and the SDR have duties to 

correct errors in the data that may be identified 

under proposed Rules 905(a) (parties to the 

security-based swap) and 905(b) (SDRs) of 

Regulation SBSR. See Public Law 111–203, sec. 

763(i) (adding Exchange Act Section 13(n)(5)(B); 

Regulation SBSR Proposing Release, supra note 16. 

SDRs are required by Exchange Act Section 13(n)(5) 

(15 U.S.C. 78m(n)(5)) to have policies and 

procedures reasonably designed to protect the 

privacy of all transaction information received by 

the SDR, and the Commission recently proposed 

Rule 13n–9 to implement this requirement. See 

Exchange Act Release No. 63347 (Nov. 19, 2010), 

75 FR 77306 (Dec. 10, 2010) (‘‘Regulation SDR 

Release’’). Exchange Act Section 13A(c)) requires 

each party to a non-cleared security-based swap to 

maintain records of the security-based swaps held 

by such party in the form required by the 

Commission, and Exchange Act Section 13A(d) 

mandates that these records must be in a form not 

less comprehensive than required to be collected by 

SDRs. See Public Law 111–203, sec. 766(a) (adding 

Exchange Act Sections 13A(c)–(d)) These records 

are available for inspection by the Commission and 

other specified authorities pursuant to Exchange 

Act Section 13A(c)(2) (Public Law 111–203, sec. 

766(a) (adding Exchange Act Section 13A(c)(2))). 

43See Regulation SDR Release, supra note 42. 

44See id. 

45See id. Exchange Act Sections 13(n) and 13A 

require parties to report transaction information to 

SDRs, confirm its accuracy and correct 

inaccuracies. See Public Law 111–203, sec. 763(i) 

(adding Exchange Act Section 13(n)); Public Law 

111–203, sec. 766(a) (adding Exchange Act Section 

13A). The Commission preliminarily believes these 

requirements create sufficient assurance to consider 

the transaction records collected by SDRs reliable 

for use in connection with regulatory decisions, and 

therefore the Commission preliminarily believes the 

records should also be considered reliable for 

purposes of the notice requirement under Exchange 

Act Section 3C(g). Public Law 111–203, sec. 763(a) 

(adding Exchange Act Section 3C(g)). 

46The proposed notification method is supported 

by the recordkeeping requirements under Exchange 

Act Section 13A, which will permit the 

Commission to review transaction information and 

take such action as may be necessary to prevent 

abuses of the end-user clearing exception. See 

Public Law 111–203, sec. 766(a) (adding Exchange 

Act Section 13A). 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. 

47Proposed Rule 902(c)(2) of Regulation SBSR 

would prohibit disclosure of any information 

disclosing the business transactions and market 

positions of any person with respect to a securitybased swap that is not cleared. See supra note 16 

(citing Regulation SBSR Proposing Release). 

48See EDGAR Filer Manual, Volume I: ‘‘General 

Information’’ Version 8 (Sept. 2009), incorporated 

by reference into the Code of Federal Regulations 

(Release Nos. 33–9058, 34–60390, 39–2466, IC– 

28838, July 28, 2009); EDGAR Filer Manual, 

Volume II: ‘‘EDGAR Filing,’’ Version 15 (Aug. 2010), 

incorporated by reference into the Code of Federal 

Regulations (Release Nos. 33–9140; 34–62873; 39– 

2471; IC–29413, Sept. 9, 2010). 

than collecting information through a 

separate process established by the 

Commission for these purposes, the 

information delivered in compliance 

with the requirements of proposed Rule 

3Cg–1(a) and proposed Regulation SBSR 

would serve as the official notice of a 

security-based swap transaction made in 

reliance on the end-user clearing 

exception. 

The Dodd-Frank Act requires all 

transactions in security-based swaps 

(whether cleared or non-cleared) to be 

reported to a registered SDR or the 

Commission.41 As centralized 

recordkeeping facilities of OTC 

derivatives transactions, SDRs are 

intended to play a critical role in 

enhancing transparency in the securitybased swap markets. SDRs will enhance 

transparency by having complete 

records of security-based swap 

transactions, 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.42

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.43 The Commission 

also recently proposed Regulation SBSR 

to establish the standards that would 

apply when information is submitted to 

an SDR.44

The Commission preliminarily 

believes collecting notice information 

for the end-user clearing exception 

through SDRs will support the 

development of straight through trade 

processing, help to reduce the 

administrative burdens of the notice 

requirement and assure the accuracy of 

the information collected.45 Using the 

centralized facilities of SDRs should 

also make it easier for the Commission 

to analyze how the end-user clearing 

exception is being used, monitor for 

potentially abusive practices, and take 

timely action to address abusive 

practices if they were to develop.46

Under proposed Regulation SBSR, 

and in particular proposed Rule 901(d), 

the information required to be reported 

to an SDR includes, if the security-based 

swap is not cleared, ‘‘whether the 

exception in Section 3C(g) of the 

Exchange Act was invoked.’’ This 

information would then be included in 

the transaction report disseminated to 

the public under proposed Rule 902. 

Pursuant to proposed Rule 3Cg–1(a), 

however, the information required to be 

reported to an SDR would include more 

detailed information than simply 

whether Section 3C(g) was invoked—for 

example, under Rule 3Cg–1(a) the 

reportable information would include 

the identity of the counterparty relying 

on the clearing exception, and 

information regarding how that 

counterparty expects to meet its 

financial obligations. The Commission 

preliminarily believes that this 

additional information would either fall 

under the exception to public 

dissemination contained in proposed 

Rule 902(c)(2),47 or otherwise should be 

excluded from the publiclydisseminated transaction report. Thus, 

the only information collected pursuant 

to Rule 3Cg–1 that would be 

disseminated publicly is ‘‘whether the 

exception to Section 3C(g) of the 

Exchange Act was invoked.’’ 

Request for Comment 

The Commission generally requests 

comments on all aspects of proposed 

Rule 3Cg–1. 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? Should notifying 

the Commission necessarily involve 

direct conveyance of the information to 

the Commission rather than delivery 

through an SDR? What are the 

advantages or disadvantages of the 

Commission’s proposal? 

• Does collecting Financial 

Obligation Notice information through 

SDRs interfere with the ability of nonfinancial entities to use the end-user 

clearing exception in any way? Are 

SDRs reliable enough to be used for 

these purposes? Are the services 

provided by SDRs reasonably available 

to non-financial entities? 

• Is Financial Obligation Notice 

information different from other 

information proposed to be collected by 

SDRs in some 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? 

• Would it be preferable to require 

notice of use of the end-user clearing 

exception to be given through the 

Commission’s EDGAR system on a 

newly developed EDGAR form? 48 What 

would be the advantages or 

disadvantages of using the EDGAR 

system? For example: 

Æ Do parties intending to invoke the 

end-user clearing exception anticipate 

any benefits or burdens of filing an 

EDGAR form electronically that should 

be considered? 


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Æ Is the EDGAR system likely to be 

familiar to all entities invoking the enduser clearing exception? Will small 

companies or other identifiable 

categories of persons face different 

burdens or advantages than others when 

using the EDGAR system? 

Æ Should the Commission require 

persons invoking the end-user clearing 

exception to submit notice to the 

Commission on an EDGAR form in 

addition to the information collected 

through SDRs? Would collecting 

information in both ways significantly 

aid the Commission’s efforts to prevent 

abuse of the end-user clearing exception 

or have other benefits that should be 

considered by the Commission? Would 

doing so create significant additional 

burdens for persons invoking the enduser clearing exception? 

• Other than the alternative of using 

the Commission’s EDGAR system, are 

there other methods that the 

Commission should consider for 

receiving notification regarding the use 

of the end-user clearing exception? For 

example, could the information 

submitted to an SDR also be dually 

submitted to Commission in some form? 

If so, what are the possible alternatives 

and what advantages or disadvantages 

would they have? 

• Do the Exchange Act and the 

associated rules and proposed rules 

regulating SDRs and parties to securitybased 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 know, in all cases, the information 

the Commission is requiring to be 

reported under proposed Rule 3Cg–1(a)? 

If not, why not? Are representations and 

warranties and similar established 

market practices associated with 

documenting security-based swap 

transactions adequate to ensure the 

person reporting information to the SDR 

can obtain the information required to 

be reported under proposed Rule 3Cg– 

1? 

• Should the Commission consider 

more or less frequent reporting of the 

information required by Rule 3Cg–1(a)? 

How frequently will the information 

required to be reported be expected to 

change? Would alternatives to proposed 

Rule 3Cg–1 such as the collection of 

periodic reports or updates of general 

notifications to the Commission be 

sufficient to achieve the purposes of 

Exchange Act Section 3C(g)? If so, what 

are the possible alternatives and what 

advantages or disadvantages would they 

have? 

• How long would it be expected to 

take for the person reporting 

information to the SDR to gather the 

information required under proposed 

Rule 3Cg–1(a)? Will the time needed to 

gather the required information disrupt 

the transaction process for securitybased swaps to any material extent? 

• Should the Commission require 

persons invoking the end-user clearing 

exception to follow additional 

compliance practices in some 

circumstances? For example: 

Æ Should the Commission require 

persons invoking the end-user clearing 

exception swap to create additional 

records of the means being used to 

mitigate the credit risk of the securitybased swap as contemplated by 

proposed Rule 3Cg–1(a)(5) and maintain 

such record in the manner required by 

Exchange Act Section 13A(d)? 

Æ Should the Commission require 

persons invoking the end-user clearing 

exception to file materials referred to in 

proposed Rule 3Cg–1(a)(5) with the 

Commission? Why or why not? 

Æ Should the Commission require 

persons invoking the end-user clearing 

exception to establish any other 

additional compliance practices? If not, 

why not? If so, what should those 

practices be and what would be the 

advantages and disadvantages of 

adopting such a requirement? 

• Will collecting notice information 

together with other transaction 

information have the advantages 

expected by the Commission? For 

example, will analyzing information 

regarding use of the end-user clearing 

exception by product type and other 

transaction characteristics help to 

promote market efficiency or inform 

future Commission rulemaking? Are 

there other advantages or disadvantages 

related to collecting notice information 

through SDRs that the Commission 

should consider? If so, what are they? 

• Does collecting notice information 

regarding use of the end-user clearing 

exception through SDRs create 

significantly greater burdens or 

advantages for some parties to securitybased swaps compared to others? For 

example, will parties who frequently 

transact security-based swaps face 

higher or lower burdens or advantages 

compared to parties that enter into 

security-based swap transactions less 

frequently? Will parties who enter into 

both cleared and non-cleared securitybased swaps face different burdens or 

advantages in comparison to parties 

who enter into only cleared securitybased swaps or only non-cleared 

security-based swaps? Will small 

companies face different burdens than 

large companies? If so, what steps 

should the Commission consider taking 

to account for these differences? Given 

that certain efficiencies may arise from 

conducting frequent transactions in 

security-based swaps, are the additional 

burdens that may be faced by small 

companies or non-financial entities that 

enter into security-based swaps 

infrequently unique to the proposed 

rule or do they principally reflect the 

nature of the security-based swaps 

market and the nature of the transacting 

party? Are there benefits from collecting 

notice information that should also be 

considered? 

• Should any or all of the information 

required to be reported to an SDR 

pursuant to proposed Rule 3Cg–1(a) be 

publicly disseminated? Should public 

dissemination be limited only to the fact 

that Exchange Act Section 3C(g) was 

invoked? Are there any changes to the 

proposed rules the Commission should 

consider regarding public 

dissemination? If publicly disclosed, 

how would market participants, 

academics and other members of the 

public expect to use such information 

and what are the potential benefits or 

costs of such uses? Would additional 

information be useful? What 

information, if any, included in 

proposed Rule 3Cg–1(a) would raise 

concerns for end-users if made public 

after the end-user elected to use the 

exception? How would the public 

interest be better served by keeping 

information relating to the end-user 

clearing exception in or out of the 

public domain? 

• If restrictions on public 

dissemination of the information are in 

place, should the Commission consider 

permitting such dissemination after the 

lapse of a certain period of time? If so, 

should all or only a subset of the 

information be disseminated? What 

would be an appropriate time period for 

a delay in dissemination? How would 

the analysis of whether the public 

interest would be better served by 

keeping information relating to the enduser clearing exception in or out of the 

public domain change based on whether 

there is a delay in such dissemination? 

• Should information regarding 

whether the end-user clearing exception 

was invoked that is collected pursuant 

to proposed Rule 3Cg–1(a) be made 

available to the public through the SDR 

or through new processes established by 

the Commission? What would be the 

advantages and disadvantages of either 

approach? 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
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49See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)(1)(B)). 

50See Definitions Proposing Release, supra note 

3. Persons wishing to comment on the definition of 

‘‘hedging or mitigating commercial risk’’ should 

submit comments pursuant to the Definitions 

Proposing Release. For reference, proposed 

Exchange Act Rule 3a67–4(a) reads as follows: 

‘‘Hedging or mitigating commercial risk 

For purposes of section 3(a)(67) of the Act, 15 

U.S.C. 78c(a)(67) and § 240.3a67–1 of this chapter, 

a security-based swap position shall be deemed to 

be held for the purpose of hedging or mitigating 

commercial risk when: 

(a) Such position is economically appropriate to 

the reduction of risks that are associated with the 

present conduct and management of a commercial 

enterprise, or are reasonably expected to arise in the 

future conduct and management of the commercial 

enterprise, where such risks arise from: 

(1) 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; 

(2) 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 

(3) 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; 

(b) Such position is: 

(1) Not held for a purpose that is in the nature 

of speculation or trading; 

(2) Not held to hedge or mitigate the risk of 

another security-based swap position or swap 

position, unless that other position itself is held for 

the purpose of hedging or mitigating commercial 

risk as defined by this section or 17 CFR § 1.3(ttt); 

and 

(c) The person holding the position satisfies the 

following additional conditions: 

(1) The person identifies and documents the risks 

that are being reduced by the security-based swap 

position; 

(2) The person establishes and documents a 

method of assessing the effectiveness of the 

security-based swap as a hedge; and 

(3) The person regularly assesses the effectiveness 

of the security-based swap as a hedge.’’ 

51The Commission notes that certain portions of 

proposed Rule 3a67–4 would be either inapplicable 

to, or would need to be interpreted in light of, the 

circumstances surrounding the end-user clearing 

exception. For example, subparagraph 3a67–4(c)(3) 

of the proposed Rule requires that a person 

regularly assess the effectiveness of the securitybased swap as a hedge. Given that persons must 

determine whether the end-user clearing exception 

is available at the time the security-based swap is 

first confirmed, this portion of proposed Rule 3a67– 

4 is inapplicable for purposes of Exchange Act 

Section 3C(g)(1)(B). In addition, proposed Rule 

3a67–4 does not contemplate applying the 

definition of hedging or mitigating commercial risk 

to affiliates. Exchange Act Section 3C(g)(4) creates 

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

clearing exception, and these requirements must 

also be satisfied for the end-user clearing exception 

to be available. 

B. Hedging or Mitigating Commercial 

Risk 

To apply the end-user clearing 

exception, Exchange Act Section 

3C(g)(1)(B) requires a non-financial 

entity to determine whether it uses 

security-based swaps to hedge or 

mitigate commercial risk.49 The phrase 

‘‘hedging or mitigating commercial risk’’ 

is itself the subject of current joint 

rulemaking by the Commission and the 

CFTC. The Commission and the CFTC 

recently proposed a definition of 

‘‘hedging or mitigating commercial risk’’ 

under proposed Exchange Act Rule 

3a67–4 that the Commission 

preliminarily believes should also 

govern the meaning of ‘‘hedging or 

mitigating commercial risk’’ for 

purposes of Exchange Act Section 

3C(g)(1)(B).50 The Commission 

preliminarily believes this approach 

should ensure consistency of 

interpretation across the Exchange Act 

provisions for which this concept is 

relevant and provide assurance of fair 

and equivalent treatment for similarly 

situated parties in a wide variety of 

circumstances.51

Request for Comment 

The Commission generally requests 

comments on all aspects of proposed 

Rule 3Cg–1. Additionally, the 

Commission requests comments on the 

following specific issues: 

• Are there reasons to believe that the 

proposed joint rulemaking by the 

Commission and the CFTC to define the 

meaning of certain terms used in the 

Exchange Act may affect the availability 

of the end-user clearing exception? If so, 

what specifically are the affects 

expected and what concerns do they 

raise? 

• Are there further distinctions or 

clarifications that should be made by 

the Commission for purposes of the enduser clearing exception that are different 

from those being made in connection 

with the proposed joint rulemaking by 

the Commission and the CFTC? If so, 

what are they and what would be the 

benefits of adopting them? 

• Are there technical requirements or 

details associated with terms used in the 

definition of ‘‘financial entity’’ in 

Exchange Act Section 3C(g)(3) that may 

have unexpected consequences when 

used in connection with the end-user 

clearing exception? 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? 

• Should the Commission consider 

adopting a separate definition of 

‘‘hedging or mitigating commercial risk’’ 

specifically designed to address the 

circumstances of the end-user clearing 

exception? If so, what are the specific 

considerations associated with the enduser clearing exception that make a 

separate rule desirable? What features 

would such a rule need in order to be 

effective and what would be the benefits 

of adopting them? 

• Should the Commission consider 

limiting or broadening the definition of 

‘‘hedging or mitigating commercial risk’’ 

as it applies to the end-user clearing 

exception? For example, should 

security-based swaps subject to the enduser clearing exception be required to 

hedge or mitigate commercial risk on a 

single risk or an aggregate risk basis, 

and/or on a single entity or a 

consolidated basis? Are more specific 

industry-specific rules on hedging or 

rules that apply only to certain 

categories of asset classes appropriate at 

this time? Should security-based swaps 

facilitating asset optimization or 

dynamic hedging be included? Why or 

why not? Commenters are requested to 

discuss both the policy and legal bases 

underlying such comments. 

• If an entity is designated as a swap 

dealer, security-based swap dealer, 

major swap participant or major 

security-based swap participant only for 

some of its swaps or security-based 

swaps, should it be treated as a financial 

entity under Exchange Act Section 

3C(g)(3) and thereby be disqualified 

from invoking the end-user clearing 

exception for all of its security-based 

swaps? If so, why? If not, should the 

Commission require security-based 

swap dealers and major security-based 

swap participants in that position to 

separate or otherwise keep distinct 

those security-based swap activities for 

which they are designated as a securitybased swap dealer or major securitybased swap participant from their other 

security-based swap activities? If so, 

how? If not, why not? 

III. Required Consideration of a 

Clearing Exemption for Small Banks, 

Savings Associations, Farm Credit 

System Institutions and Credit Unions 

Mandatory clearing of security-based 

swaps is a central part of the reforms 

enacted by the Dodd-Frank Act and 

generally applies to financial entities 

without regard to size. However, Section 

3C(g)(3)(B) of the Exchange Act requires 

the Commission to consider whether to 

exempt small banks, savings 

associations, farm credit systems 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 244 / Tuesday, December 21, 2010 / Proposed Rules 80001 

52See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)(3)(B)). 

53See Dodd-Lincoln Letter, supra note 23. 

54See S. Rep. No. 111–176, at 34 (2010) (Report 

of the Senate Committee on Banking, Housing, and 

Urban Affairs regarding The Restoring American 

Financial Stability Act of 2010 discussing the enduser clearing exception and exceptions from 

bilateral reporting, capital and margin 

requirements, and stating that ‘‘Some parts of the 

OTC market may not be suitable for clearing and 

exchange trading due to individual business needs 

of certain users. Those users should retain the 

ability to engage in customized, uncleared contracts 

while bringing in as much of the OTC market under 

the centrally cleared and exchange-traded 

framework as possible. Also, OTC (contracts not 

cleared centrally) should still be subject to 

reporting, capital, and margin requirements so that 

regulators have the tools to monitor and discourage 

potentially risky activities, except in very narrow 

circumstances. These exceptions should be crafted 

very narrowly with an understanding that every 

company, regardless of the type of business they are 

engaged in, has a strong commercial incentive to 

evade regulatory requirements.’’) 

institutions and credit unions from the 

Exchange Act’s definition of ‘‘financial 

entity’’, including specifically those 

with total assets of $10,000,000,000 or 

less (‘‘Identified Financial 

Institutions’’).52 The advantages and 

disadvantages associated with 

mandatory clearing may be different 

with respect to certain types of financial 

entities and the Commission is required 

to consider whether such differences 

warrant granting an exemption for 

Identified Financial Institutions.53

The Identified Financial Institutions 

may use security-based swaps, and 

other derivatives to hedge or mitigate 

their business risks in ways that may be 

directly related to the business of 

banking. Under the definition of 

‘‘financial entity’’ in the Dodd-Frank 

Act, however, these institutions would 

not qualify to use the end-user clearing 

exception unless further action is taken 

by the Commission. Depending on the 

extent to which an Identified Financial 

Institution relies on security-based 

swaps to manage its risk, the lack of an 

end-user exception could limit the 

availability, or raise associated initial 

costs, of security-based swaps for that 

institution. 

Alternatively, providing a blanket 

carve-out from the clearing requirement, 

albeit in connection with hedging 

transactions, for a class of financial 

entities could undercut the statutory 

goal of greater centralized clearing and 

the related benefits of efficiency and 

transparency. The Commission 

preliminarily does not believe that 

Identified Financial Institutions transact 

in securities-based swaps for hedging 

purposes in significant volume, but is 

requesting comments on this point. The 

Commission would also be interested in 

commenters’ views on the practical 

impact of either permitting or 

prohibiting Identified Financial 

Institutions from using the end-user 

exception to effect securities-based 

swaps transactions, and how narrowly 

or broadly any exemption should be 

structured.54

In accordance with Section 

3C(g)(3)(B) of the Exchange Act and 

taking the above considerations into 

account, the Commission is proposing 

alternative additional rule text under 

consideration in proposed Rules 3Cg– 

1(b) and (c) to exclude from the 

definition of ‘‘financial entity’’ those 

banks, savings associations, farm credit 

systems institutions and credit unions 

with total assets of $10 billion or less 

falling within the definition of 

‘‘financial entity’’ solely because of 

Section 3C(g)(3)(A)(viii) of the Exchange 

Act. The Commission preliminarily 

believes it would be appropriate to 

consider an alternative that contains an 

exemption for such entities at the $10 

billion total assets threshold because it 

would be consistent with the 

consideration contemplated in Section 

3C(g)(3)(B) of the Exchange Act and 

because it may include financial 

institutions in the relevant categories 

that may face difficulties in meeting the 

burdens associated with a mandatory 

clearing requirement due to their 

limited operations or infrequent use of 

security-based swaps. 

Specifically, the alternative language 

would apply to a bank, as defined in 

Section 3(a)(6) of the Act, the deposits 

of which are insured by the Federal 

Deposit Insurance Corporation; a 

savings association, as defined in 

section 3(b) of the Federal Deposit 

Insurance Act (12 U.S.C. 1831), the 

deposits of which are insured by the 

Federal Deposit Insurance Commission; 

a farm credit system institution 

chartered under the Farm Credit Act of 

1971 (12 U.S.C. 2001); or an insured 

Federal credit union, State credit union 

or State-chartered credit union under 

the Federal Credit Union Act (12 U.S.C. 

1752) falling within the definition of 

‘‘financial entity’’ solely because of 

Section 3C(g)(3)(A)(viii) of the Exchange 

Act. The exemption would not be 

available to any institution that falls 

into any of the other seven categories 

specified in Exchange Act Section 

3C(g)(3) for any reason. The $10 billion 

total asset threshold for these entities 

would be measured by reference to the 

total assets of the institution on the last 

day of the most recent fiscal year. The 

Commission believes it would be 

appropriate to consider such time frame 

for measurement of the $10 billion 

threshold in order to balance the need 

to maintain an updated assessment of 

the total asset threshold and the need to 

avoid frequently monitoring the ability 

to make use of the exemption. 

Request for Comment 

The Commission generally requests 

comments on all aspects of proposed 

Rule 3Cg–1. In addition, to inform our 

consideration of whether it would be 

appropriate for the Commission to 

provide an exemption for Identified 

Financial Institutions, the Commission 

requests comments on the following 

specific issues: 

• Should the Commission grant an 

exemption from mandatory clearing 

requirements for Identified Financial 

Institutions? Would it be better for the 

Commission to simply require Identified 

Financial Institutions to follow the same 

clearing requirements as other financial 

entities? Why or why not? 

• Is the proposed alternative language 

in proposed Rules 3Cg–1(b) and (c) 

sufficiently clear to allow Identified 

Financial Institutions to assess whether 

or not they would qualify to use the 

alternative proposed end-user clearing 

exception? Why or why not? If not, what 

steps could the Commission take to 

make the standards more clear and what 

would be the advantages or 

disadvantages of the alternative 

approach? 

• How significant are the aggregated 

activities of Identified Financial 

Institutions to the security-based swap 

market currently? Do the activities of 

such institutions have a material effect 

on the pricing of swaps, or contribute to 

an understanding of the security-based 

swap market? What is the aggregate 

gross exposure of security-based swaps 

held by Identified Financial 

Institutions? How would these activities 

and exposures change if such 

institutions were excluded from the 

mandatory clearing requirement? Is it 

possible that the activities of such 

institutions could change in a way such 

that they could have an effect on the 

pricing of security-based swaps if they 

are excluded from the mandatory 

clearing requirement? If so, what would 

be the effect on pricing of security-based 

swaps? 

• What types of security-based swap 

transactions do Identified Financial 

Institutions enter into and why? Are any 

risks presented by these types of 

transactions adequately addressed 

through the regulatory controls and 

business practices of Identified 

Financial Institutions? Should the 

Commission consider treating different 

types of security-based swaps 

differently when considering whether 

the end-user clearing exception is 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
80002 Federal Register / Vol. 75, No. 244 / Tuesday, December 21, 2010 / Proposed Rules 

available for Identified Financial 

Institutions? If so, what specific 

distinctions should be considered by the 

Commission and what would be the 

advantages and disadvantages of 

adopting them? 

• Would there be any benefit for 

Identified Financial Institutions in 

receiving an exemption taking into 

account their anticipated activity in the 

security-based swap market? What 

would be the potential effects of 

granting an exemption for Identified 

Financial Institutions? What would be 

the effect on the security-based swap 

market? What would be the effect on the 

goals of promoting central clearing and 

reducing systemic risk? 

• If an exemption permitting 

Identified Financial Institutions to use 

the end-user clearing exception were to 

be adopted, should the Commission 

consider limiting the availability of the 

end-user clearing exception to only 

some of the financial institutions 

identified in Exchange Act Section 

3C(g)(3)(B)? Are there differences in the 

supervisory regimes applicable to banks, 

savings associations, farm credit 

institutions and credit unions that 

create material substantive differences 

between such institutions that are 

relevant for these purposes? If so, what 

specific distinctions should be 

considered by the Commission and 

what would be the benefits of adopting 

them? 

• Do Identified Financial Institutions 

commonly enter into security-based 

swaps? Would such institutions’ 

behavior in respect of security-based 

swaps change if the end-user exception 

was extended or not extended to 

include them? 

• What would be the possible 

consequences of not proposing an 

exemption on the banking activities and 

operational practices of Identified 

Financial Institutions? Would the 

absence of an exemption prevent 

Identified Financial Institutions from 

providing or increase the costs of 

providing certain types of financial 

services to their customers or require 

them to make additional investments? If 

so, how? What types of services and 

what types of customers might be 

impacted? What types of investments 

might be required? Would the expected 

impact be justified by the systemic or 

other benefits of requiring mandatory 

clearing? 

• Is the $10,000,000,000 total asset 

threshold an appropriate point for the 

Commission to use when defining the 

availability of a clearing exception for 

Identified Financial Institutions? 

Should the threshold be lower? Should 

the threshold be higher? Is there a 

measure other than total assets, or a 

more precise definition of total assets, 

that should be used for these purposes, 

and if so, what would be the benefit of 

adopting the alternative measure? 

• What would be an appropriate 

frequency for measuring compliance 

with the $10,000,000,000 total asset 

threshold for entities? Is the proposed 

time frame too long or too short? If so, 

why? Are there any difficulties in 

measuring or monitoring such 

threshold? Would Identified Financial 

Institutions generally measure and 

monitor such thresholds as part of their 

normal business practices? 

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 

rule. In addition, the Commission seeks 

comment on the following: 

1. 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? 

2. Are the obligations in the proposed 

rule sufficiently clear? Is additional 

guidance from the Commission 

necessary? 

3. What are the technological or 

administrative burdens of complying 

with the rule proposed by the 

Commission? Does the method of 

collecting information contained in the 

proposed rule offer any technological or 

administrative advantages in 

comparison to other possible methods? 

4. Should the Commission implement 

substantive requirements in addition to, 

or in place of, the requirements in the 

proposed rule? 

In addition, the Commission seeks 

commenters’ views regarding any 

potential impact of the proposal on nonfinancial entities expecting to invoke 

the end-user clearing exception, SDRs, 

other market participants, and the 

public generally. The Commission seeks 

comments on the proposal as a whole, 

including its 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 

OTC derivatives market. 

The Commission requests comment 

generally on whether its proposed 

actions today to govern the exception to 

mandatory clearing of security-based 

swaps available under Exchange Act 

Section 3C(g) are necessary or 

appropriate for those purposes. If 

commenters do not believe the 

provisions of the proposed rule are 

necessary and appropriate, why not? 

What would be the preferred action? 

Title VII requires that the SEC consult 

and coordinate to the extent possible 

with the CFTC for the purposes of 

assuring regulatory consistency and 

comparability, to the extent possible, 

and states that in adopting rules, the 

CFTC and SEC shall treat functionally 

or economically similar products or 

entities in a similar manner. 

The CFTC is proposing rules related 

to an exception to mandatory clearing of 

swaps as required under Section 723(a) 

of the Dodd-Frank Act. Understanding 

that the Commission and the CFTC 

regulate different products and markets, 

and as such, appropriately may be 

proposing alternative regulatory 

requirements, we request comments on 

the impact of any differences between 

the Commission and CFTC approaches 

to the regulation of swap data 

repositories and SDRs, respectively. 

Specifically, do the regulatory 

approaches under the Commission’s 

proposed rulemaking pursuant to 

Section 763(a) of the Dodd-Frank Act 

and the CFTC’s proposed rulemaking 

pursuant to Section 723(a) of the DoddFrank Act 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 CFTC to govern the 

end-user clearing exception to 

mandatory clearing of security-based 

swaps and swaps are comparable? If not, 

why? Do commenters believe there are 

approaches that would make the enduser clearing exceptions for securitybased swaps and 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 CFTC that differs from our proposal? 

If so, which one? 

Commenters should, when 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 Section 763(a) of the Dodd-Frank Act 


jlentini on DSKJ8SOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 244 / Tuesday, December 21, 2010 / Proposed Rules 80003 

55See supra, notes 21–37 and accompanying text. 

Proposed Regulation SBSR would specify who 

reports security-based swap transactions, where 

such transactions are to be reported, what 

information is to be reported, and in what format. 

The information required under proposed Exchange 

Act Rule 3Cg–1 would be in addition to these 

requirements but would be delivered to the SDR by 

the Reporting Party in the same manner as required 

by proposed Regulation SBSR. Regulation SBSR 

contemplates that information may be delivered to 

the Commission directly in limited circumstances 

when an SDR is not available. When permitted by 

Regulation SBSR, such delivery would also meet 

the end-user clearing exception notice requirement. 

56See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)(1)(C)). 

57 Id. 

58See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)(6)). 

59See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)(3)(A)(i)–(viii)). 

60See Definitions Proposing Release, supra note 

3. 

61See Regulation SBSR Proposing Release, supra 

note 16. 

62 Id. 

63This figure is based on the 5,000 total 

participants in the security-based swap market 

minus the 1,000 of those participants that qualify 

as financial entities. 

64For purposes of the discussion that follows, the 

term ‘‘non-financial entities’’ includes Identified 

Financial Institutions that would be excluded from 

the definition of ‘‘financial entity’’ in Exchange Act 

Section 3C(g)(3) in the event the proposed 

alternative language in Rules 3Cg–1(b) and (c) is 

adopted by the Commission. 

65For purposes of the discussion that follows, 

references to proposed Rule 3Cg–1 are to proposed 

Rule 3Cg–1 including the alternative proposed rule 

text, unless otherwise noted. 

governing the exception to mandatory 

clearing of security-based swaps. 

V. Paperwork Reduction Act Analysis 

Proposed Rule 3Cg–1 

Proposed Rule 3Cg–1 Notice to the 

Commission [and Financial Entity 

Exemption] contains ‘‘collection of 

information’’ requirements within the 

meaning of the Paperwork reduction Act 

of 1995 (44 U.S.C. 3501 et seq.). The 

Commission has submitted it 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 of the new collection of 

information under proposed Rule 3Cg– 

1 under the Exchange Act is ‘‘Rule 3Cg– 

1 Notice to the Commission [and 

Financial Entity Exemption].’’ OMB has 

not yet assigned a control number for 

the new collection of information 

contained in proposed Rule 3Cg–1 

under the Exchange Act. 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. 

A. Summary of Collection of 

Information 

Proposed Rule 3Cg–1(a) under the 

Exchange Act would require a 

counterparty to a security-based swap 

transaction to meet the requirements of 

Exchange Act Section 3C(g)(1)(C) by 

delivering certain specified items of 

information to an SDR in the manner 

required by proposed Regulation 

SBSR.55 Whenever the end-user clearing 

exception is invoked, ten additional 

items of information would be required 

to be produced. If the counterparty 

invoking the end-user clearing 

exception is also an issuer of securities 

under Exchange Act Section 12 or 

required to file periodic reports with the 

Commission pursuant to Exchange Act 

Section 15(d) then two additional items 

of information would also be required 

for a total of twelve items of information 

required to be produced. In either case, 

this additional information collected in 

the form and manner required by 

Regulation SBSR would serve as the 

official notice to the Commission of a 

security-based swap transaction that is 

made in reliance on the end-user 

clearing exception.56

B. Proposed Use of Information 

The collection of information in 

proposed Rule 3Cg–1(a) serves two 

purposes contemplated by the DoddFrank Act. First, the proposed Rule 

identifies what a party to a securitybased swap transaction must do to 

satisfy the statutory requirement in 

Exchange Act 3C(g)(1)(C) to provide 

notice to the Commission if it invokes 

the end-user clearing exception.57

Second, the Commission expects the 

empirical data collected under Rule 

3Cg–1(a) will aid efforts to prevent 

abuse of the end-user clearing exception 

by allowing it to evaluate how the enduser clearing exception is being used, 

identify areas of potential concern and 

take prompt action to limit abuses in 

appropriate circumstances.58

C. Respondents 

The proposed collection of 

information in proposed Rule 3Cg–1(a) 

would apply to transactions that qualify 

for the end-user clearing exception 

under Exchange Act Section 3C(g)(1) 

where at least one of the parties to the 

security-based swap is not included in 

the definition of financial entity and is 

using the security-based swap to hedge 

or mitigate commercial risk. For an 

entity to determine whether it is not a 

financial entity and whether it is using 

the security-based swap transaction to 

hedge or mitigate commercial risk, the 

party must first make an assessment 

under the applicable definition of 

financial entity in Exchange Act Section 

3C(g)(3) 59 and then consider whether 

the definition of hedging or mitigating 

commercial risk in proposed Rule 3a67– 

4 applies to the security-based swap in 

question.60 In addition, those entities 

that may be considered Identified 

Financial Institutions and therefore fall 

within the exemption under the 

proposed alternative language in Rule 

3Cg–1(b) and (c) would be required to 

conduct an assessment under the 

proposed alternative language to 

determine whether they are entitled to 

elect to use the end-user clearing 

exception. 

Based on the information currently 

available to the Commission, the 

Commission preliminarily estimates 

there are roughly 5,000 entities in the 

credit default swaps marketplace.61 The 

Commission preliminarily estimates 

that 1,000 of these entities regularly 

participate in the market for credit 

default swaps and other security-based 

swaps to an extent that may lead them 

to be reporting persons for purposes of 

proposed Regulation SBSR. In addition, 

the Commission estimates that there 

may be up to another 4,000 securitybased swap counterparties 62 that 

transact security-based swaps much less 

frequently.63 The Commission 

preliminarily believes the 1,000 regular 

participants in the security-based swaps 

market are likely to be entities that are 

financial entities for purposes of the 

Dodd-Frank Act and would therefore 

not qualify for the end-user clearing 

exception, while the 4,000 less frequent 

counterparties to security-based swaps 

could, for purposes of the end-user 

clearing exception, be non-financial 

entities using security-based swaps to 

hedge or mitigate commercial risk. 

These 4,000 counterparties are also 

preliminarily believed by the 

Commission to include Identified 

Financial Institutions using securitybased swaps.64 Accordingly, with 

respect to burdens applicable to all 

security-based swap counterparties that 

qualify for the end-user clearing 

exception, the Commission 

preliminarily believes that it is 

reasonable to use the figure of 4,000 

respondents for purposes of estimating 

collection of information burdens under 

the PRA. 

D. Total Initial and Annual Reporting 

and Recordkeeping Burdens 

The Commission preliminarily 

believes the notification required by 

proposed Rule 3Cg–1 65 imposes a 

limited reporting or recordkeeping 

burden, because it references commonly 

used market practices when defining 

whether a security-based swap hedges 


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66See Definitions Proposing Release, supra note 

3. 67See Regulation SBSR Proposing Release, supra 

note 16. 68See, e.g., ‘‘Table 17: Summary of Weekly 

Transaction Activity,’’ http://www.dtcc.com/ 

products/derivserv/data_table_iii.php (weekly data 

as updated by DTCC). 69Cf., Regulation SBSR Proposing Release, supra 

note 16, which used an estimate of 36,000 

transactions in single name CDS transactions per 

day, referencing the same DTCC data. The 

difference is accounted for by differences in the 

scope of proposed Rule 3Cg–1 compared to 

proposed Regulation SBSR. Proposed Regulation 

SBSR encompasses both new transactions in 

security-based swaps and certain transactions 

occurring during the lifecycle of security-based 

swaps and therefore both of these elements are 

taken into account for purposes of its discussion of 

estimated burdens to be experienced by 

respondents as a result of the proposed regulation. 

Proposed Rule 3Cg–1 would only affect new 

transactions and therefore the estimated number of 

transactions used for purposes of the burden 

calculations is limited to new transactions. 

70The Commission’s estimate is based on internal 

analysis of available security-based swap market 

data. The Commission is seeking comment about 

the overall size of the security-based swap market. 71The Commission notes that regulation of the 

security-based swap markets, including by means of 

proposed Regulation SBSR and proposed Rule 3Cg– 

1, could impact market participant behavior. 72This figure is based on the following: 

(5,200,000/0.85) = 6,117,647. 

73 Information from ISDA surveys relating to 

collateralized swap transactions indicate that the 

average number of outstanding OTC derivative 

trades for non-bank firms generally average just 1% 

of all transactions in the marketplace, and this 

figure includes transactions associated with certain 

parties not entitled to invoke the end-user clearing 

exception, such as certain major swap participants, 

commodity pools as defined in section 1a(10) of the 

Commodity Exchange Act and private funds as 

defined in section 202(a) of the Investment Advisers 

Act of 1940. See ISDA Collateral Committee, ISDA 

Feasibility Study: Extending Collateralized Portfolio 

Reconciliations (Dec. 18, 2009) (available at 

http://www.isda.org/c_and_a/pdf/ISDA-PortfolioReconciliation-Feasibility-Study.pdf). The 

Commission is seeking comment about the overall 

size of the security-based swap market. 

74This 80% figure is based on the quotient of 

dividing the 4,000 participants that could qualify 

for the end-user clearing exception by the estimated 

5,000 participants in the security-based swaps 

marketplace. 

75See supra note 73. An estimate that nonfinancial entities account for 1% of security-based 

swap transactions will be used for purposes of the 

calculations that follow below. 

76See Definitions Proposing Release, supra note 

3. 

77The Commission preliminarily believes some 

entities establish and follow these types of 

procedures so that their hedging transactions will 

qualify for hedge accounting treatment under 

generally accepted accounting principles, which 

require procedures similar to those contained in 

this proposed rule, or to meet other statutory 

requirements. While hedging relationships 

involving security-based swaps that qualify for the 

hedging or mitigating commercial risk exception 

within the proposed rule are not limited to those 

recognized as hedges for accounting purposes, we 

believe that entities that are not seeking hedge 

accounting treatment for their hedging transactions 

commonly identify and document their risk 

management activities as well as assess the 

effectiveness of those activities as a matter of good 

business practice. See also Item 305 of Regulation 

S–K, 17 CFR 229.305 (requiring SEC Filers to 

provide identified risk based disclosures relating to 

their activities in financial derivatives); Internal 

revenue Code Section 1259 (26 U.S.C. 1259) 

(recognizing hedging transactions as ‘‘constructive 

sales’’ of certain appreciated financial positions in 

specified circumstances). 

or mitigates commercial risk 66 and 

utilizes the proposed reporting and 

recordkeeping mechanism under Rule 

901 of Regulation SBSR to meet the 

notice requirement contemplated by 

Exchange Act Section 3C(g)(1)(C).67

Under proposed Rule 3Cg–1 the 

additional reporting burden on the party 

invoking the end-user clearing 

exception would be to identify and 

document the commercial risk being 

hedged and the effectiveness of the 

proposed security-based swap as a 

hedge, and then complete ten or, at the 

most, twelve additional data points in a 

larger set of transaction information that 

would be required to submitted to an 

SDR or the Commission under proposed 

Regulation SBSR. In addition, those 

entities that may be considered 

Identified Financial Institutions and 

therefore fall within the exemption 

under the proposed alternative language 

in Rule 3Cg–1(b) and (c) would be 

required to conduct an assessment 

under the proposed alternative language 

to determine whether they are entitled 

to elect to use the end-user clearing 

exception. The recordkeeping burden on 

the SDR would also be limited to storing 

the additional ten or twelve data points 

in the larger set of transaction 

information separately required to be 

delivered pursuant to proposed 

Regulation SBSR. 

1. Estimated Number of Security-Based 

Swap Transactions 

According to publicly available data 

from the Depository Trust Clearing 

Corporation (‘‘DTCC’’) recently, there 

have been an average of approximately 

20,000 new transactions in single-name 

credit default swap (‘‘CDS’’) transactions 

per day,68 corresponding to a total 

number of CDS transactions of 

approximately 5,200,000 per year.69 The 

Commission preliminarily believes that 

CDS represent 85% of all security-based 

swap transactions.70 Accordingly, and 

to the extent that historical market 

activity is a reasonable predictor of 

future activity,71 the Commission 

preliminarily estimates that the total 

number of security-based swap 

transactions that would be subject to 

proposed Rule 3Cg–1 on an annual basis 

would be approximately 6,200,000.72

Based on publicly available 

information and consultation with 

industry sources, the Commission 

preliminarily believes that even the 

most active non-financial entity 

participants in the security-based swap 

market enter a relatively small number 

of new security-based swaps during any 

given period.73 There are approximately 

4,000 participants in the security-based 

swap marketplace that the Commission 

preliminarily believes could qualify for 

the end-user clearing exception and 

they represent approximately 80% of 

the total number of participants in the 

security-based swap market.74 However, 

based on all information reviewed the 

Commission preliminarily estimates 

that non-financial entities account for 

1% of all security-based swap 

transactions.75

2. Reporting and Recordkeeping 

Burdens 

To qualify for the end-user clearing 

exception proposed Rule 3Cg–1(a)(4) 

would require a non-financial entity to 

determine whether the terms of the 

proposed security-based swap and the 

manner in which it will be used satisfy 

the definition of hedging or mitigating 

commercial risk established by 

proposed Exchange Act Rule 3a67–4. To 

meet the requirements of the definition, 

subsection 3a67–4(a)(3) of proposed 

Rule 3a67–4 specifies that the 

counterparty to the security-based swap 

must identify and document one or 

more risks associated with the present 

or future conduct and management of 

the enterprise that are being reduced by 

the security-based swap and establish 

and document a method of assessing the 

effectiveness of the security-based swap 

as a hedge for such identified risks. In 

complying with proposed Rule 3a67–4, 

non-financial entities seeking to invoke 

the end-user clearing exception would 

need to establish and maintain an 

appropriate compliance mechanism 

including the necessary professional, 

legal, technical and administrative 

support to make and document the 

required assessment of hedging 

effectiveness.76

The Commission preliminarily 

believes that counterparties transacting 

in security-based swaps to hedge 

commercial risks ordinarily will have 

established risk management or 

financial control systems in place for 

other reasons which will likely be 

adjusted to accommodate the 

requirements of proposed Rule 3a67– 

4(a)(3).77 Accordingly, the Commission 

preliminarily estimates that designing 

and implementing an appropriate 

compliance and support program to 

estimate the hedging effectiveness of 

security-based swaps would impose an 

initial one time aggregate burden of 

approximately 44,000 hours, 

corresponding to 11 burden hours for 


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78This figure is based on the following: (Senior 

Business Analyst at 4 hours) + (Compliance 

Manager at 4 hours) + (Director of Compliance at 

2 hours) + (Compliance Attorney at 1 hour) × (4000 

respondents) = 44,000 burden hours; (44,000 

burden hours per year)/(4000 respondents) = 11 

burden hours per year per respondent. 

79These figures are based on the following: 

(((Senior Business Analyst at 30 minutes) + 

(Compliance Manager at 30 minutes)) × (6,200,000 

security-based swap transactions) × (1% 

transactions by parties eligible to invoke end-user 

clearing exception)))/60 minutes = 62,000 burden 

hours per year; (62,000 burden hours per year)/ 

4,000 respondents = 15.5 burden hours per year per 

respondent. 

80These figures are based on the following: 

((Compliance Manager at 30 minutes) × (6,200,000 

security-based swap transactions) × (1% 

transactions by parties eligible to invoke end-user 

clearing exception))/60 minutes = 31,000 burden 

hours per year; (31,000 burden hours per year)/ 

4,000 respondents = 7.75 burden hours per year per 

respondent. 

81For example, the Commission preliminarily 

expects that a counterparty’s status as a nonfinancial entity, a finance affiliate or an SEC Filer 

would change infrequently. The Commission 

understands the time required to collect this 

information is likely to vary depending on whether 

the particular security-based swap is documented 

using electronic or manual processes. Electronic 

processes allow for fields of required information to 

be populated automatically, substantially reducing 

the time required for transaction processing and 

compliance confirmation. A high percentage of 

electronically eligible security-based swaps are 

currently transacted using electronic processes. See 

ISDA, 2010 ISDA Operations Benchmarking Survey 

(available at http://www.isda.org/c_and_a/pdf/ 

ISDA-Operations-Survey-2010.pdf) (showing that 

for credit derivatives 99% of transactions are 

eligible to be confirmed electronically and 98% of 

eligible transactions are confirmed electronically, 

while for equity derivatives 36% of transactions are 

eligible to be confirmed electronically and 81% of 

eligible transactions are confirmed electronically). 

The Commission preliminarily believes CDS 

transactions represent 85% of all security-based 

swap transactions. See supra note 69. The 30 

minutes of time estimated to be required to produce 

the information to comply with proposed Rule 3Cg– 

1 (other than the hedging or mitigating commercial 

risk requirement) is intended to account for both 

manually and electronically processed transactions. 

82See supra note 78 and accompanying text. 

83This figure is the sum of the calculations 

presented in notes 79 and 80 above. Summation 

differences between the final figures in the body of 

the text are due to the effects of rounding. 

84See Regulation SDR Release, supra note 42. See 

also Public Law 111–203, § 763(i) (adding Exchange 

Act Section 13(n)(5)). 

85See Public Law 111–203, sec. 766(a) (adding 

Exchange Act Section 13A(c)). 

86See Public Law 111–203, sec. 766(a) (adding 

Exchange Act Section 13A(d)). 

87See Public Law 111–203, sec. 766(a) (adding 

Exchange Act Section 13A(c)(2)). 

88See Regulation SDR Release, supra note 42. 

89See supra note 47 and accompanying text. 

each reporting party, to adjust these 

established risk management or 

financial control systems to 

accommodate the requirements of 

proposed Rule 3a67–4.78

The Commission preliminarily 

estimates that to gather the information 

required to notify the Commission that 

a security-based swap is being used to 

hedge or mitigate commercial risk 

purposes of proposed Rule 3Cg–1(a)(4) 

would impose an ongoing aggregate 

annual burden of approximately 62,000 

burden hours for all respondents, which 

corresponds to an ongoing annual 

aggregate burden of approximately 16 

burden hours for each respondent.79

The Commission further preliminarily 

estimates that for a party to make an 

assessment required under proposed 

Rules 3Cg–1(b) and (c) of the proposed 

alternative rule text, if applicable, gather 

the remaining information required by 

proposed Rule 3Cg–1(a) and include the 

information in the security-based swap 

information delivered to an SDR as 

contemplated by proposed Regulation 

SBSR would impose an ongoing 

aggregate annual burden of 

approximately 31,000 burden hours for 

all respondents, which corresponds to 

an ongoing aggregate annual burden of 

approximately eight (8) burden hours 

for each respondent,80 as each item of 

additional information is factual 

information known to the party 

invoking the end-user clearing 

exception and unlikely to vary from 

transaction to transaction.81

The Commission preliminarily 

believes that proposed Rule 3Cg–1 

would impose minimal additional 

burdens on either Reporting Parties not 

using the end-user clearing exception 

themselves or on SDRs. Reporting 

Parties would be required by proposed 

Regulation SBSR to report transaction 

information relating to security-based 

swaps in a specified manner, and the 

Commission therefore preliminarily 

believes reporting a limited number of 

additional data elements to the SDR in 

an equivalent manner will have a de 

minimis effect on the burdens they 

experience. Similarly, the Commission 

preliminarily believes that for an SDR to 

receive and retain these additional data 

fields would effectively impose minimal 

additional burdens, as the information 

would be transmitted and received 

electronically and would then be stored 

as part of the existing transaction data 

already required under proposed 

Regulation SBSR. 

For the reasons described above, the 

Commission preliminarily estimates 

that the initial one-time aggregate 

burden associated with proposed Rule 

3Cg–1 would be 44,000 hours, 

corresponding to 11 burden hours for 

each respondent,82 and the recurring 

aggregate annualized burden associated 

with proposed Rule 3Cg–1 would be 

93,000 burden hours, which 

corresponds to 23 annual burden hours 

per respondent.83

E. Collection of Information Is 

Mandatory 

The collection of information under 

proposed Rule 3Cg–1 would be 

mandatory when a security-based swap 

counterparty chooses to invoke the enduser clearing exception. 

F. Record Retention Period 

Information collected pursuant to 

proposed Rule 3Cg–1 would be required 

to be retained for not less than five 

years. The Commission recently 

proposed to adopt rules to regulate the 

operation of SDRs, which include 

recordkeeping requirements for 

security-based swap transaction data 

reported to a registered SDR pursuant to 

proposed Regulation SBSR. Specifically, 

proposed Rule 13n–5(b)(5) would 

require registered SDRs to maintain the 

transaction data for not less than five 

years after the applicable security-based 

swap expires and historical positions 

and historical market values for not less 

than five years.84 Exchange Act Section 

13A(c) 85 requires each party to a noncleared security-based swap to maintain 

records of the security-based swaps held 

by such party in the form required by 

the Commission, and Exchange Act 

Section 13A(d) 86 mandates that these 

records must 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 pursuant to Exchange Act 

Section 13A(c)(2).87 Accordingly, 

security-based swap transaction reports 

received by a registered SDR pursuant to 

proposed Rule 3Cg–1 and proposed 

Rule 901 of Regulation SBSR would be 

required to be retained for not less than 

five years. 

G. Responses to Collection of 

Information Will Be Kept Confidential 

A registered SDR would be under a 

general obligation to maintain the 

confidentiality of all information 

collected pursuant to proposed Rule 

3Cg–1 and proposed Rule 901 of 

Regulation SBSR, subject to limited 

exceptions under proposed Regulation 

SDR.88 The Commission also 

preliminarily believes that the 

additional information collected 

pursuant to proposed Rule 3Cg–1 would 

either fall under the exception to public 

dissemination contained in proposed 

Rule 902(c)(2), or otherwise should be 

excluded from the publiclydisseminated transaction report.89

Accordingly, the Commission 

preliminarily believes the collection of 


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90 5 U.S.C. 552(b)(4). 

91 Darrell Duffie and Haoxiang Zhu, ‘‘Does a 

Central Clearing Counterparty Reduce Counterparty 

Risk?,’’ (Stanford University, Working Paper, 2010) 

(available at http://www.stanford.edu/∼duffie/ 

DuffieZhu.pdf). 

92See supra note 11 and accompanying text. 93See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)(1)(c)). 94See Regulation SBSR Proposing Release, supra 

note 16. 

information pursuant to proposed Rule 

3Cg–1 would be confidential and would 

not be publicly available. 

To the extent that the Commission 

receives confidential information 

pursuant this collection of information, 

such information would be kept 

confidential, subject to the provisions of 

the Freedom of Information Act 

(‘‘FOIA’’). Exemption 4 of FOIA provides 

an exemption for ‘‘trade secrets and 

commercial or financial information 

obtained from a person and privileged 

or confidential’’ 90 The information 

required to be submitted to the 

Commission under proposed Rule 3Cg– 

1 may contain proprietary financial 

information regarding security-based 

swap transactions and therefore be 

subject to protection from disclosure 

under Exemption 4 of the FOIA. 

H. Request for Comment 

Pursuant to 44 U.S.C. 3505(c)(2)(B), 

the Commission solicits comment to: 

1. Evaluate whether the proposed 

collection of information is necessary 

for the performance of the functions of 

the agency, including whether the 

information shall have practical utility; 

2. Evaluate the accuracy of the 

agency’s estimate of the burden of the 

proposed collection of information; 

3. Enhance the quality, utility and 

clarity of the information to be 

collected; and 

4. Minimize the burden of collection 

of information on those who are to 

respond, including through the use of 

automated collection techniques or 

other forms of information technology. 

Persons wishing to submit comments 

on the collection of information 

requirements should direct them to the 

following persons: (1) Desk Officer for 

the Securities and Exchange 

Commission, Office of Information and 

Regulatory Affairs, OMB, Room 3208, 

New Executive Office Building, 

Washington, DC 20503; and (2) 

Secretary, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–1090 with 

reference to File No. S7–43–10. OMB is 

required to make a decision concerning 

the collection of information between 30 

and 60 days after publication, so a 

comment to OMB is best assured of 

having its full effect if OMB receives it 

within 30 days of publication. The 

Commission has submitted the 

proposed collection of information to 

OMB for approval. Requests for the 

materials submitted to OMB by the 

Commission with regard to this 

collection of information should be in 

writing, refer to File No. S7–43–10, and 

be submitted to the Securities and 

Exchange Commission, Office of 

Investor Education and Advocacy, 100 F 

Street, NE., Washington, DC 20549– 

0213. 

VI. Analysis of Costs and Benefits of the 

Proposed Rule 

Proposed Rule 3Cg–1 implements the 

requirements of Exchange Act Section 

3C(g) which provides an exception to 

the general requirement that a securitybased swap must be cleared provided 

that one party to the security-based 

swap (1) Is not a financial entity, (2) is 

using security-based swaps to hedge or 

mitigate commercial risk, and (3) 

notifies the Commission, in a manner 

set forth by the Commission, how it 

generally meets its financial obligations 

associated with entering into noncleared security-based swaps. The 

application of the end-user clearing 

exception is solely at the discretion of 

the counterparty to the security-based 

swap that meets the conditions of 

Exchange Act Section 3C(g)(1). Section 

3C(g) specifically preserves the ability of 

counterparties qualifying for the enduser clearing exception to elect to clear 

a security-based swap when a clearing 

agency is available and to select the 

clearing agency at which the securitybased swap will be cleared. 

The purpose of mandatory clearing of 

security-based swap products is to 

centralize individual counterparty risks 

through a clearing agency acting as a 

central counterparty that distributes risk 

among the clearing agency’s 

participants. When effective, 

centralization of counterparty risks 

through clearing reduces the likelihood 

that defaults propagate between 

counterparties by establishing and 

enforcing margin requirements based on 

risk-based models and parameters 

designed to limit the possibility that 

participants will be exposed to losses 

they cannot anticipate or control. 

Effective central clearing can also lessen 

the risk of capital flight from a dealer 

that becomes economically distressed. 

In particular, without central clearing, a 

solvency concern at a major dealer 

could be made worse by its 

counterparties quickly moving to other 

dealers.91

However, mandatory clearing of 

security-based swap products may also 

alter the burdens on non-financial endusers of derivatives relative to bilateral 

transactions, including direct costs 

associated with clearing fees and 

additional margin requirements and 

indirect costs associated with using 

derivatives less tailored to their 

individual business needs and thereby 

possibly affect their risk management 

practices.92 Exchange Act Section 3C(g) 

is designed to permit non-financial endusers that meet the specified conditions 

to elect not to centrally clear securitybased swaps and retain flexibility to use 

both cleared and non-cleared securitybased swaps in their risk management 

activities. 

A. Notification to the Commission 

Exchange Act Section 3C(g)(1)(C) 

requires a non-financial entity that uses 

security-based swaps to hedge or 

mitigate commercial risk to notify the 

Commission how it generally meets its 

financial obligations associated with 

non-cleared security-based swaps in 

order for the end-user clearing 

exception to be available.93 Section 

3C(g)(1)(C) contemplates that the 

Commission may establish the manner 

of notification and Exchange Act 

Section 3C(g)(6) provides that the 

Commission may prescribe such rules as 

may be necessary to prevent abuse of 

the end-user clearing exception. In 

accordance with Exchange Act Sections 

3C(g)(1)(C) and 3C(g)(6), proposed Rule 

3Cg–1(a) requires that notification be 

given to the Commission by delivering 

specified information to a registered 

SDR or the Commission with each 

security-based swap transaction that 

invokes the end-user clearing exception 

in the manner required by proposed 

new Regulation SBSR under the 

Exchange Act.94

1. Meeting Financial Obligations 

Proposed Rule 3Cg–1(a)(5) requires 

the reporting of five specified items of 

information to satisfy the requirement 

under the Exchange Act Section 

3C(g)(1)(C) for a non-financial entity 

invoking the end-user clearing 

exception to notify the Commission of 

‘‘how it generally meets its financial 

obligations associated with non-cleared 

security-based swaps.’’ Because noncleared security-based swaps are not 

subject to uniform margin and collateral 

requirements such as those established 

by clearing agencies, providing this 

information will be useful in monitoring 

the extent to which non-financial 

entities that invoke the end-user 

exception are taking steps to mitigate 

credit risks associated with securitybased swaps. 


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95See supra note 72 and accompanying text. 

96Based on the information presented in note 73 

above and the accompanying text, the Commission 

preliminarily estimates entities qualifying for the 

end-user exception are involved in roughly 1% of 

the estimated 6,200,000 annual security-based swap 

transactions, or 62,000 such transactions 

((6,200,000 × 1%) = 62,000). 

97See supra note 80 and accompanying text. The 

estimates that follow are based on an assumption 

that the burden of complying with proposed Rule 

3Cg–1(a)(5) is equivalent to the burden of 

complying with the other requirements of proposed 

Rule 3Cg–1, not including proposed Rule 3Cg– 

1(a)(4). 

98The hourly rate for the compliance attorney is 

from SIFMA’s Management & Professional Earnings 

in the Securities Industry 2009, modified by the 

Commission’s staff to account for an 1800-hour 

work-year and multiplied by 5.35 to account for 

bonuses, firm size, employee benefits and overhead. 

The remaining hourly rates for professionals used 

in this cost benefit analysis section are also derived 

from this source and modified in the same manner. 

99These monetized costs are calculated as 

follows: (15 minutes/60 minutes per hour) × ($316 

dollars per hour) × (62,000 security-based swap 

transactions annually) = $4,898,000 annually; 

($4,898,000 annually)/4,000 respondents = $1,225 

average annually per respondent. 

100See Public Law 111–203, sec. 763(a) (adding 

Exchange Act Section 3C(g)(4)). 

101See Coalition for Derivatives End-Users 

comment (September 20, 2010), pursuant to 

Definitions Contained in Title VII of Dodd-Frank 

Wall Street Reform and Consumer Protection Act, 

Exchange Act Rel. No. 34–62,717, 75 FR 51,429 

(Aug. 20, 2010). 

In order to understand these potential 

risks, proposed Rule 3Cg–1(a)(5) 

requires a counterparty invoking the 

end-user clearing exception to provide 

notification regarding how they expect 

to meet their financial obligations 

associated with the security-based swap 

by reporting specified information to a 

registered security-based swap 

depository. In particular, an entity 

invoking the end-user clearing 

exception must indicate in the materials 

provided to the SDR whether it provides 

security for the performance of its 

financial obligations by (i) Transferring 

assets directly to the security-based 

swap counterparty pursuant to a written 

credit support agreement; (ii) pledging 

collateral pursuant to a security 

arrangement not requiring the transfer of 

collateral to the security-based swap 

counterparty; (iii) receiving credit 

support from a third-party pursuant to 

a written guarantee; (iv) solely relying 

on its available financial resources; or 

(v) using other means. 

a. Benefits 

Requiring end-users to provide the 

Commission with general information 

regarding their arrangements to meet 

financial obligations associated with 

non-cleared security-based swaps may 

confer benefits by reducing concerns 

about the potential risks that these 

market participants introduce into the 

financial markets in the absence of 

central clearing. The notification will 

also allow the Commission to 

understand how margining and other 

credit support practices may affect the 

prices and liquidity of security-based 

swaps, including by comparing and 

contrasting the trading costs of noncleared security-based swaps with 

different credit support characteristics 

to each other and to security-based 

swaps that are cleared. Proposed Rule 

3Cg–1(a)(5) also establishes a reporting 

option for ‘‘other means’’ that may be 

used to meet financial obligations 

associated with non-cleared securitybased swaps providing the Commission 

with insight on the possible emergence 

of new and currently less common 

methods of mitigating financial risks 

associated with non-cleared securitybased swaps that may arise as the 

market develops. 

b. Costs 

The Commission preliminarily 

estimates the costs associated with the 

notification required by Rule 3Cg– 

1(a)(5) will be limited, as the methods 

used to meet financial obligations 

associated with non-cleared securitybased swaps are expected to be readily 

known to counterparties invoking the 

end-user clearing exception and 

unlikely to vary from transaction to 

transaction. The Commission 

preliminarily estimates there are 

6,200,000 transactions in security-based 

swaps annually,95 and that parties 

eligible to invoke the end-user clearing 

exception are counterparties in 

approximately 1% of all security-based 

swap transactions.96 The Commission 

preliminarily estimates that to gather 

the information required for purposes of 

complying with proposed Rule 3Cg– 

1(a)(5) would impose an ongoing 

aggregate annual burden of 

approximately 15,500 burden hours for 

all respondents, which corresponds to a 

burden of four (4) burden hours for each 

respondent.97 Accordingly, applying an 

estimated hourly cost of $316 for a 

compliance attorney to gather 

information about how the counterparty 

is meeting its Financial Notice 

Obligation,98 the Commission 

preliminarily estimates proposed Rule 

3Cg–1(a)(5) would result in an ongoing 

aggregate annual cost of $4,900,000 to 

the entire end-user community, which 

corresponds to an average ongoing 

aggregate annual cost of $1,225 per enduser.99

2. Preventing Abuse of the End-User 

Clearing Exception 

To aid the Commission’s efforts to 

prevent abuse of the end-user clearing 

exception, proposed Rule 3Cg–1(a) 

requires notification of which of the 

counterparties to the security-based 

swap is invoking the end-user clearing 

exception, whether the counterparty 

invoking the exception is or is not a 

financial entity, whether the 

counterparty invoking the exception is a 

finance affiliate meeting the 

requirements of Exchange Act 3C(g)(4), 

whether the counterparty invoking the 

exception uses the security-based swap 

to hedge or mitigate commercial risk, 

and whether the counterparty invoking 

the exception is an SEC Filer. SEC Filers 

invoking the end-user clearing 

exception must provide their SEC 

Central Index Key number and confirm 

that an appropriate committee of the 

SEC Filer’s board of directors or 

equivalent body has reviewed and 

approved the decision to enter into the 

security-based swap that is subject to 

the end-user clearing exception. 

a. Benefits 

Requiring notification of the abovelisted information would provide 

regulators with information about the 

end-user that could help verify that the 

end-user clearing exception is being 

invoked by market participants 

appropriately. The requirement to 

identify which counterparty is invoking 

the end-user clearing exception is 

critical in making this determination. 

Similarly, since Exchange Act Section 

3C(g) limits the availability of the enduser clearing exception to non-financial 

entities and counterparties hedging or 

the mitigating commercial risk, an 

affirmative notification to the 

Commission that these two factors are 

satisfied will help verify eligibility of 

the counterparty to invoke the 

exception. Given the nature of the 

specific provisions in the Exchange Act 

governing use of the end-user clearing 

exception by finance affiliates,100

separately identifying transactions 

involving finance affiliates will also 

help to ensure these requirements are 

complied with over time. 

The Commission preliminarily 

expects counterparties to security-based 

swaps invoking the end-user clearing 

exception would frequently be entities 

that have raised capital in public 

financial markets and are therefore 

regulated by the Commission.101

Entities registered under the Exchange 

Act Section 12 or required to file reports 

pursuant to the Exchange Act Section 

15(d) are generally required to include 

a discussion of qualitative and 

quantitative elements of market risk in 

annual reports filed with the 

Commission, including a discussion of 


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102See Item 305 of Regulation S–K, 17 CFR 

229.305. The Commission does not require 

companies with a public common equity float of 

less than $75 million, or, if a company is unable 

to calculate public equity float, less than $50 

million in revenue in the last fiscal year to provide 

quantitative and qualitative disclosure about market 

risk as required of larger companies under 

Regulation S–K. See Smaller Reporting Company 

Regulatory Relief and Simplification, Securities Act 

Release No. 8876, Exchange Act Release No. 56994, 

Trust Indenture Act No. 2451 (Dec. 19, 2007), 73 

FR 934 (Jan. 4, 2008). 

103See supra note 76 and accompanying text. 

104See supra note 77 and accompanying text. 

105This figure is based on the following: (Senior 

Business Analyst at 4 hours × $234 per hour) + 

(Compliance Manager at 4 hours × $294 per hour) 

+ (Director of Compliance at 2 hours × $426 per 

hour) + (Compliance Attorney at 1 hour × $316 per 

hour) × (4000 respondents) = $13,120,000; 

($13,120,000 initial aggregate cost)/(4000 

respondents) = $3,280 initial aggregate cost per 

respondent. See also supra note 78. 

106See supra note 79 and accompanying text. The 

estimates that follow are based on an assumption 

that the burden of complying with proposed Rule 

3Cg–1(a)(5) is equivalent to the burden of 

complying with the requirements of proposed Rule 

3Cg–1, not including proposed Rules 3Cg–1(a)(4), 

given the comparable nature of the information 

required. 

107This figure is based on the following: ((Senior 

Business Analyst at 30 minutes × $234 per hour) + 

(Compliance Manager at 30 minutes × $294 per 

hour)) × ((6,200,000 security-based swap 

transactions) × (1% transactions by parties eligible 

to invoke end-user clearing exception)) = 

$16,368,000 aggregate ongoing costs per year; 

($16,368,000 aggregate ongoing costs per year)/ 

(4,000 respondents) = $4,092 in aggregate ongoing 

costs per year per respondent. These figures do not 

include the costs associated with complying with 

proposed Rule 3Cg–1(a)(5), which are separately 

accounted for in note 99 above and the 

accompanying text, or costs associated with 

proposed Rule 3Cg–1 other than proposed Rules 

3Cg–1(a)(4) and (5), which are separately accounted 

for in note 112 below and the accompanying text. 

See also supra note 79. 

108See supra note 80 and accompanying text. 

109See supra note 81. 

110See supra note 99 and accompanying text. 

111See supra note 80 and accompanying text. The 

estimates that follow are based on an assumption 

that the burden of complying with proposed Rule 

3Cg–1(a)(5) is equivalent to the burden of 

complying with the requirements of proposed Rule 

3Cg–1, not including proposed Rule 3Cg–1(a)(4), 

given the comparable nature of the information 

required. 

112These monetized costs are calculated as 

follows: (15 minutes/60 minutes per hour) × 

(Compliance Manager at $294 dollars per hour) × 

(62,000 security-based swap transactions annually) 

= $4,557,000 annually; ($4,557,000 dollars 

annually)/(4,000 respondents) = $1,139 average 

annually per respondent. These figures do not 

include the costs associated with complying with 

proposed Rule 3Cg–1(a)(5), which are separately 

accounted for in note 99 above and the 

accompanying text, and the costs associated with 

complying with proposed Rule 3Cg–1(a)(4), which 

how derivatives are used to manage 

risk.102 Notification by an end-user that 

it is subject to this requirement would 

allow regulators to review how 

frequently SEC Filers use the end-user 

clearing exception and better 

understand how security-based swaps 

are used by SEC Filers to hedge or 

mitigate commercial risk. The proposed 

requirement that SEC Filers invoking 

the end-user clearing exception provide 

the relevant Commission file number 

will allow the Commission to cross 

reference information received in 

connection with the end-user clearing 

exception with other Commission 

documents more easily. The additional 

proposed requirement that SEC Filers 

indicate whether a committee of the 

board of directors (or equivalent body) 

reviewed and approved the decision to 

enter into the security-based swap that 

is the subject of the end-user clearing 

exception would serve as confirmation 

that the requirements of Exchange Act 

Section 3C(i) applicable to SEC Filers 

were completed. 

b. Costs 

To qualify for the end-user clearing 

exception a non-financial entity would 

be required to determine whether the 

terms of the proposed security-based 

swap and the manner in which it will 

be used satisfy the definition of hedging 

or mitigating commercial risk 

established by proposed Exchange Act 

Rule 3a67–4. To meet the requirements 

of the definition, subsection 3a67– 

4(a)(3) of proposed Rule 3a67–4 

specifies that the counterparty to the 

security-based swap must identify and 

document one or more risks associated 

with the present or future conduct and 

management of the enterprise and 

establish and document a method of 

assessing the effectiveness of the 

security-based swap as a hedge for such 

identified risks. 

The Commission preliminarily 

believes that non-financial entities 

seeking to invoke the end-user clearing 

exception would need to establish and 

maintain an appropriate compliance 

mechanism to meet the hedge or 

mitigate standard in proposed Rule 

3a67–4 including the necessary 

professional, legal, technical and 

administrative support to make and 

document the required assessment of 

hedging effectiveness.103 The 

Commission also preliminarily believes 

that counterparties transacting in 

security-based swaps to hedge 

commercial risks ordinarily will have 

established risk management systems in 

place for other reasons that can be 

adjusted to accommodate the 

requirements of proposed Rule 3Cg– 

1(a)(4) and proposed Rule 3a67–4.104

Accordingly, the Commission 

preliminarily estimates that designing 

and implementing an appropriate 

compliance and support program to 

identify the risks being reduced and 

document the hedging effectiveness of 

security-based swaps would impose an 

initial one time initial aggregate cost of 

$13,200,000 to all end-users, which 

corresponds to an average initial cost of 

$3300 per end-user.105

The Commission expects there would 

also be ongoing costs associated with 

determining whether the hedging or 

mitigating commercial risk standard is 

met for each security-based swap 

transaction for which the end-user 

clearing exception is invoked. The 

Commission preliminarily estimates 

that to gather the information required 

for purposes of complying with 

proposed Rule 3a67–4 and proposed 

Rule 3Cg–1(a)(4) would impose an 

ongoing aggregate annual burden of 

approximately 62,000 burden hours for 

all respondents, which corresponds to a 

burden of 16 burden hours for each 

respondent.106 Assuming an hourly cost 

of $234 per hour for a senior business 

analyst and $294 per hour for a 

compliance manager to meet this 

requirement, proposed Rule 3Cg–1 

would impose an annual cost of 

$16,400,000 to all end-users and an 

average annual cost of $4,100 dollars 

per end-user.107

It was estimated that to make an 

assessment required under proposed 

Rules 3Cg–1(b) and (c) of the alternative 

proposed rule text, if applicable, gather 

the information required by Rule 3Cg– 

1(a) besides the information with 

respect to hedging or mitigating 

commercial risk, would require the 

additional work of a compliance 

manager.108 That information is factual 

information a party is likely to have as 

a result of its existing compliance 

process and the information is unlikely 

to vary between transactions.109 Costs 

associated with collecting requisite 

Financial Obligation Notice information 

required by proposed Rule 3Cg–1(a)(5) 

have already been discussed.110

Therefore, the information collection 

and reporting costs that remain to be 

accounted for are those not associated 

with either proposed Rules 3Cg–1(a)(4) 

or (5). The Commission preliminarily 

estimates that to gather the information 

required for purposes of complying with 

proposed Rule 3Cg–1 other than 

proposed Rules 3Cg–1(a)(4) and (5) 

would impose an ongoing aggregate 

annual burden of approximately 15,500 

burden hours for all respondents, which 

corresponds to a burden of four (4) 

burden hours for each respondent.111

These remaining costs are estimated to 

impose an annual cost of approximately 

$4,600,000 on all respondents and an 

average annual cost of approximately 

$1,200 per respondent.112


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are separately accounted for in note 107 above and 

the accompanying text. 

113See supra notes 16–20 and accompanying text. 

114See Regulation SBSR Proposing Release, supra 

note 16, proposed Rule 902; Regulation SDR 

Release, supra note 42, proposed Rule 13n–4(b)(6). 

115See supra note 105 and accompanying text. 

116These figures are based on the following: 

($4,900,000 associated with proposed Rule 3Cg– 

1(a)(5)) + ($16,400,000 to comply with proposed 

Rule 3Cg–1(a)(4)) + ($4,600,000 to comply with 

other notification requirements established by Rule 

3Cg–1) = $25,900,000; ($25,900,000 aggregate 

annual ongoing costs)/(4000 covered entities) = 

$6,475 per covered entity. 

117See 15 U.S.C. 78w(a)(2). 

118For purposes of the discussion that follows, 

the term ‘‘non-financial entities’’ includes Identified 

Financial Institutions that would be excluded from 

the definition of ‘‘financial entity’’ in Exchange Act 

Section 3C(g)(3) in the event the proposed 

alternative language in Rules 3Cg–1(b) and (c) is 

adopted by the Commission. 

3. Form of Notice to the Commission 

Exchange Act Section 3C(g)(1)(C) 

requires that a non-financial entity 

invoking the end-user clearing 

exception notify the Commission how it 

generally meets its financial obligations 

and gives the Commission discretion to 

establish how to collect this 

information. To satisfy this requirement, 

proposed Rule 3Cg–1(a) requires entities 

invoking the end-user clearing 

exception to deliver specified 

information to a registered SDR in the 

form and manner required for delivery 

of information specified under proposed 

Rule 901(d) of Regulation SBSR.113

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 Rule 

3Cg–1(a) and proposed Regulation SBSR 

would serve as the notice to the 

Commission necessary to invoke the 

end-user clearing exception. 

a. Benefits 

Since all market participants must 

already report security-based swap 

transactions to a registered SDR, the 

Commission preliminarily believes that 

requiring participants invoking the enduser clearing exception to report the 

information required by proposed Rule 

3Cg–1(a) as part of the transaction 

record should be a reliable and costeffective method of collecting the 

information. Standardized reporting 

through a registered SDR also should 

increase transparency of the market to 

regulators by providing a full account of 

all transactions, which benefits market 

participants through increased 

confidence in the reliability and 

integrity of market transactions and 

activity. Furthermore, standardized 

reports should allow periodic auditing, 

which should be less costly to regulators 

than examining on a case-by-case basis 

possibly unstructured financial data 

submitted by entities invoking the 

exception to perform their regulatory 

duties. 

b. Costs 

Because the form of notice required 

by proposed Rule 3Cg–1(a) would use 

the existing reporting and recordkeeping 

mechanism for security-based swap 

transactions that is required by 

proposed Rule 901 of Regulation SBSR, 

the Commission preliminarily believes 

the form of notice required by proposed 

Rule 3Cg–1(a) would impose no 

additional burden on persons invoking 

the end-user clearing exception or SDRs 

other than those described above. The 

information required to be provided to 

the Commission pursuant to proposed 

Rule 3Cg–1(a) would be transmitted and 

received electronically and would be 

stored as part of the existing transaction 

materials that would be required to be 

prepared by proposed Regulation SBSR. 

The Commission preliminarily believes 

that information collected under 

proposed Rule 3Cg–1 will not be 

required to be publicly disseminated by 

the SDR, therefore the Commission 

preliminarily believes there will be no 

costs associated with organizing and 

posting such information under the 

requirements for public dissemination 

of information proposed to be met by 

SDRs.114

4. Total Costs 

In total, the Commission preliminarily 

estimates that proposed Rule 3Cg–1 

would result in a one-time initial 

aggregate annualized cost of 

$13,200,000, or $3400 per covered 

entity 115 and an ongoing aggregate 

annualized cost of $25,900,000 for all 

covered entities, or approximately 

$6,500 per covered entity.116

B. Request for Comments 

The Commission requests comment 

on the costs and benefits of proposed 

Rule 3Cg–1 discussed above, as well as 

any costs and benefits not already 

described that could result. The 

Commission also requests data to 

quantify any potential costs and 

benefits. In addition, the Commission 

requests comment on the following: 

• What other factors, if any, should 

the Commission consider to estimate the 

costs and benefits of proposed Rule 

3Cg–1? 

• Is there additional data the 

Commission should use to estimate the 

costs and benefits of proposed Rule 

3Cg–1? 

• Would proposed Rule 3Cg–1 create 

additional costs and benefits not 

discussed here? 

VII. Consideration of Burden on 

Competition, and Promotion of 

Efficiency, Competition, and Capital 

Formation 

Section 3(f) of the Exchange Act 

requires the Commission, whenever it 

engages in rulemaking and is required to 

consider or determine whether an action 

is necessary or appropriate in the public 

interest, to consider whether the action 

would promote efficiency, competition, 

and capital formation. In addition to the 

protection of investors, Section 23(a)(2) 

of the Exchange Act requires the 

Commission, when making rules under 

the Exchange Act, to consider the 

impact of such rules on competition.117

Section 23(a)(2) also prohibits the 

Commission from adopting any rule that 

would impose a burden on competition 

not necessary or appropriate in 

furtherance of the purposes of the 

Exchange Act. 

The Commission preliminarily 

believes that the Rule 3Cg–1 would 

impose limited competitive burdens on 

counterparties to security-based swaps 

qualifying for the end-user clearing 

exception and the financial markets 

generally because the overall costs 

associated with invoking the end-user 

clearing exception are limited. Using the 

proposed reporting structure of 

Regulation SBSR to satisfy the notice 

requirement necessary to invoke the 

end-user clearing exception would 

promote efficiency by allowing 

participants in the security-based swap 

market to use an existing process to 

accomplish an additional legislative 

requirement. Satisfaction of the notice 

requirement in this way is preliminarily 

believed by the Commission to promote 

efficiency by allowing participants to 

fully utilize the capabilities of SDRs 

being established to serve the securitybased swaps market specifically rather 

than requiring them to use a separate 

filing process and data repository 

created for other purposes, such as the 

Commission’s EDGAR system, or to 

establish new infrastructure or business 

processes to meet the statutory notice 

obligation. 

The end-user clearing exception 

would be available to non-financial 

entities 118 that use security-based 

swaps to hedge or mitigate commercial 

risk, but do not necessarily compete 

with each other. Such counterparties by 

definition would not transact in 


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119See Public Law 104–121 (March 29, 1996), as 

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

120See Public Law 96–354, 94 Stat. 1164 (1980), 

as amended by SBREFA. 

121 17 CFR 230.157. See also 17 CFR 240.0–10(a). 

122See supra note 73 and accompanying text. 

123The Commodity Futures Modernization Act of 

2000 introduced the concept of ‘‘eligible contract 

participant’’ that the Commission preliminarily 

believes is a standard frequently referenced by 

market participants and which may act to limit the 

ability of non-financial entities with assets less than 

$10 million to transact in security-based swaps. See 

Public Law 106–554, 114 Stat. 2763 (Dec. 21, 2000). 

See also Section 1(a)(18) of the Commodity 

Exchange Act (‘‘CEA’’), 7 U.S.C. 1a(18) as redesignated and amended by Section 721 of the 

Dodd-Frank Act (defining ‘‘eligible contract 

participant’’). The Dodd-Frank Act added a 

definition of eligible contract participant to the 

Exchange Act which references the equivalent 

definition in the CEA, and created new standards 

to limit the ability of persons who are not eligible 

contract participants to transact in security-based 

swaps. See Public Law 111–203, § 761(a) (adding 

Exchange Act Section 3(a)(65)). See also Public Law 

111–203, § 761(e) (adding Exchange Act Section 

6(l)) (making it unlawful for any person to effect a 

transaction in a security-based swap for a person 

that is not an eligible contract participant, unless 

such transaction is conducted on a registered 

national securities exchange). 

security-based swaps as their primary 

business, but rather as part of a risk 

management program related to their 

other commercial operations. Therefore, 

the Commission preliminarily expects 

the end-user clearing exception to have 

a neutral effect on competition. In 

addition, proposed Rule 3Cg–1 contains 

elements noted above intended to limit 

the potential for the end-user clearing 

exception to be abused, as contemplated 

by Exchange Act Section 3C(g)(6). 

Features of this kind are preliminarily 

expected by the Commission to limit the 

potential for counterparties that make 

use of the exception to avoid the 

mandatory clearing requirements to gain 

an unfair competitive advantage over 

their competitors. 

Proposed Rule 3Cg–1 allows certain 

non-financial entities who use securitybased swaps to hedge or mitigate 

commercial risk to bypass mandatory 

clearing, and instead engage in noncleared security-based swap 

transactions even when equivalent 

products are available for clearing by a 

central counterparty. To the extent that 

proposed Rule 3Cg–1 is successful in 

separating appropriate uses of the enduser clearing exception from abusive 

ones, the proposed rule should help 

economic efficiency and capital 

formation by not imposing additional 

costs on end-users using security-based 

swaps to hedge or mitigate commercial 

risk and therefore not contributing to 

systemic risk in the financial system. 

The Commission requests comment 

on the possible effects of proposed Rule 

3Cg–1 on efficiency, competition, and 

capital formation. The Commission 

requests that commenters provide views 

and supporting information regarding 

any such effects. The Commission notes 

that such effects are difficult to quantify. 

The Commission seeks comment on 

possible anti-competitive effects of the 

proposed Rule not already identified. 

The Commission also requests comment 

regarding the competitive effects of 

pursuing alternative regulatory 

approaches such as requiring notice to 

be provided through the Commission’s 

EDGAR system. In addition, the 

Commission requests comment on how 

the other provisions of the Dodd-Frank 

Act, for which Commission rulemaking 

is required, will interact with and 

influence the competitive effects of the 

proposed Rule. 

VIII. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996 (‘‘SBREFA’’) the Commission must 

advise the OMB whether the proposed 

regulation constitutes a ‘‘major’’ rule.119

Under SBREFA, 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 costs 

or prices for consumers or individual 

industries; or (3) significant adverse 

effect on competition, investment or 

innovation. If a rule is ‘‘major,’’ its 

effectiveness will generally be delayed 

for 60 days pending Congressional 

review. 

The Commission requests comment 

on the potential impact of proposed 

Rule 3Cg–1, on the economy on an 

annual basis, on the costs or prices for 

consumers or individual industries, and 

on competition, investment, or 

innovation. Commenters are requested 

to provide empirical data and other 

factual support for their view to the 

extent possible. 

IX. Initial Regulatory Flexibility Act 

Certification 

Section 603(a) of the Regulatory 

Flexibility Act 120 (‘‘RFA’’) requires 

federal agencies, in promulgating rules, 

to make available for public comment 

an initial regulatory flexibility analysis 

that describes the impact of the 

proposed rule on small entities. 

Alternatively, section 605(b) of the RFA 

provides that this analysis shall not 

apply to any proposed rule or proposed 

rule amendment, if the head of the 

agency certifies that the rule if 

promulgated will not have a significant 

economic impact on a substantial 

number of small entities. 

For purposes of Commission 

rulemaking in connection with the RFA, 

a small business includes an issuer or 

person, other than an investment 

company, that on the last day of its most 

recent fiscal year had total assets of $5 

million or less.121 Based on input from 

security-based swap market participants 

and its own information, the 

Commission preliminarily believes that 

currently there is very little use of 

security-based swaps by non-financial 

entities that would be eligible to use the 

end-user clearing exception,122 and that 

the non-financial entities eligible to 

invoke the end-user clearing exception 

and transacting in security-based swaps 

would be corporations, partnerships and 

trusts with assets in excess of $10 

million.123 On this basis, the 

Commission preliminarily believes that 

the number of security-based swap 

transactions involving a small entity as 

that term is defined for purposes of the 

RFA would be de minimis. Moreover, 

the Commission does not believe that 

any aspect of proposed Rule 3Cg–1 

would be likely to alter the type of 

counterparties presently engaging in 

security-based transactions. Therefore, 

the Commission preliminarily believes 

that proposed Rule 3Cg–1 would have a 

de minimis impact on small entities. 

For the foregoing reasons, the 

Commission certifies that Rule 3Cg–1 

would not have a significant economic 

impact on a substantial number of small 

entities for purposes of the RFA. The 

Commission encourages written 

comments regarding this certification. 

The Commission requests that 

commenters describe the nature of any 

impact on small entities and provide 

empirical data to support the extent of 

the impact. 

X. Statutory Basis and Text of Proposed 

Rule 

Pursuant to the Exchange Act and 

particularly Section 3C thereof, the 

Commission proposes new Rule 3Cg–1, 

as set forth below, governing the 

exception to mandatory clearing of 

security-based swaps established by 

Exchange Act Section 3C(g). 

List of Subjects in 17 CFR Part 240 

Reporting and recordkeeping 

requirements, Securities. 

Text of the Proposed Rule 

In accordance with the foregoing, 

Title 17, Chapter II of the Code of 

Federal Regulations, is proposed to be 

amended as follows. 


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PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

1. The authority citation for part 240 

is amended by adding the following 

citation in numerical order to read as 

follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 

78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78o– 

4, 78p, 78q, 78s, 78u–5, 78w, 78x, 78ll, 

78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– 

3, 80b–4, 80b–11, and 7201 et seq.; 18 U.S.C. 

1350; and 12 U.S.C. 5221(e)(3), unless 

otherwise noted. 

* * * * * 

Section 240.3Cg–1 is also issued under 

Public Law 111–203, § 763, 124 Stat. 1841 

(2010). 

* * * * * 

2. Add § 240.3Cg–1 to read as follows: 

§ 240.3Cg–1 Notice to the Commission 

[and Financial Entity Exemption]. 

(a) A counterparty to a security-based 

swap that invokes the clearing 

exception under Section 3C(g)(1) of the 

Act (15 U.S.C. 78c–3(g)(1)) shall satisfy 

the requirements of Section 3C(g)(1)(C) 

of the Act (15 U.S.C. 78c–3(g)(1)(C)) by 

delivering or causing to be delivered the 

following additional information to a 

registered security-based swap data 

repository (or, if none is available, to the 

Commission) in the form and manner 

required for delivery of the information 

separately specified under § 242.901(d) 

of Regulation SBSR of this chapter: 

(1) The identity of the counterparty 

relying on the clearing exception; 

(2) Whether the counterparty invoking 

the clearing exception is a ‘‘financial 

entity’’ as defined in Section 3C(g)(3) of 

the Act (15 U.S.C. 78c–3(g)(3)); 

(3) Whether the counterparty invoking 

the clearing exception is a finance 

affiliate meeting the requirements 

described in Section 3C(g)(4) of the Act 

(15 U.S.C. 78c–3(g)(4)); 

(4) Whether the security-based swap 

is used by the counterparty invoking the 

clearing exception to hedge or mitigate 

commercial risk as defined in 

§ 240.3a67–4 of this chapter; 

(5) Whether the counterparty invoking 

the clearing exception generally expects 

to meet its financial obligations 

associated with the security-based swap 

by using any of the following: 

(i) A written credit support 

agreement; 

(ii) A written agreement to pledge or 

segregate assets; 

(iii) A written third-party guarantee; 

(iv) Solely the counterparty’s 

available financial resources; or 

(v) Means other than those described 

in paragraphs (a)(5)(i), (ii), (iii), and (iv) 

of this section; 

(6) Whether the counterparty invoking 

the clearing exception is an issuer of 

securities registered under Section 12 

(15 U.S.C. 78l) or subject to reporting 

requirements pursuant to Section 15(d) 

(15 U.S.C. 78o(d)) of the Act, and if so: 

(i) The relevant Commission Central 

Index Key number for the counterparty 

invoking the clearing exception; and 

(ii) Whether an appropriate committee 

of the board of directors (or equivalent 

body) of the counterparty invoking the 

clearing exception has reviewed and 

approved the decision to enter into a 

security-based swap subject to the 

clearing exception. 

Additional Rule Text Under 

Consideration by the Commission 

(b) For purposes of Section 

3C(g)(1)(A) of the Act (15 U.S.C. 78c– 

3(g)(1)(A)), any person specified in 

paragraph (c) of this section that would 

be a financial entity within the meaning 

of the term in Section 3C(g)(3)(A) of the 

Act (15 U.S.C. 78c–3(g)(3)(A)) solely 

because of Section 3C(g)(3)(A)(viii) of 

the Act (15 U.S.C. 78c–3(g)(3)(A)(viii)) 

shall be exempt from the definition of 

financial entity. 

(c) A person shall be eligible for the 

exemption in paragraph (b) of this 

section if such person: 

(1) Is organized as a bank, as defined 

in Section 3(a)(6) of the Act (15 U.S.C. 

78c), the deposits of which are insured 

by the Federal Deposit Insurance 

Corporation, a savings association, as 

defined in section 3(b) of the Federal 

Deposit Insurance Act (12 U.S.C. 1831), 

the deposits of which are insured by the 

Federal Deposit Insurance Corporation, 

a farm credit system institution 

chartered under the Farm Credit Act of 

1971 (12 U.S.C. 2001), or an insured 

Federal credit union or State-chartered 

credit union under the Federal Credit 

Union Act (12 U.S.C. 1752); and 

(2) Has total assets of $10,000,000,000 

or less on the last day of the most recent 

fiscal year. 

By the Commission. 

Dated: December 15, 2010. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–31973 Filed 12–20–10; 8:45 am] 

BILLING CODE 8011–01–P 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Food and Drug Administration 

21 CFR Part 58 

[Docket No. FDA–2010–N–0548] 

Good Laboratory Practice for 

Nonclinical Laboratory Studies 

AGENCY: Food and Drug Administration, 

HHS. 

ACTION: Advance notice of proposed 

rulemaking. 

SUMMARY: The Food and Drug 

Administration (FDA) is seeking 

comment on whether to amend the 

regulations governing good laboratory 

practices (GLPs). The Agency decided 

that to require a GLP quality system for 

all facilities/laboratories, as well as to 

more completely address nonclinical 

studies as they are presently conducted, 

the Agency would need to modify the 

existing regulations. 

DATES: Submit either electronic or 

written comments by February 22, 2011. 

ADDRESSES: You may submit comments, 

identified by the Docket No. FDA–2010– 

N–0548, by any of the following 

methods: 

Electronic Submissions 

Submit electronic comments in the 

following way: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Written Submissions 

Submit written submissions in the 

following ways: 

• Fax: 301–827–6870. 

• Mail/Hand delivery/Courier (for 

paper, disk, or CD–ROM submissions): 

Division of Dockets Management (HFA– 

305), Food and Drug Administration, 

5630 Fishers Lane, Rm. 1061, Rockville, 

MD 20852. 

Instructions: All submissions received 

must include the Agency name and 

docket number for this rulemaking. All 

comments received may be posted 

without change to http:// 

www.regulations.gov, including any 

personal information provided. For 

additional information on submitting 

comments, see the ‘‘Comments’’ heading 

of the SUPPLEMENTARY INFORMATION

section of this document. 

Docket: For access to the docket to 

read background documents or 

comments received, go to http:// 

www.regulations.gov and insert the 

docket number, found in the brackets in 

the heading of this document, into the 

‘‘Search’’ box and follow the prompts 


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