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

System, which describes the application 

procedure. 

The Proposal 

The FAA is considering an 

amendment to Title 14, Code of Federal 

Regulations (14 CFR) part 71 to establish 

Class E airspace at Wolfeboro, NH 

providing the controlled airspace 

required to support the new Copter 

RNAV GPS special standard instrument 

approach procedures for Huggins 

Hospital Heliport. Controlled airspace 

extending upward from 700 feet above 

the surface is required for IFR 

operations within a 6-mile radius of the 

point in space coordinates for the 

heliport. 

Class E airspace designations are 

published in Paragraph 6005 of FAA 

order 7400.9U, dated August 18, 2010, 

and effective September 15, 2010, which 

is incorporated by reference in 14 CFR 

71.1. The Class E airspace designation 

listed in this document will be 

published subsequently in the Order. 

The FAA has determined that this 

proposed regulation only involves an 

established body of technical 

regulations for which frequent and 

routine amendments are necessary to 

keep them operationally current. It, 

therefore, (1) Is not a ‘‘significant 

regulatory action’’ under Executive 

Order 12866; (2) is not a ‘‘significant 

rule’’ under DOT Regulatory Policies 

and Procedures (44 FR 11034; February 

26, 1979); and (3) does not warrant 

preparation of a Regulatory Evaluation 

as the anticipated impact is so minimal. 

Since this is a routine matter that will 

only affect air traffic procedures and air 

navigation, it is certified that this 

proposed rule, when promulgated, 

would not have a significant economic 

impact on a substantial number of small 

entities under the criteria of the 

Regulatory Flexibility Act. 

The FAA’s authority to issue rules 

regarding aviation safety is found in 

Title 49 of the United States Code. 

Subtitle I, section 106 describes the 

authority of the FAA Administrator. 

Subtitle VII, Aviation Programs, 

describes in more detail the scope of the 

agency’s authority. This proposed 

rulemaking is promulgated under the 

authority described in subtitle VII, part 

A, subpart I, section 40103. Under that 

section, the FAA is charged with 

prescribing regulations to assign the use 

of airspace necessary to ensure the 

safety of aircraft and the efficient use of 

airspace. This proposed regulation is 

within the scope of that authority as it 

would establish Class E airspace at 

Huggins Hospital, Wolfeboro, NH. 

List of Subjects in 14 CFR Part 71: 

Airspace, Incorporation by reference, 

Navigation (Air). 

The Proposed Amendment 

In consideration of the foregoing, the 

Federal Aviation Administration 

proposes to amend 14 CFR part 71 as 

follows: 

PART 71—DESIGNATION OF CLASS A, 

B, C, D, AND CLASS E AIRSPACE 

AREAS; AIR TRAFFIC SERVICE 

ROUTES; AND REPORTING POINTS 

1. The authority citation for part 71 

continues to read as follows: 

Authority: 49 U.S.C. 106(g); 40103, 40113, 

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959– 

1963 Comp., p. 389. 

§ 71.1 [Amended] 

2. The incorporation by reference in 

14 CFR 71.1 of Federal Aviation 

Administration Order 7400.9U, 

Airspace Designations and Reporting 

Points, dated August 18, 2010, effective 

September 15, 2010, is amended as 

follows: 

Paragraph 6005 Class E Airspace Areas 

Extending Upward from 700 Feet or More 

Above the Surface of the Earth. 

* * * * * 

ANE NH E5 Wolfeboro, NH [New] 

Huggins Hospital Heliport, NH 

(Lat. 43°34′56′′ N., long. 71°12′06′′ W.) 

Point in Space Coordinates 

(Lat. 43°35′15′′ N., long. 71°11′19′′ W.) 

That airspace extending upward from 700 

feet above the surface within a 6-mile radius 

of the Point in Space Coordinates (lat. 

43°35′15′′ N., long. 71°11′19′′ W.) serving the 

Huggins Hospital Heliport. 

Issued in College Park, Georgia, on 

December 13, 2010. 

Mark D. Ward, 

Manager, Operations Support Group, Eastern 

Service Center, Air Traffic Organization. 

[FR Doc. 2010–32581 Filed 12–27–10; 8:45 am] 

BILLING CODE 4910–13–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 23 

RIN 3038–AC96 

Confirmation, Portfolio Reconciliation, 

and Portfolio Compression 

Requirements for Swap Dealers and 

Major Swap Participants 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is proposing regulations to 

implement new statutory provisions 

established under Title VII of the DoddFrank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act). 

Section 731 of the Dodd-Frank Act 

added a new section 4s(i) to the 

Commodity Exchange Act (CEA), which 

requires the Commission to prescribe 

standards for swap dealers and major 

swap participants related to the timely 

and accurate confirmation, processing, 

netting, documentation, and valuation 

of swaps. The proposed rules would 

establish requirements for swap 

confirmation, portfolio reconciliation, 

and portfolio compression for swap 

dealers and major swap participants. 

DATES: Submit comments on or before 

February 28, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AC96 

and Confirmation, Portfolio 

Reconciliation, and Portfolio 

Compression Requirements for Swap 

Dealers and Major Swap Participants, by 

any of the following methods: 

• Agency Web site, via its Comments 

Online process at http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one method. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that may be exempt from disclosure 

under the Freedom of Information Act, 

a petition for confidential treatment of 

the exempt information may be 

submitted according to the established 

procedures in § 145.9 of the 

Commission’s regulations, 17 CFR 

145.9. 

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from http://www.cftc.gov that it may 

deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been redacted 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
81520 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

1See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

may be accessed at http://www.cftc.gov/ 

LawRegulation/OTCDERIVATIVES/index.htm. 

2Pursuant to Section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

3 7 U.S.C. 1 et seq. 

4The Commission may propose additional rules 

related to documentation provisions under section 

4s(i) of the CEA. 

5Section 8a(5) of the CEA authorizes the 

Commission to promulgate such regulations as, in 

the judgment of the Commission, are reasonably 

necessary to effectuate any of the provisions or to 

accomplish any of the purposes of the CEA. 

6See, e.g., Press Release, ‘‘President’s Working 

Group on Financial Markets, Progress Summary on 

OTC Derivatives Operational Improvements’’ (Nov. 

2008). 

or removed that contain comments on 

the merits of the rulemaking will be 

retained in the public comment file and 

will be considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Sarah E. Josephson, Associate Director, 

202–418–5684, sjosephson@cftc.gov; 

Frank N. Fisanich, Special Counsel, 

202–418–5949, ffisanich@cftc.gov; or 

Jocelyn Partridge, Special Counsel, 202– 

418–5926, jpartridge@cftc.gov; Division 

of Clearing and Intermediary Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act.1 Title VII of 

the Dodd-Frank Act 2 amended the 

Commodity Exchange Act (CEA) 3 to 

establish a comprehensive regulatory 

framework to reduce risk, increase 

transparency, and promote market 

integrity within the financial system by, 

among other things: (1) Providing for the 

registration and comprehensive 

regulation of swap dealers and major 

swap participants; (2) imposing clearing 

and trade execution requirements on 

standardized derivative products; (3) 

creating rigorous recordkeeping and 

real-time reporting regimes; and (4) 

enhancing the Commission’s 

rulemaking and enforcement authorities 

with respect to all registered entities 

and intermediaries subject to the 

Commission’s oversight. 

Section 731 of the Dodd-Frank Act 

amends the CEA by adding a new 

Section 4s, which sets forth a number of 

requirements for swap dealers and 

major swap participants. Specifically, 

section 4s(i) of the CEA establishes 

swap documentation standards for those 

registrants. 

Section 4s(i)(1) requires swap dealers 

and major swap participants to 

‘‘conform with such standards as may be 

prescribed by the Commission by rule or 

regulation that relate to timely and 

accurate confirmation, processing, 

netting, documentation, and valuation 

of all swaps.’’ Under section 4s(i)(2), the 

Commission is required to adopt rules 

‘‘governing documentation standards for 

swap dealers and major swap 

participants.’’ The Commission is 

proposing the regulations on swap 

confirmation, portfolio reconciliation, 

and portfolio compression 4 discussed 

below, pursuant to the authority granted 

under sections 4s(h)(1)(D), 4s(h)(3)(D), 

4s(i), and 8a(5) of the CEA. 5 The DoddFrank Act requires the Commission to 

promulgate these provisions by July 15, 

2011. 

The proposed regulations reflect 

consultation with staff of the following 

agencies: (i) The Securities and 

Exchange Commission; (ii) the Board of 

Governors of the Federal Reserve 

System; (iii) the Office of the 

Comptroller of the Currency; and (iv) 

the Federal Deposit Insurance 

Corporation. Staff from each of these 

agencies has had the opportunity to 

provide oral and/or written comments 

to the proposal, and the proposed 

regulations incorporate elements of the 

comments provided. 

II. Proposed Regulations 

The proposed regulations would 

prescribe standards for the timely and 

accurate confirmation of swaps and 

would require the reconciliation and 

compression of swap portfolios. 

Confirmation, portfolio reconciliation, 

and portfolio compression have been 

recognized as important post-trade 

processing mechanisms for reducing 

risk and improving operational 

efficiency by both current market 

participants and their regulators. 

With respect to confirmation, prudent 

practice requires that, after coming to an 

agreement on the terms of a transaction, 

parties document the transaction in a 

complete and definitive written record 

so there is legal certainty about the 

terms of their agreement. Through 

portfolio reconciliation, counterparties 

are able to resolve any discrepancies or 

disputes as early as possible and arrive 

at an understanding of their overall risk 

exposure to one another. Portfolio 

compression allows for a reduction in 

outstanding trade count and outstanding 

gross notional value by replacing 

redundant trades with a smaller number 

of trades and reduced gross notional 

value. This process reduces operational 

risk and increases operational efficiency 

because there are fewer trades to 

maintain, and results in a more accurate 

expression of market size. 

In the past few years, market 

participants and regulators have paid 

particular attention to the post-trade 

processing of swaps. For example, 

operational issues associated with the 

over-the-counter (OTC) derivatives 

market have been the focus of reports 

and recommendations by the President’s 

Working Group on Financial Markets 

(PWG).6 In response to the financial 

crisis in 2008, the PWG called on the 

industry to improve trade matching and 

confirmation and to promote portfolio 

reconciliation. 

Since 2005, the Federal Reserve Bank 

of New York (FRBNY) has led a 

targeted, supervisory effort to enhance 

operational efficiency and performance 

in the OTC derivatives market, by 

increasing automation in processing and 

by promoting the timely confirmation of 

trades. Known as the OTC Derivatives 

Supervisors’ Group (ODSG), the FRBNY 

leads an on-going effort with OTC 

derivatives dealers’ primary supervisors, 

trade associations, industry utilities, 

and private vendors, through which 

market participants (including buy-side 

participants) regularly set goals and 

commitments to bring infrastructure, 

market design, and risk management 

improvements to all OTC derivatives 

asset classes. Over the years, the ODSG 

has expanded its focus from credit 

derivatives to include interest rate 

derivatives, equity derivatives, foreign 

exchange derivatives, and commodity 

derivatives. Along with this expanded 

focus has come increased engagement 

with market participants on cross-asset 

class issues. Specifically, the ODSG 

encouraged the industry to commit itself 

to a number of reforms, including 

improved operational performance with 

respect to the OTC derivatives 

confirmation process, portfolio 

reconciliation, and portfolio 

compression. The regulations proposed 

by the Commission would build upon 

the ODSG’s work. 

It is important to note at the outset, 

that the Commission expects that swap 

dealers and major swap participants 

would be able to comply with each of 

the proposed rules by executing a swap 

on a swap execution facility (SEF) or on 

a designated contract market (DCM), or 

by clearing the swap through a 

derivatives clearing organization (DCO). 

For swaps executed on a SEF or a DCM, 

the SEF or DCM will provide the 

counterparties with a definitive written 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 81521 

7U.S. Government Accountability Office, ‘‘Credit 

Derivatives: Confirmation Backlogs Increased 

Dealers’ Operational Risks, But Were Successfully 

Addressed After Joint Regulatory Action,’’ GAO–07– 

716 (2007) at pages 3–4. 

8See October 4, 2005 industry commitment letter 

to the Federal Reserve Bank of New York, available 

at http://www.newyorkfed.org/newsevents/ 

news_archive/markets/2005/an050915.html. 

9 It remains unclear precisely how much of the 

total CDS market is not ‘‘electronically eligible,’’ as 

eligibility is determined by the OTC derivatives 

market participants. 

10See March 1, 2010 Summary of OTC 

Derivatives Commitments provided to the Federal 

Reserve Bank of New York, available at http:// 

www.newyorkfed.org/newsevents/news/markets/ 

2010/100301_table.pdf. 

record of the terms of their agreement, 

which will serve as a confirmation of 

the swap. Similarly, if a swap is 

executed bilaterally, but subsequently 

submitted to a DCO for clearing, the 

DCO will require a definitive written 

record of all terms to the counterparties’ 

agreement prior to novation by the DCO; 

this too would serve as a confirmation 

of the swap. 

When a swap is cleared by a central 

counterparty, the problems that 

portfolio reconciliation is designed to 

solve (agreement on all terms and the 

valuation of the swap) no longer exist 

because the clearinghouse (1) requires a 

definitive written record of all terms of 

the swap; and (2) arrives at a settlement 

price for all cleared swaps on a daily 

basis. Additionally, the Commission is 

considering a proposed regulation that 

would require DCOs to offer portfolio 

compression exercises on a regular 

basis. The proposed rule for swap 

dealers and major swap participants has 

been designed to complement the 

proposed DCO rule. 

In designing these rules, the 

Commission has taken care to minimize 

the burden on those parties that will not 

be registered with the Commission as 

swap dealers or major swap 

participants. To the extent that market 

participants believe that additional 

measures should be taken to reduce the 

burden or increase the benefits of 

confirmation, reconciliation, and 

compression for the swaps market, the 

Commission welcomes all comments. 

The Commission requests comment 

on all aspects of proposed §§ 23.500 

(definitions), 23.501 (confirmation), 

23.502 (portfolio reconciliation), and 

23.503 (portfolio compression), as well 

as comment on the specific provisions 

and issues highlighted in the discussion 

below. The Commission further requests 

comment on an appropriate effective 

date for final regulations, including 

comment on whether it would be 

appropriate to have staggered or delayed 

effective dates for some regulations 

based on the nature or characteristics of 

the activities or entities to which they 

apply. The Commission recognizes that 

there will be differences in the size and 

scope of the business of particular swap 

dealers and major swap participants. 

Therefore, comments are solicited on 

whether certain provisions of the 

proposed regulations should be 

modified or adjusted to reflect the 

differences among swap dealers and 

major swap participants or differences 

among asset classes. 

A. Swap Confirmation 

1. Background 

Over the past several years, OTC 

derivatives market participants and 

their regulators have paid particular 

attention to the timely confirmation of 

swaps. The Government Accountability 

Office (GAO) found that the rapid 

expansion of trading volume of swaps, 

such as credit derivatives since 2002, 

caused stresses on the operational 

infrastructure of market participants. 

These stresses in turn caused the 

participants’ back office systems to fail 

to confirm the increased volume of 

trades for a period of time.7 The GAO 

found that the lack of automation in 

trade processing and the purported 

assignment of positions by transferring 

parties to third parties without notice to 

their counterparties were factors 

contributing to this backlog. If 

transactions, whether newly executed or 

recently transferred to another party, are 

left unconfirmed, there is no definitive 

written record of the contract terms. 

Thus, in the event of a dispute, the 

terms of the agreement must be 

reconstructed from other evidence, such 

as e-mail trails or recorded trader 

conversations. This process is 

cumbersome and may not be wholly 

accurate. Moreover, if purported 

transfers of swaps, in whole or in part, 

are made without giving notice to the 

remaining parties and obtaining their 

consent, disputes may arise as to which 

parties are entitled to the benefits and 

subject to the burdens of the transaction. 

As the work of the ODSG 

demonstrates, the industry is capable of 

swift movement to contemporaneous 

execution and confirmation. A large 

back-log of unexecuted confirmations in 

the credit default swap (CDS) market 

created by prolonged negotiations and 

inadequate confirmation procedures 

were the subject of the first industry 

commitments made by participating 

dealers to ODSG.8 In October 2005, the 

participating dealers committed to 

reduce by 30% the number of 

confirmations outstanding more than 30 

days within four months. In March 

2006, the dealers committed to reduce 

the number of outstanding 

confirmations by 70% by June 30, 2006. 

By September 2006, the industry had 

reduced the number of all outstanding 

CDS confirmations by 70%, and the 

number of CDS confirmations 

outstanding more than 30 days by 85%. 

The industry achieved these targets 

largely by moving 80% of total trade 

volume in CDS to confirmation on 

electronic platforms, eliminating 

backlogs in new trades. Today, over 

90% of ‘‘electronically eligible’’ 9 CDS 

trades are confirmed electronically, the 

majority on the day of execution and up 

to 98% within two days.10

The ODSG has established a 

supervisory goal for all transactions to 

be confirmed as soon as possible after 

the time of execution. Ideally, this 

would mean that there would be a 

written or electronic document executed 

by the parties to a swap for the purpose 

of evidencing all of the terms of the 

swap, including the terms of any 

termination (prior to its scheduled 

maturity date), assignment, novation, 

exchange, or similar transfer or 

conveyance of, or extinguishing of rights 

or obligations. 

In the case of electronically processed 

transactions, all such transactions 

should be matched and confirmed, at a 

minimum, on the same day the trade 

was executed. For electronically 

processed transactions, confirmation 

typically is effected by a third-party 

‘‘matching’’ process. If transactions are 

not confirmed in a timely manner, 

backlogs of outstanding unconfirmed 

trades develop, increasing risk. Timely 

and accurate confirmation of 

transactions is critical for all 

downstream operational and risk 

management processes, including the 

correct calculation of cash flows and 

discharge of settlement obligations as 

well as accurate measurement of 

counterparty credit exposures. Timely 

confirmation also allows any rejections, 

exceptions, and/or discrepancies to be 

identified and resolved more quickly. 

Another ODSG objective is a 

marketplace that electronically 

processes as many transactions as 

possible in as many parts of the 

processing life cycle as possible, but 

particularly in the ‘‘upstream’’ parts of 

the life cycle, where transaction 

information is first entered into the 

system (trade capture). To achieve this 

objective, as many transactions as 

possible and practicable should be 

executed on electronic platforms, such 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
81522 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

11Life cycle events would also include corporate 

actions affecting a security or securities on which 

the swap is based (e.g., a merger, dividend, stock 

split or bankruptcy). 

12The Notice of Proposed Rulemaking for Swap 

Data Recordkeeping and Reporting Requirements is 

available on the Commission’s Web site: http:// 

comments.cftc.gov/FederalRegister/Proposed.aspx. 

13This definition is taken from the end user 

exception to the clearing requirement under section 

2(h)(7)(C)(i) of the CEA. The term financial entity 

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 CEA; (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. See 7 U.S.C. 2(h)(7)(C)(i). 

The definition would include the statutory 

exclusion and limitation as contained in section 

2(h)(7)(C) and also would include any Commission 

regulations promulgated pursuant to the statutory 

section. 

as SEFs, in order to approach the ideal 

of ‘‘straight-through processing.’’ 

Otherwise, transactions should be keyed 

into electronic systems as soon as 

possible after execution. 

2. Proposed Confirmation Rule 

To promote the efficient operation of 

the swap market, and to facilitate 

market participants’ overall risk 

management, the Commission is 

proposing confirmation § 23.501. 

For the purposes of proposed 

§ 23.501, proposed § 23.500 would 

provide certain critical definitions 

pertaining to confirmation. An 

acknowledgment would be defined as a 

written or electronic record of all the 

terms of a swap signed and sent by one 

party to another. When one party 

acknowledges the terms of a swap and 

its counterparty verifies it, the result is 

the issuance of a confirmation that 

reflects the terms of the swap between 

the parties. A confirmation thus would 

be defined as a written or electronic 

record of a swap that has been signed 

and sent by one party and verified by 

the other where that record has been 

manually, electronically, or by some 

other legally equivalent means, signed 

by the receiving counterparty. Finally, 

proposed § 23.500 would define 

execution to be a legally-binding oral, 

written, or electronic agreement by the 

parties. For the purposes of the 

confirmation rule, the term swap 

transaction is defined to include any 

event that would result in a new swap 

or a change in the terms of a swap, 

including execution, termination, 

assignment, novation, exchange, 

transfer, amendment, conveyance, or 

extinguishing of rights or obligations 

under a swap. 

With regard to both acknowledgments 

and confirmations, the Commission 

intends that all the terms of a swap 

transaction be provided for 

acknowledgment and confirmation. The 

objective is that parties have full written 

agreement on all terms as soon as 

practicable after execution and also 

upon any ownership event during the 

life of the swap. Such life cycle events 

would include any termination (prior to 

the scheduled maturity date of the 

swap), assignment, novation, exchange, 

transfer, amendment, or conveyance of, 

or extinguishing of rights or obligations 

under the swap.11 For each of these 

events, the parties should have written 

documentation evidencing all the terms 

of the transaction, as soon as possible 

after the transaction occurs. This 

approach to documenting ‘‘life cycle 

event data’’ is consistent with the 

Commission’s proposed rules for 

reporting swap data to a swap data 

repository.12

The timely and accurate confirmation 

of all swaps and life cycle events for 

existing swaps would ensure that the 

parties know the terms of their executed 

transactions and the identities of their 

counterparties at all times. Confirming 

all swap transactions on the day of 

execution should be standard for all 

market participants. However, the 

Commission recognizes some entities 

that will not be registered as swap 

dealers or major swap participants may 

not have the operational capacity to 

confirm their swap transactions as 

quickly as swap dealers and major swap 

participants. Accordingly, the 

Commission is proposing a bifurcated 

approach for confirmations. Swap 

dealers and major swap participants 

entering into swap transactions with 

other swap dealers or major swap 

participants would be required to obtain 

a confirmation on the same calendar day 

as execution (i.e., no later than T+0). 

On the other hand, swap dealers and 

major swap participants entering into 

swap transactions with counterparties 

that are not swap dealers or major swap 

participants would be required to send 

an acknowledgment for each swap on 

the same calendar day as execution (i.e., 

no later than T+0). Swap dealers and 

major swap participants would then 

have policies and procedures in place to 

confirm the swap with financial entities 

as defined in proposed § 23.500 13 on 

the same calendar day as execution and 

with all other entities not later than the 

next business day following execution. 

The Commission also is proposing 

that the times prescribed for achieving 

swap acknowledgment and 

confirmation vary depending upon 

whether transactions are electronically 

executed or electronically processed. 

Under proposed § 23.501(a)(1), all swap 

dealers and major swap participants 

entering into swap transactions with 

other swap dealers or major swap 

participants would be required to 

confirm their swap transactions 

according to the following timeframe: 

• For any swap transaction that has 

been executed and processed 

electronically, within 15 minutes of 

execution; 

• For any swap transaction that is not 

electronically executed, but that will be 

processed electronically, within 30 

minutes of execution; or 

• For any swap transaction that 

cannot be processed electronically by 

the swap dealer or major swap 

participant, within the same calendar 

day as execution. 

Under proposed § 23.501(a)(2), swap 

dealers and major swap participants 

entering into swap transactions with 

counterparties that are not swap dealers 

or major swap participants would be 

required to send an acknowledgment of 

each swap transaction according to the 

following timeframe: 

• For any swap transaction that has 

been executed and processed 

electronically, within 15 minutes of 

execution; 

• For any swap transaction that is not 

executed electronically, but that will be 

processed electronically, within 30 

minutes after execution; or 

• For any swap transaction that 

cannot be processed electronically by 

the swap dealer or major swap 

participant, within the same calendar 

day as execution. 

For those swap transactions entered 

into with counterparties that are not 

swap dealers or major swap 

participants, under proposed 

§ 23.501(a)(3), swap dealers and major 

swap participants would be required to 

establish written policies and 

procedures reasonably designed to 

ensure confirmation with financial 

entities on the same calendar day as 

execution and with all other entities by 

the next business day after the swap 

transaction is executed. These 

procedures must include a requirement 

that, prior to entering into any swap 

transaction, the swap dealer or major 

swap participant furnish to a 

prospective counterparty, or receive 

from a prospective counterparty, a draft 

acknowledgment specifying all terms of 

the swap transaction other than pricing 

and terms to be definitively agreed to at 

execution. As is currently the custom in 

many swap markets, including credit 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 81523 

14See ISDA Collateral Committee, ‘‘Commentary 

to the Outline of the 2009 ISDA Protocol for 

Resolution of Disputed Collateral Calls,’’ June 2, 

2009 (stating ‘‘Disputed margin calls have increased 

significantly since late 2007, and especially during 

2008 have been the driver of large (sometimes > $1 

billion) un-collateralized exposures between 

professional firms.’’). 

15The Commission also recognizes and 

encourages the industry practice of immediately 

transferring undisputed collateral amounts. 

16See June 2, 2009 summary of industry 

commitments, available at http://www.isda.org/ 

c_and_a/pdf/060209table.pdf. 

and equity derivative markets, the 

parties may rely on a standard 

confirmation agreement. 

Under proposed § 23.501(b), a swap 

dealer or major swap participant would 

be required to keep records regarding 

the processing of swap 

acknowledgments and confirmations. 

These records would include the time 

and date of transmission or receipt of 

any acknowledgment or confirmation, 

the length of time between transmission 

of any acknowledgment to a 

counterparty and receipt of the signed 

confirmation, and the length of time 

between execution and confirmation of 

the swap. 

In order to retain flexibility for all 

market participants, the proposed rules 

do not prescribe a particular venue or 

platform for confirmation. As noted 

above, currently many swap 

transactions are electronically processed 

by third-party ‘‘matching’’ services. 

While the Commission encourages the 

continued use and expansion of these 

services, the approach taken in the 

proposed rule would allow parties the 

ability to confirm bilaterally through 

whatever means they select, so long as 

they are able to meet the schedule laid 

out in the rule. 

In a similar effort to retain flexibility, 

at this time, the Commission is not 

prescribing the acknowledgment or 

confirmation documentation that market 

participants must use. The Commission 

encourages the use of master 

confirmation agreements and other 

standardized documentation that has 

been developed by the industry in an 

effort to reduce confirmation backlogs, 

among other things. However, the most 

critical aspect of the confirmation rule 

is that all the terms of the swap are 

agreed to in writing and in a timely 

manner. 

The proposed rules would apply to all 

new swaps and to all swap transactions, 

as that term is defined in the rules, 

entered into after the effective date of 

the regulation. 

3. Comments Requested 

The Commission requests comment 

on all aspects of proposed § 23.501. In 

particular, the Commission requests 

comment on the following questions: 

• Does the proposed rule 

appropriately allocate the responsibility 

for providing the swap 

acknowledgments? 

• Is it feasible to require that all 

acknowledgments be provided 

electronically? 

• Should the proposed rule require 

swap dealers and major swap 

participants to provide a swap 

acknowledgment or confirmation more 

quickly, particularly for transactions 

that are executed or processed 

electronically? 

• Does the proposed rule provide 

sufficient time for swap dealers and 

major swap participants to provide 

swap acknowledgments to their 

counterparties? 

• Are there swap transactions for 

which all of the terms required to be 

included on an acknowledgment or in a 

confirmation would not be known on 

the same calendar day as execution? If 

so, please describe these swap 

transactions and include the terms that 

would not be known on the same 

calendar day as execution, as well as the 

reason these terms would not be known. 

• Is it necessary to clarify further that 

the confirmation rule would apply to 

life cycle events, such as termination, 

assignment, novation, exchange, 

transfer, amendment, or conveyance? 

• Are there other post-execution 

events for which a confirmation should 

be executed? 

• Should counterparties be permitted 

to agree expressly that certain life cycle 

events (such as assignment of payable 

rights), do not require subsequent 

confirmations? Are there life cycle 

events that can be carved out of the rule 

while still achieving the purpose of the 

rule? Should more time be permitted for 

confirmation of certain life cycle events, 

such as transfers resulting from a 

merger, consolidation, or transfer of all 

assets to another entity? 

• Should the Commission require that 

electronic matching services or 

confirmation platforms be used where 

reasonably practicable? 

• Does the term ‘‘processed 

electronically’’ require more 

clarification? If so, what definition 

would be effective and flexible enough 

to accommodate future market 

innovation? 

• Should the Commission require that 

all swaps be processed electronically? 

• Are there circumstances where 

swap dealers and major swap 

participants have the ability to process 

a transaction electronically, but should 

not be required to do so? 

• Has the Commission properly 

accounted for current industry practice 

with respect to the time necessary to 

confirm swap transactions? 

• Would the proposed rule unduly 

restrict the types of swaps that swap 

dealers and major swap participants 

may enter into or the persons that may 

be their counterparties? 

• Should executing a swap on a SEF 

or DCM be deemed to satisfy the 

confirmation requirement? 

• Should clearing a swap through a 

DCO be deemed to satisfy the 

confirmation requirement? 

• Should the terms calendar day and 

business day be further defined and has 

the rule properly accounted for 

counterparties in different time zones 

executing swaps? 

B. Swap Portfolio Reconciliation 

1. Background 

Section 4s(i) of the CEA directs the 

Commission to prescribe regulations for 

the timely and accurate confirmation, 

processing, documentation, and 

valuation of all swaps entered into by 

swap dealers and major swap 

participants. Disputes related to 

confirming the terms of a swap, as well 

as swap valuation disputes,14 have long 

been recognized as a significant problem 

in the OTC derivatives market. Portfolio 

reconciliation is considered an effective 

means of identifying and resolving these 

disputes. Specifically, portfolio 

reconciliation is a post-execution 

processing and risk management 

technique that is designed to: 

(1) Identify and resolve discrepancies 

between the counterparties with regard 

to the terms of a swap either 

immediately after execution or during 

the life of the swap; (2) ensure effective 

confirmation of all the terms of the 

swap; and (3) identify and resolve 

discrepancies between the 

counterparties regarding the valuation 

of the swap. In some instances, portfolio 

reconciliation also may facilitate the 

identification and resolution of 

discrepancies between the 

counterparties with regard to valuations 

of collateral held as margin. 

The Commission recognizes that the 

industry has made significant progress 

in adopting the use of portfolio 

reconciliation to decrease the number of 

swap disputes.15 In December 2008, the 

ODSG’s group of 14 major dealers 

committed to execute daily portfolio 

reconciliations for collateralized 

portfolios in excess of 500 trades 

between participating dealers by June of 

2009.16 As of May 2009, all participating 

dealers were satisfying this 

commitment. In October 2009, the 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
81524 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

17See ‘‘ISDA 2010 Convention on the 

Investigation of Disputed Margin Calls’’ and ‘‘ISDA 

2010 Formal Market Polling Procedure.’’ 

18The frequency thresholds are similar: Daily for 

portfolios consisting of 500 or more swaps, at least 

weekly for portfolios consisting of 100–500 swaps, 

and at least quarterly for portfolios consisting of 

less than 100 swaps. 

ODSG committed to publishing a 

feasibility study on market-wide 

portfolio reconciliation that would set 

forth how regular portfolio 

reconciliation could be extended 

beyond the ODSG dealers to include 

smaller banks, buy-side participants, 

and derivative end users. Consistent 

with this publication, the ODSG dealers 

expanded their portfolio reconciliation 

commitment in March 2010 to include 

monthly reconciliation of collateralized 

portfolios in excess of 1,000 trades with 

any counterparty. Most recently, the 

industry has been preparing a new 

‘‘Convention on the Investigation of 

Disputed Margin Calls’’ and a new 

‘‘Formal Market Polling Procedure’’ that 

are intended to ‘‘create a consistent and 

predictable process * * * that 

eliminates present uncertainties and 

delays.’’ 17

Accordingly, the Commission is 

proposing § 23.502, which would 

require swap dealers and major swap 

participants to reconcile their portfolios 

with one another and provide 

counterparties who are not registered as 

swap dealers or major swap participants 

with regular opportunities for portfolio 

reconciliation. In order for the 

marketplace to realize the full risk 

reduction benefits of portfolio 

reconciliation, the Commission is 

proposing to expand portfolio 

reconciliation to all transactions, 

whether collateralized or 

uncollateralized. For the swap market to 

operate efficiently and to reduce 

systemic risk, portfolio reconciliation 

should be a proactive process that 

delivers a consolidated view of 

counterparty exposure down to the 

transaction level. By identifying and 

managing mismatches in key economic 

terms and valuation for individual 

transactions across an entire portfolio, 

overall risk can be identified and 

reduced. 

2. Proposed Portfolio Reconciliation 

Rule 

For the purposes of proposed 

§ 23.502, swap portfolio reconciliation 

would be defined in proposed § 23.500 

as a process by which the two parties to 

one or more swaps: (1) Exchange the 

terms of all swaps in the portfolio 

between the parties; (2) exchange each 

party’s valuation of each swap in a 

portfolio between the parties as of the 

close of business on the immediately 

preceding business day; and (3) resolve 

any discrepancy in material terms and 

valuations. Valuation would be defined 

in proposed § 23.500 as the current 

market value or net present value of a 

swap, and material terms would be 

defined as all terms of a swap required 

to be reported in accordance with part 

45 of this chapter. 

Proposed § 23.502(a) would require 

swap dealers and major swap 

participants to reconcile swap portfolios 

with other swap dealers or major swap 

participants with the following 

frequency: Daily for portfolios 

consisting of 300 or more swaps, at least 

weekly for portfolios consisting of 50 to 

300 swaps, and at least quarterly for 

portfolios consisting of fewer than 50 

swaps. Swap dealers and major swap 

participants would be required to 

resolve immediately any discrepancy in 

a material term identified as part of a 

portfolio reconciliation process. The 

Commission is proposing an immediate 

resolution requirement for material 

terms for the same reasons that 

necessitate timely confirmation—parties 

need to know the terms of their 

executed agreements with one another. 

A discrepancy in the terms of a swap 

likely indicates that the parties have 

failed to confirm the swap in 

accordance with Commission 

regulations, and, therefore, the parties 

should take immediate action to resolve 

the discrepancy. This requirement 

would support and ensure compliance 

with proposed § 23.501, which requires 

a confirmation of all terms of a swap. 

The Commission believes that 

requiring reconciliation of all swap 

portfolios among swap dealers and 

major swap participants (rather than 

only collateralized portfolios, as 

contemplated by the ODSG work) is 

appropriate because CEA section 4s(e) 

requires that swap dealers and major 

swap participants will be subject to 

minimum capital and margin 

requirements. As a result, the 

Commission anticipates that most, if not 

all, swaps entered by swap dealers and 

major swap participants will be subject 

to some form of collateralization. The 

Commission also believes that requiring 

more frequent reconciliation of smaller 

portfolios is appropriate because section 

2(a)(13)(G) of the CEA requires all swaps 

to be reported to a registered swap data 

repository, and, therefore, the 

Commission anticipates that swap 

dealers and major swap participants 

will be able to efficiently reconcile their 

internal records with their 

counterparties electronically by 

reference to data in the repositories. The 

threshold of 300 swaps for daily 

reconciliation is intended to capture 

swap portfolios where there is a high 

likelihood that the swap dealer or major 

swap participant’s counterparty will 

have the technological capacity to 

perform reconciliation processes 

electronically. 

Under proposed § 23.502(a)(5), swap 

dealers and major swap participants 

would be required to resolve any 

discrepancy in a valuation identified as 

part of a portfolio reconciliation process 

within one business day. The 

Commission recognizes that there may 

be reasonable grounds for some 

variation in the calculation of swap 

valuation at any given time. 

Consequently, the proposed rule would 

not require that swap dealers and major 

swap participants expend resources to 

resolve all discrepancies in the 

valuation of the swap, but only if the 

difference between the lower valuation 

and the higher is greater than 10%. 

In addition, given that there are a 

number of services and industry-led 

initiatives that may facilitate resolution 

of valuation disputes, at this time the 

Commission is not proposing to 

mandate that swap dealers and major 

swap participants implement any 

specific procedure for resolution of a 

discrepancy in the valuation of a swap. 

Rather, it is only proposing a deadline 

for dispute resolution of one business 

day following discovery of such 

discrepancy. 

For swap portfolios with entities other 

than swap dealers or major swap 

participants, proposed § 23.502(b) 

would require swap dealers and major 

swap participants to establish written 

policies and procedures to perform 

reconciliation, but would not prescribe 

the manner in which the reconciliation 

must be performed. For example, the 

exchange of terms and valuations 

between the counterparties may consist 

of one party reviewing the details and 

valuations delivered by the other party 

and either affirming or objecting to such 

details and valuations. The frequency 

parameters of portfolio reconciliation 

would be similar to those for swap 

portfolios between swap dealers or 

major swap participants.18 There are 

some important distinctions in the 

proposed treatment of swap portfolios 

between a swap dealer or major swap 

participant and others that promote 

flexibility for those entities that will not 

be registered with the Commission. 

Swap dealers and major swap 

participants would be required simply 

to establish written procedures 

reasonably designed to resolve any 

discrepancies in the material terms or 

valuation of each swap identified as part 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 81525 

19Federal Reserve Bank of New York Staff Report 

No. 424: ‘‘Policy Perspectives on OTC Derivatives 

Market Infrastructure,’’ Jan. 2010 (revised Mar. 

2010). 

20See http://www.trioptima.com. 

21See ‘‘ISDA 2009 A Yearbook of ISDA 

Activities,’’ International Swaps and Derivatives 

Association, Inc. (2009). 

22 ‘‘Policy Objectives for the OTC Derivatives 

Markets,’’ President’s Working Group on Financial 

Markets (Nov. 14, 2008). 

23Federal Reserve Bank of New York Staff Report 

No. 424: ‘‘Policy Perspectives on OTC Derivatives 

Market Infrastructure,’’ Jan. 2010 (revised Mar. 

2010). 

of a portfolio reconciliation process in a 

timely fashion. Again, differences in 

valuation of a swap need not be deemed 

a discrepancy unless the difference 

between the lower valuation and the 

higher valuation is greater than 10% of 

the higher valuation. 

Proposed § 23.502(c) would create a 

safe harbor for cleared swaps because 

portfolio reconciliation is needed 

primarily for uncleared swaps. When 

swaps are cleared, the clearinghouse 

requires that each swap be matched 

prior to novation by the clearinghouse. 

Moreover, once cleared, clearinghouses 

determine daily settlement prices, 

which preclude any valuation disputes. 

The proposed rule would apply to all 

swaps within a swap portfolio as of the 

effective date of the regulation. 

Finally, proposed § 23.502(d) would 

require that swap dealers and major 

swap participants maintain records of 

each discrepancy identified during 

portfolio reconciliation and the length 

of time taken to resolve that 

discrepancy. 

3. Comments Requested 

The Commission requests comment 

on all aspects of proposed § 23.502(d). 

In particular, the Commission requests 

comment on the following questions: 

• Are the proposed deadlines for 

swap portfolio discrepancy resolution in 

the proposed regulation appropriate? 

• Are the reconciliation thresholds 

and frequency requirements 

appropriate? 

• Are swap dealers and major swap 

participants likely to have a large 

number of counterparties with whom 

they would be required to perform daily 

reconciliation that do not have the 

technological capacity to perform 

reconciliation processes electronically? 

• Is the proposal that a valuation 

difference of less than 10% not be 

deemed to be a discrepancy 

appropriate? If not, please provide a 

suggested valuation discrepancy 

threshold. 

• Should the proposed rule include a 

provision that requires discrepancy 

resolution if the aggregate of valuation 

differences of less than 10% across a 

portfolio exceeds a certain threshold? If 

so, please provide a suggested 

threshold. 

• How would the requirement to 

resolve valuation discrepancies in one 

day for swaps among swap dealers and 

major swap participants affect the very 

detailed and complex industry 

initiatives currently being considered 

for resolving valuation disputes? 

• Should all terms of a swap 

transaction be reconciled or just the key 

economic terms? 

• Should all discrepancies in swap 

transaction terms be resolved or just the 

material ones? 

• Should the definition of material 

terms be clarified? 

• Should financial entities as defined 

in proposed § 23.500 be required to 

participate in portfolio reconciliation 

under proposed § 23.502(a)? 

C. Portfolio Compression 

1. Background 

Section 4s(i) of the CEA directs the 

Commission to prescribe regulations for 

the timely and accurate processing and 

netting of all swaps entered into by 

swap dealers and major swap 

participants. Portfolio compression is an 

important, post-trade processing and 

netting mechanism that can be an 

effective and efficient tool for the timely 

and accurate processing and netting of 

swaps by market participants. 

Accordingly, the Commission is 

proposing § 23.503, which would 

require swap dealers and major swap 

participants to engage in certain 

bilateral and multilateral portfolio 

compression exercises. 

Portfolio compression is a mechanism 

whereby substantially similar 

transactions among two or more 

counterparties are terminated and 

replaced with a smaller number of 

transactions of decreased notional value 

in an effort to reduce the risk, cost, and 

inefficiency of maintaining unnecessary 

transactions on the counterparties’ 

books. In many cases, these redundant 

or economically-equivalent positions 

serve no useful business purpose, but 

can create unnecessary risk,19 as well as 

operational and capital inefficiencies. In 

a portfolio compression exercise, swap 

market participants whose combined 

portfolios include outstanding 

transactions that contain substantially 

similar economic terms and/or that 

would result in redundant payments 

wholly or partially net their swaps by 

terminating the original swaps and 

replacing them with a smaller number 

of new transactions that have a lower 

gross notional value. 

Market vendors assert that as many as 

40,000 trades can be terminated in a 

single portfolio compression cycle.20

Because portfolio compression 

participants are permitted to establish 

their own credit, market, and cash 

payment risk tolerances and to establish 

their own mark-to-market values for the 

transactions to be compressed, the 

process does not alter the risk profiles 

of the individual participants beyond a 

level acceptable to the participant. 

Portfolio compression exercises can 

be performed on a bilateral or 

multilateral basis. Multilateral 

compression exercises are preferable 

because the larger number of 

participants significantly increases the 

number of trades that can be eliminated 

and removes the need for bilateral 

negotiation between counterparties. In a 

multilateral portfolio compression 

exercise, the replacement swaps may be 

with the same or different 

counterparties. 

The benefits of portfolio compression 

to both individual market participants 

and to the market as a whole are 

considerable. The reduced transaction 

count decreases operational risk 

generally as there are fewer trades to 

maintain, process, and settle.21 The 

reduction in the outstanding gross 

notional value of the swaps also allows 

for increased capital liquidity and 

efficiency. Firms can set aside less 

capital for their positions while 

maintaining their desired risk positions 

in the market. The diminished 

operational risk for the individual 

market participants achieved by 

portfolio compression, in turn, may 

lessen systemic risk and enhance the 

overall stability of the financial markets. 

Compression also may provide a more 

accurate expression of overall market 

size and composition, and provide 

market participants with a more precise 

picture of their exposures. 

The usefulness of portfolio 

compression as a risk management tool 

has been acknowledged widely. In 2008, 

the PWG identified frequent portfolio 

compression of outstanding trades as a 

key policy objective in the effort to 

strengthen the OTC derivatives market 

infrastructure.22 Similarly, the 2010 

staff report outlining policy perspectives 

on OTC derivatives infrastructure issued 

by the FRBNY identified trade 

compression as an element of strong risk 

management and recommended that 

market participants engage in regular, 

market-wide portfolio compression 

exercises.23

The value of portfolio compression 

also is illustrated by existing market 

participation in compression exercises. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
81526 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

24 DTCC Press Release, ‘‘DTCC Trade Information 

Warehouse Completes Record Year Processing OTC 

Credit Derivatives’’ (Mar. 11, 2010). Notably, 

beginning in August 2008, ISDA encouraged 

compression exercises for credit default swaps by 

selecting the service provider and defining the 

terms of service. 

25See http://www.trioptima.com. Between 2007 

and 2008, TriOptima reduced $54.7 trillion gross 

notional of interest rate swaps and $49.1 trillion 

gross notional of credit swaps. In March of 2010, 

the staff of the Federal Reserve Bank of New York 

estimated that since 2008 nearly $50 trillion gross 

notional of credit default swap positions has been 

eliminated through portfolio compression. Federal 

Reserve Bank of New York Staff Report No. 424: 

‘‘Policy Perspectives on OTC Derivatives Market 

Infrastructure,’’ Jan. 2010 (revised Mar. 2010). 

26See http://www.isdacdsmarketplace.com. 

27At the present time, the principal portfolio 

compression vendors offer compression exercises 

for limited types of trades in a limited number of 

asset classes. Compression currently is available for 

certain interest rate swaps and credit default swaps 

and, to a lesser degree, specific energy products. For 

example, TriOptima’s TriReduce service provides 

portfolio compression services for: (1) Interest rate 

swap transactions in twenty-three currencies; (2) 

credit default swaps (index, single name, and 

tranches); and (3) a more limited number of energy 

products. Markit and Creditex offer portfolio 

compression for credit default swaps. 

In March 2010, the Depository Trust and 

Clearing Corporation (DTCC) explicitly 

attributed the reduction in the gross 

notional value of the contracts in its 

warehouse to industry supported 

portfolio compression.24 TriOptima, 

which offers the TriReduce portfolio 

compression service, estimates that it 

has terminated $106.3 trillion gross 

notional of interest rate swaps and $66.9 

trillion gross notional of credit swaps 

since its inception in 2003.25 Similarly, 

Creditex and Markit, which offer 

portfolio compression exercises in 

single name credit default swaps, have 

enabled participating institutions to 

eliminate $4.5 trillion in notional 

between late 2008 through 2009.26

2. Proposed Compression Rule 

Based upon these considerations, the 

Commission is proposing § 23.503, 

which would impose certain portfolio 

compression requirements upon swap 

dealers and major swap participants. 

Specifically, swap dealers and major 

swap participants would be required to 

participate in multilateral compression 

exercises that are offered by those DCOs 

or self-regulatory organizations of which 

the swap dealer or major swap 

participant is a member. The 

Commission would encourage swap 

dealers and major swap participants to 

work with the DCOs and self-regulatory 

organizations of which they are 

members to develop portfolio 

compression opportunities. 

The portfolio compression obligation 

would be limited to swaps in which the 

counterparty is also a swap dealer or 

major swap participant and swaps that 

are eligible for inclusion in the exercise, 

as determined by those conducting the 

compression exercise and agreed to by 

those participating in the exercise. A 

swap dealer or major swap participant 

would be permitted to exclude swaps 

from a compression exercise if 

including the swap would be reasonably 

likely to increase significantly the risk 

exposure of the swap dealer or major 

swap participant. A swap dealer or 

major swap participant also would be 

permitted to establish counterparty, 

market, cash payment, and other risk 

tolerances and to exclude potential 

counterparties from the compression 

exercise, provided that the swap dealer 

or major swap participant is not using 

the risk tolerances or counterparty 

exclusions to evade the compression 

requirements. 

In recognition that portfolio 

compression currently is not available 

for all asset classes and all transactions 

within an asset class,27 the Commission 

also is proposing that swap dealers and 

major swap participants be required to 

terminate bilaterally all fully offsetting 

swaps between them by the close of 

business on the business day following 

the day the parties entered into the 

offsetting swap transaction and to 

engage annually in bilateral portfolio 

compression exercises with 

counterparties that are also swap dealers 

or major swap participants. Swap 

dealers and major swap participants 

need not engage in bilateral portfolio 

compression exercises, however, to the 

extent that the counterparties have 

mutually participated in a multilateral 

exercise involving the swaps between 

them during the same year. 

The Commission anticipates that 

portfolio compression exercises will be 

offered by additional vendors and will 

encompass additional products and 

asset classes as the industry progresses 

toward increased product 

standardization and centralized 

clearing. To afford the Commission the 

flexibility to react to the expected future 

availability and need for portfolio 

compression exercises, proposed 

§ 23.503 also would require swap 

dealers and major swap participants to 

participate in all multilateral portfolio 

compression exercises required by 

Commission regulation or order. 

Proposed § 23.503 would not mandate 

portfolio compression exercises for 

swaps outstanding between a swap 

dealer or a major swap participant and 

counterparties that are neither swap 

dealers nor major swap participants. 

Instead, swap dealers and major swap 

participants would be required to 

maintain written policies and 

procedures for periodically terminating 

all fully offsetting swaps and 

periodically engaging in compression 

exercises. 

The proposed rule would apply to all 

swaps within a swap portfolio as of the 

effective date of the regulation. 

3. Comments Requested 

The Commission is requesting 

comment on all aspects of the portfolio 

compression rule, and specifically 

requests comment on the following 

questions: 

• Should the Commission require 

swap dealers and major swap 

participants to engage in bilateral and 

multilateral compression exercises, 

particularly with respect to transactions 

where the counterparty is not a swap 

dealer or major swap participant? 

• Should the compression 

requirement be restricted to particular 

asset classes? 

• With what frequency should 

bilateral or multilateral compression be 

required? 

• What are the costs associated with 

engaging in bilateral and multilateral 

compression and are such costs a barrier 

to participation? 

• Should the Commission expressly 

define the transactions that are eligible 

for inclusion in a portfolio compression 

exercise or leave that determination to 

those conducting the compression 

exercise and/or to those participating in 

the exercise? 

• What factors (e.g., sufficiently 

standardized terms) would render a 

particular swap eligible or ineligible for 

inclusion in a bilateral or multilateral 

compression exercise? 

• Should the Commission provide 

specific risk management, accounting, 

regulatory, and other rationale under 

which a swap dealer or major swap 

participant may exclude particular 

swaps transactions from a multilateral 

portfolio compression exercise? 

• How much time would be sufficient 

to allow swap dealers and major swap 

participants to come into compliance 

with the proposed portfolio 

compression requirements? 

• Should the Commission require 

participation in compression exercises 

conducted only by registered derivatives 

clearing organizations or by all central 

counterparties of which the swap dealer 

or major swap participant may be a 

member? 

• Should financial entities as defined 

in proposed § 23.500 be subject to the 

provisions of § 23.503(a), (b), and (c)? 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 81527 

28 5 U.S.C. 601 et seq. 

29 47 FR 18618, Apr. 30, 1982. 

30 Id. at 18619. 

31 Id. 

32 Id. at 18620. 33 44 U.S.C. 3501 et seq. 

III. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires that agencies consider whether 

the rules they propose will have a 

significant economic impact on a 

substantial number of small entities.28

The Commission previously has 

established certain definitions of ‘‘small 

entities’’ to be used in evaluating the 

impact of its regulations on small 

entities in accordance with the RFA.29

The proposed rules would affect swap 

dealers and major swap participants. 

Swap dealers and major swap 

participants are new categories of 

registrants. Accordingly, the 

Commission has not previously 

addressed the question of whether such 

persons are, in fact, small entities for 

purposes of the RFA. However, the 

Commission previously has determined 

that futures commission merchants 

should not be considered to be small 

entities for purposes of the RFA.30 The 

Commission’s determination was based, 

in part, upon the obligation of futures 

commission merchants to meet the 

minimum financial requirements 

established by the Commission to 

enhance the protection of customers’ 

segregated funds and protect the 

financial condition of futures 

commission merchants generally.31 Like 

futures commission merchants, swap 

dealers will be subject to minimum 

capital and margin requirements and are 

expected to comprise the largest global 

financial firms. The Commission is 

required to exempt from swap dealer 

designation any entities that engage in 

a de minimis level of swaps dealing in 

connection with transactions with or on 

behalf of customers. The Commission 

anticipates that this exemption would 

tend to exclude small entities from 

registration. Accordingly, for purposes 

of the RFA for this rulemaking, the 

Commission is hereby proposing that 

swap dealers not be considered ‘‘small 

entities’’ for essentially the same reasons 

that futures commission merchants have 

previously been determined not to be 

small entities and in light of the 

exemption from the definition of swap 

dealer for those engaging in a de 

minimis level of swap dealing. 

The Commission also has previously 

determined that large traders are not 

‘‘small entities’’ for RFA purposes.32 In 

that determination, the Commission 

considered that a large trading position 

was indicative of the size of the 

business. Major swap participants, by 

statutory definition, maintain 

substantial positions in swaps or 

maintain outstanding swap positions 

that create substantial counterparty 

exposure that could have serious 

adverse effects on the financial stability 

of the United States banking system or 

financial markets. Accordingly, for 

purposes of the RFA for this 

rulemaking, the Commission is hereby 

proposing that major swap participants 

not be considered ‘‘small entities’’ for 

essentially the same reasons that large 

traders have previously been 

determined not to be small entities. 

Moreover, the Commission is carrying 

out Congressional mandates by 

proposing this regulation. Specifically, 

the Commission is proposing these 

regulations to comply with the DoddFrank Act, the aim of which is to reduce 

systemic risk presented by swap dealers 

and swap market participants through 

comprehensive regulation. The 

Commission does not believe that there 

are regulatory alternatives to those being 

proposed that would be consistent with 

the statutory mandate. Accordingly, the 

Chairman, on behalf of the Commission, 

hereby certifies pursuant to 5 U.S.C. 

605(b) that the proposed rules will not 

have a significant economic impact on 

a substantial number of small entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act 

(PRA) 33 imposes certain requirements 

on Federal agencies (including the 

Commission) in connection with their 

conducting or sponsoring any collection 

of information as defined by the PRA. 

This proposed rulemaking would result 

in new collection of information 

requirements within the meaning of the 

PRA. The Commission therefore is 

submitting this proposal to the Office of 

Management and Budget (OMB) for 

review in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. The title for 

this collection of information is 

‘‘Confirmation, Portfolio Reconciliation, 

and Portfolio Compression 

Requirements for Swap Dealers and 

Major Swap Participants.’’ 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. The OMB has not yet assigned 

this collection a control number. 

The collection of information under 

these proposed rules is necessary to 

implement certain provisions of the 

CEA, as amended by the Dodd-Frank 

Act. Specifically, it is essential to 

ensuring that swap dealers and major 

swap participants document the terms 

of all of their swaps, reconcile their 

swap portfolios to resolve any 

discrepancies or disputes, and wholly or 

partially terminate some or all 

outstanding swaps through regular 

compression exercises. Commission 

staff would use the information related 

to each of these important risk-reducing 

activities when conducting the 

Commission’s examination and 

oversight program with respect to the 

registrants. 

If the proposed regulations are 

adopted, responses to this collection of 

information would be mandatory. The 

Commission will protect proprietary 

information according to the Freedom of 

Information Act and 17 CFR part 145, 

‘‘Commission Records and Information.’’ 

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

strictly prohibits the Commission, 

unless specifically authorized by the 

CEA, from making public ‘‘data and 

information that would separately 

disclose the business transactions or 

market positions of any person and 

trade secrets or names of customers.’’ 

The Commission also is required to 

protect certain information contained in 

a government system of records 

according to the Privacy Act of 1974, 5 

U.S.C. 552a. 

1. Information Provided by Reporting 

Entities/Persons 

Proposed §§ 23.501, 23.502, and 

23.503 would require swap dealers and 

major swap participants to make and 

retain records of confirmations, 

portfolio reconciliations, and portfolio 

compression exercises. The proposed 

regulations do not impose any reporting 

requirements. The proposed regulations 

will be an important part of the 

Commission’s regulatory program for 

swap dealers and major swap 

participants. The information required 

to be preserved would be used by 

representatives of the Commission and 

any examining authority responsible for 

reviewing the activities of the swap 

dealer or major swap participant to 

ensure compliance with the CEA and 

applicable Commission regulations. 

The annual burden associated with 

these proposed regulations is estimated 

to be 1,282.5 hours, at an annual cost of 

$1,282,250 for each swap dealer and 

major swap participant. Burden means 

the total time, effort or financial 

resources expended by persons to 

generate, maintain, retain, disclose, or 

provide information to or for a Federal 

agency. Specifically, the Commission 

anticipates that swap dealers and major 

swap participants will spend an average 

of 40 hours per year drafting and 


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34http://www.bls.gov/oes/current/oes113031.htm. 

35 Due to the absence of prior experience in 

regulating swap dealers and major swap 

participants and with regulations similar to the 

proposed rules, the actual, average number of 

counterparties that a swap dealer or major swap 

participant is likely to have and the average size of 

its portfolio with particular counterparties is 

uncertain. The estimate of 5,600 portfolio 

reconciliation records is based upon the assumption 

that each swap dealer and major swap participant 

engages in swap transactions with approximately 

one third (100) of the other swap dealers or major 

swap participants and that 10% of such portfolios 

would require daily reconciliation; 20% would 

require weekly reconciliation; and 70% would 

require quarterly reconciliation. The estimate also 

is based upon the assumption that a swap dealer or 

major swap participant has an average of 440 other 

counterparties and that all of the portfolios with 

those counterparties generally would be limited to 

quarterly reconciliation. Consistent with other 

proposed rulemakings, the Commission has 

estimated that each of the 14 major swap dealers 

has an average 7,500 counterparties and the other 

286 swap dealers and major swap participants have 

an average of 200 counterparties per year, for an 

average of 540 total counterparties per registrant. 

The Commission estimates that 440 of those 

counterparties would not be other swap dealers or 

major swap participants. 

36This estimate assumes that swap dealers and 

major swap participants would engage in 

multilateral compression exercises for 2 asset 

classes at an average rate of 12 multilateral 

compression exercises per year (approximately 1 

per month). 

updating the policies and procedures 

required by the proposed regulations; 

252 hours per year making and retaining 

the acknowledgment and confirmation 

records required by proposed § 23.501; 

812 hours per year making and retaining 

the portfolio reconciliation records 

required by proposed § 23.502; and 

178.5 hours per year making and 

retaining the bilateral offset and 

portfolio compression records required 

by proposed § 23.503. 

It is not currently known how many 

swap dealers and major swap 

participants will become subject to 

these rules, and this will not be known 

to the Commission until the registration 

requirements for these entities become 

effective after July 16, 2011, the date on 

which the Dodd-Frank Act becomes 

effective. While the Commission 

believes there will be approximately 200 

swap dealers and 50 major swap 

participants, it has taken a conservative 

approach, for PRA purposes, in 

estimating that there will be a combined 

number of 300 swap dealers and major 

swap participants who will be required 

to comply with the recordkeeping 

requirements of the proposed rules. The 

Commission estimated the number of 

affected entities based on industry data. 

According to recent Bureau of Labor 

Statistics findings, the mean hourly 

wage of an employee under occupation 

code 11–3031, ‘‘Financial Managers,’’ 

(which includes operations managers) 

that is employed by the ‘‘Securities and 

Commodity Contracts Intermediation 

and Brokerage’’ industry is $74.41.34

Because swap dealers and major swap 

participants include large financial 

institutions whose operations 

management employees’ salaries may 

exceed the mean wage, the Commission 

has estimated the cost burden of these 

proposed regulations based upon an 

average salary of $100 per hour. 

Accordingly, the estimated burden 

was calculated as follows: 

Drafting and Updating Policies and 

Procedures. This hourly burden arises 

from the time necessary to develop and 

periodically update the policies and 

procedures required by the proposed 

regulations. 

Number of registrants: 300. 

Frequency of collection: Initial 

implementation, updating as needed. 

Estimated number of annual 

responses per registrant: 1. 

Estimated aggregate number of 

annual responses: 300. 

Estimated annual hour burden per 

registrant: 40 hours. 

Estimated aggregate annual hour 

burden: 12,000 burden hours [300 

registrants × 40 hours per registrant]. 

Acknowledgment and Confirmation 

Recordkeeping. This hourly burden 

arises from the proposed requirement 

that swap dealers and major swap 

participants make and maintain records 

of the date and time of transmission to, 

or receipt from, a counterparty of an 

acknowledgment or confirmation; the 

length of time between the 

acknowledgment and confirmation of 

each swap; and the length of time 

between execution and confirmation of 

each swap. 

Number of registrants: 300. 

Frequency of collection: daily. 

Estimated number of annual 

responses per registrant: 252 [252 

trading days]. 

Estimated aggregate number of 

annual responses: 75,600 [300 

registrants × 252 trading days]. 

Estimated annual hour burden per 

registrant: 252 [252 trading days × 1 

hour per day]. 

Estimated aggregate annual hour 

burden: 75,600 burden hours [300 × 252 

hours]. 

Portfolio Reconciliation 

Recordkeeping. This hourly burden 

arises from the proposed requirement 

that swap dealers and major swap 

participants make and maintain records 

of the portfolio reconciliation exercises 

in which they engage. Registrants would 

be required to reconcile portfolios with 

counterparties that are swap dealers and 

major swap participants on a daily, 

weekly, or quarterly basis, depending 

upon the size of the portfolio. They also 

would be required to maintain policies 

and procedures for conducting portfolio 

reconciliation with other counterparties 

with similar frequency. 

Number of registrants: 300. 

Frequency of collection: daily, 

weekly, or quarterly. 

Estimated number of annual 

responses per registrant: 8,120.35

Estimated aggregate number of 

annual responses: 2,436,000 [300 

registrants × 8,120 responses]. 

Estimated annual hour burden per 

registrant: 812 hours [8,120 × .10 hours 

per response]. 

Estimated aggregate annual hour 

burden: 243,600 burden hours [300 

registrants × 812 hours per registrant]. 

Portfolio Compression Recordkeeping. 

This hourly burden results from the 

proposed requirement that swap dealers 

and major swap participants make and 

maintain records of the bilateral offsets 

and portfolio compression exercises in 

which they participate, including the 

beginning and completion dates; the 

swaps that were included and excluded; 

the applicable risk tolerance levels; and 

the results of the particular exercise. 

The proposed regulations would require 

that each swap dealer and major swap 

participant terminate fully offsetting 

swaps; participate in certain multilateral 

compression exercises; and participate 

in annual bilateral portfolio 

compression exercises with each 

counterparty that is also a swap dealer 

or major swap participant (except to the 

extent that the counterparties 

participate in multilateral compression 

exercises for the same swaps). Swap 

dealers and major swap participants 

also would be required to maintain 

policies and procedures for periodically 

engaging in portfolio compression 

exercises with other counterparties. 

Number of registrants: 300. 

Frequency of collection: As needed. 

Estimated number of annual 

responses per registrant: 1,029 [24 

multilateral compression records 36] + 

[465 bilateral compression exercise 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
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37As with other approximations set forth in this 

proposal, the estimate of 465 bilateral compression 

exercise records is based upon the assumption that 

each swap dealer and major swap participant 

engages in swap transactions with approximately 

one third (100) of the other swap dealers or major 

swap participants. Because it is anticipated that 

most swaps between swap dealers and major swap 

participants would be eligible for multilateral 

portfolio compression exercises, the Commission 

expects that a swap dealer or major swap 

participant would need to engage in annual 

bilateral compression with only one quarter of (25) 

such counterparties. The estimate also is based 

upon the assumption that the average swap dealer 

or major swap participant has an average of 440 

non-swap dealer or major swap participant 

counterparties and would engage in 1 bilateral 

portfolio compression exercise with each. This 

would result in a total of 465 bilateral portfolio 

compression records (25 + 440). 

38This estimate is based upon the assumption 

that each swap dealer and major swap participant 

will have an average of 1 set of swaps that is eligible 

for annual bilateral offset with each of its estimated 

540 counterparties per year. 39http://www.bls.gov/oes/current/oes113031.htm. 40 7 U.S.C. 19(a). 

records 37] + [540 bilateral offset 

records 38]. 

Estimated aggregate number of 

annual responses: 308,700 [300 

registrants × 1,029 responses per year]. 

Estimated annual hour burden per 

registrant: 178.5 hours [24 multilateral 

compression records × .5 hours per 

records] + [465 bilateral compression 

exercise records × .3 hours per records] 

+ [540 bilateral offset records × .05 

hours per record]. 

Estimated aggregate annual hour 

burden: 53,550 burden hours [300 

registrants × 178.5 hours per registrant]. 

Based upon the above, the aggregate 

hourly burden for all registrants is 

334,350 hours and $33,435,000 [334,350 

× $100 per hour]. 

In addition to the per hour burden 

discussed above, the Commission 

anticipates that swap dealers and major 

swap participants may incur minimal 

start-up costs in connection with the 

proposed recordkeeping obligations. 

Such costs would include the 

expenditures related to developing and 

installing new recordkeeping 

technology or re-programming or 

updating existing recordkeeping 

technology and systems to enable the 

swap dealer or major swap participant 

to collect, maintain, and re-produce any 

newly required records. The 

Commission believes that swap dealers 

and major swap participants generally 

could adapt their current infrastructure 

to accommodate the new or amended 

technology and thus, no significant 

infrastructure expenditures would be 

needed. The Commission estimates the 

programming burden hours associated 

with technology improvements to be 40 

hours. 

According to recent Bureau of Labor 

Statistics findings, the mean hourly 

wages of computer programmers under 

occupation code 15–1021 and computer 

software engineers under program codes 

15–1031 and 1032 are between $34.10 

and $44.94.39 Because swap dealers and 

major swap participants generally will 

be large entities that may engage 

employees with wages above the mean, 

the Commission has conservatively 

chosen to use a mean hourly 

programming wage of $60 per hour. 

Accordingly, the start-up burden 

associated with the required 

technological improvements would be 

$2,400 [$60 × 40 hour per affected 

registrant] or $720,000 in the aggregate. 

2. Information Collection Comments 

The Commission invites the public 

and other Federal agencies to comment 

on any aspect of the recordkeeping 

burdens discussed above. The 

Commission specifically requests 

comment on the variables used in the 

above-referenced hourly burden 

calculations. For example, the 

Commission requests comment on the 

following: 

• What is the total number of swap 

dealers and major swap participants in 

the marketplace? 

• What is the average number of 

counterparties that a swap dealer or 

major swap participant is likely to have? 

• What percentage of those 

counterparties are other swap dealers or 

major swap participants? 

• What is the average size (number of 

swaps) of a portfolio that a swap dealer 

or major swap participant is likely to 

have with a particular type of 

counterparty? 

• What is the average number of 

acknowledgment and confirmation 

records that a swap dealer or major 

swap participant would likely be 

required to make under the proposed 

regulations? 

Pursuant to 44 U.S.C. 3506(c)(2)(B), 

the Commission solicits comments in 

order to: (i) Evaluate whether the 

proposed collection of information is 

necessary for the proper performance of 

the functions of the Commission, 

including whether the information will 

have practical utility; (ii) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed collection 

of information; (iii) determine whether 

there are ways to enhance the quality, 

utility, and clarity of the information to 

be collected; and (iv) minimize the 

burden of the collection of information 

on those who are to respond, including 

through the use of automated collection 

techniques or other forms of information 

technology. 

Comments may be submitted directly 

to the Office of Information and 

Regulatory Affairs, by fax at (202) 395– 

6566 or by e-mail at 

OIRAsubmissions@omb.eop.gov. Please 

provide the Commission with a copy of 

submitted comments so that all 

comments can be summarized and 

addressed in the final rule preamble. 

Refer to the Addresses section of this 

notice of proposed rulemaking for 

comment submission instructions to the 

Commission. 

A copy of the supporting statements 

for the collections of information 

discussed above may be obtained by 

visiting RegInfo.gov. OMB is required to 

make a decision concerning the 

collection of information between 30 

and 60 days after publication of this 

document in the Federal Register. 

Therefore, a comment is best assured of 

having its full effect if OMB receives it 

within 30 days of publication. 

C. Cost-Benefit Analysis 

Section 15(a) of the CEA40 requires 

the Commission to consider the costs 

and benefits of its actions before issuing 

a rulemaking under the CEA. By its 

terms, Section 15(a) does not require the 

Commission to quantify the costs and 

benefits of a new regulation or to 

determine whether the benefits of the 

rule outweigh its costs; rather, it 

requires that the Commission ‘‘consider’’ 

the costs and benefits of its actions. 

Section 15(a) further specifies that 

costs and benefits of a proposed 

rulemaking shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may, in its discretion, give 

greater weight to any one of the five 

enumerated considerations and could, 

in its discretion, determine that, 

notwithstanding its costs, a particular 

regulation was necessary or appropriate 

to protect the public interest or to 

effectuate any of the provisions or to 

accomplish any of the purposes of the 

CEA. 

Summary of proposed requirements. 

The proposed regulations would 

implement new section 4s(i) of the CEA 

which was added by section 731 of the 

Dodd-Frank Act. The proposed 

regulations would set forth certain 

requirements for swap confirmations, 

portfolio reconciliation, and portfolio 

compression applicable to swap dealers 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
81530 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

and major swap participants and related 

recordkeeping requirements. 

Costs. With respect to costs, the 

Commission has determined that the 

nominal cost that would be borne by 

swap dealers and major swap 

participants to institute the policies and 

procedures and recordkeeping systems 

necessary to satisfy the new regulatory 

requirements are far outweighed by the 

benefits that would accrue to the 

financial system as a whole as a result 

of the implementation of the rules. It is 

expected that any additional cost 

imposed by the confirmation, portfolio 

reconciliation, and portfolio 

compression requirements of proposed 

§§ 23.501, 23.502, and 23.503 would be 

minimal because the confirmation, 

reconciliation, and compression 

processes required under the rules are 

already part of a prudent operational 

processing regime that many, if not 

most, swap dealers and major swap 

participants already undertake as part of 

their ordinary course of business. 

Moreover, most swap dealers and 

major swap participants have adequate 

resources and existing back office 

operational systems that are capable of 

adjusting to the new regulatory 

framework without material diversion of 

resources away from commercial 

operations. As discussed in the 

preamble, there are also numerous 

third-party vendors that provide 

confirmation, compression, and 

reconciliation services. Some of these 

providers charge fees based on results 

achieved (such as number of swaps 

compressed) and, thus, the cost would 

be necessarily proportionate to the 

benefit. 

Benefits. With respect to benefits, the 

Commission has determined that the 

proposed regulations would require a 

swap dealer or major swap participant 

to confirm, reconcile, and compress 

their swaps in a manner that will result 

in reduced risk, increased transparency, 

and greater market integrity in the 

swaps market. The proposed swap 

confirmation, portfolio reconciliation, 

and portfolio compression rules would 

further the goal of avoiding market 

disruptions and financial losses to 

market participants and the general 

public. Among other benefits, the 

proposed rules would promote levels of 

operational scalability and resilience 

that are most evident in periods of 

sustained high volume and market 

volatility. Therefore, the Commission 

believes it is prudent to prescribe these 

proposed regulations. 

Public Comment. The Commission 

invites public comment on its costbenefit considerations. Commentators 

are also invited to submit any data or 

other information that they may have 

quantifying or qualifying the costs and 

benefits of the proposed rules with their 

comment letters. 

List of Subjects in 17 CFR Part 23 

Antitrust, Commodity futures, 

Conduct standards, Conflict of Interests, 

Major swap participants, Reporting and 

recordkeeping, Swap dealers, Swaps. 

For the reasons stated in this release, 

the Commission proposes to amend 17 

CFR part 23, as proposed to be added in 

FR Doc. 2010–XXXX, published on 

XXXX (75 FR XXXX), as follows: 

PART 23—SWAP DEALERS AND 

MAJOR SWAP PARTICIPANTS 

1. The authority citation for part 23 to 

read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 

6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a, 

18, 19, 21. 

2. Subpart I, (consisting of §§ 23.500, 

23.501, 23.502, and 23.503) is added to 

read as follows: 

Subpart I—Swap Documentation 

Sec. 

23.500 Definitions. 

23.501 Swap confirmation. 

23.502 Portfolio reconciliation. 

23.503 Portfolio compression. 

Subpart I—Swap Documentation 

§ 23.500 Definitions. 

For purposes of subpart I, the 

following terms shall be defined as 

provided. 

(a) Acknowledgment means a written 

or electronic record of all of the terms 

of a swap signed and sent by one 

counterparty to the other. 

(b) Bilateral portfolio compression 

exercise means an exercise in which two 

swap counterparties wholly or partially 

terminate some or all of the swaps 

outstanding between those 

counterparties and replace those swaps 

with a smaller number of swaps whose 

combined notional value is less than the 

combined notional value of the original 

swaps included in the exercise. 

(c) Confirmation means the 

consummation (electronically or 

otherwise) of legally binding 

documentation (electronic or otherwise) 

that memorializes the agreement of the 

counterparties to all of the terms of a 

swap transaction. A confirmation must 

be in writing (whether electronic or 

otherwise) and must legally supersede 

any previous agreement (electronically 

or otherwise). A confirmation is created 

when an acknowledgment is manually, 

electronically, or by some other legally 

equivalent means, signed by the 

receiving counterparty. 

(d) Execution means, with respect to 

a swap transaction, an agreement by the 

counterparties (whether orally, in 

writing, electronically, or otherwise) to 

the terms of the swap transaction that 

legally binds the counterparties to such 

terms under applicable law. 

(e) Financial entity has the meaning 

given to the term in section 2h(7)(C) of 

the Act and any Commission regulations 

promulgated thereunder, provided that 

the term shall not include a swap dealer 

or major swap participant. 

(f) Fully offsetting swaps means swaps 

of equivalent terms where no net cash 

flow would be owed to either 

counterparty after the offset of payment 

obligations thereunder. 

(g) Material terms means all terms of 

a swap required to be reported in 

accordance with part 45 of this chapter. 

(h) Multilateral portfolio compression 

exercise means an exercise in which 

multiple swap counterparties wholly or 

partially terminate some or all of the 

swaps outstanding among those 

counterparties and replace the swaps 

with a smaller number of swaps whose 

combined notional value is less than the 

combined notional value of the original 

swaps included in the exercise. The 

replacement swaps may be with the 

same or different counterparties. 

(i) Portfolio reconciliation means any 

process by which the two parties to one 

or more swaps: 

(1) Exchange the terms of all swaps in 

the swap portfolio between the 

counterparties; 

(2) Exchange each counterparty’s 

valuation of each swap in the swap 

portfolio between the counterparties as 

of the close of business on the 

immediately preceding business day; 

and 

(3) Resolve any discrepancy in 

material terms and valuations. 

(j) Processed electronically means to 

be entered into a swap dealer or major 

swap participant’s computerized 

processing systems to facilitate 

clearance and settlement. 

(k) Prudential regulator has the 

meaning given to the term in section 

1a(39) of the Commodity Exchange Act 

and includes the Board of Governors of 

the Federal Reserve System, the Office 

of the Comptroller of the Currency, the 

Federal Deposit Insurance Corporation, 

the Farm Credit Association, and the 

Federal Housing Finance Agency, as 

applicable to the swap dealer or major 

swap participant. The term also 

includes the Federal Deposit Insurance 

Corporation, with respect to any 

financial company as defined in section 

201 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act or 

any insured depository institution 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 81531 

under the Federal Deposit Insurance 

Act, and with respect to each affiliate of 

any such company or institution. 

(l) Swap portfolio means all swaps 

currently in effect between a particular 

swap dealer or major swap participant 

and a particular counterparty. 

(m) Swap transaction means any 

event that results in a new swap or in 

a change to the terms of a swap, 

including execution, termination, 

assignment, novation, exchange, 

transfer, amendment, conveyance, or 

extinguishing of rights or obligations of 

a swap. 

(n) Unwind proposal means a 

proposal offered by the sponsor of a 

multilateral portfolio compression 

exercise which, if accepted, would 

wholly or partially terminate some or all 

of the original swaps included in the 

exercise. 

(o) Valuation means the current 

market value or net present value of a 

swap. 

§ 23.501 Swap confirmation. 

(a) Confirmation. 

(1) Each swap dealer and major swap 

participant entering into a swap 

transaction with a counterparty that is a 

swap dealer or major swap participant 

shall execute a confirmation for the 

swap transaction according to the 

following schedule: 

(i) For any swap transaction that has 

been executed and processed 

electronically, within 15 minutes of 

execution; 

(ii) For any swap transaction that is 

not executed electronically, but that will 

be processed electronically, within 30 

minutes of execution; or 

(iii) For any swap transaction that 

cannot be processed electronically by 

the swap dealer or major swap 

participant, within the same calendar 

day as execution. 

(2) Each swap dealer and major swap 

participant entering into a swap 

transaction with a counterparty that is 

not a swap dealer or a major swap 

participant shall send an 

acknowledgment of such swap 

transaction according to the following 

schedule: 

(i) For any swap transaction that has 

been executed and processed 

electronically, within 15 minutes of 

execution; 

(ii) For any swap transaction that is 

not executed electronically, but that will 

be processed electronically, within 30 

minutes of execution; or 

(iii) For any swap transaction that 

cannot be processed electronically by 

the swap dealer or major swap 

participant, within the same calendar 

day as execution. 

(3) Each swap dealer and major swap 

participant shall establish, maintain, 

and enforce written policies and 

procedures reasonably designed to 

ensure that it executes a confirmation 

for each swap transaction that it enters 

into with a counterparty that is a 

financial entity within the same 

calendar day as execution and with a 

counterparty that is not a swap dealer, 

major swap participant, or a financial 

entity not later than the next business 

day after execution. Such procedures 

shall include a requirement that, prior 

to execution of any such swap, the swap 

dealer or major swap participant furnish 

to a prospective counterparty, or receive 

from a prospective counterparty, a draft 

acknowledgment specifying all terms of 

the swap transaction other than the 

applicable pricing and other relevant 

terms that are to be expressly agreed at 

execution. 

(b) Recordkeeping. (1) Each swap 

dealer and major swap participant shall 

make and retain a record of: 

(i) The date and time of transmission 

to, or receipt from, a counterparty of any 

acknowledgment; 

(ii) The date and time of transmission 

to, or receipt from, a counterparty of any 

confirmation; 

(iii) The length of time between 

acknowledgment and confirmation of 

each swap; and 

(iv) The length of time between 

execution and confirmation of each 

swap. 

(2) All records required to be 

maintained pursuant to this section 

shall be maintained in accordance with 

§ 1.31 and shall be made available 

promptly upon request to any 

representative of the Commission or any 

applicable prudential regulator, or with 

regard to swaps defined in section 

1a(47)(A)(v), to any representative of the 

Commission, the Securities and 

Exchange Commission, or any 

applicable prudential regulator. 

§ 23.502 Portfolio reconciliation. 

(a) Swaps with swap dealers or major 

swap participants. Each swap dealer 

and major swap participant shall engage 

in portfolio reconciliation as follows for 

all swaps in which its counterparty is 

also a swap dealer or major swap 

participant. 

(1) Each swap dealer or major swap 

participant shall agree in writing with 

each of its counterparties on the terms 

of the portfolio reconciliation. 

(2) The portfolio reconciliation may 

be performed on a bilateral basis by the 

counterparties or by a qualified third 

party. 

(3) The portfolio reconciliation shall 

be performed no less frequently than: 

(i) Once each business day for each 

swap portfolio that includes 300 or 

more swaps; 

(ii) Once each week for each swap 

portfolio that includes more than 50 but 

fewer than 300 swaps on any business 

day during any week; and 

(iii) Once each calendar quarter for 

each swap portfolio that includes no 

more than 50 swaps at any time during 

the calendar quarter. 

(4) Each swap dealer and major swap 

participant shall resolve immediately 

any discrepancy in a material term of a 

swap identified as part of a portfolio 

reconciliation. 

(5) Each swap dealer and major swap 

participant shall resolve any 

discrepancy in a valuation identified as 

part of a portfolio reconciliation within 

one business day. A difference between 

the lower valuation and the higher 

valuation of less than 10% of the higher 

valuation need not be deemed a 

discrepancy. 

(b) Swaps with entities other than 

swap dealers or major swap 

participants. Each swap dealer and 

major swap participant shall establish, 

maintain, and enforce written policies 

and procedures for engaging in portfolio 

reconciliation as follows for all swaps in 

which its counterparty is neither a swap 

dealer nor a major swap participant. 

(1) Each swap dealer or major swap 

participant shall agree in writing with 

each of its counterparties on the terms 

of the portfolio reconciliation. 

(2) The portfolio reconciliation may 

be performed on a bilateral basis by the 

counterparties or by a qualified third 

party. 

(3) The portfolio reconciliation shall 

be performed no less frequently than: 

(i) Once each business day for each 

swap portfolio that includes 500 or 

more swaps; 

(ii) Once each week for each swap 

portfolio that includes more than 100 

but fewer than 500 swaps on any 

business day during any week; and 

(iii) Once each calendar quarter for 

each swap portfolio that includes no 

more than 100 swaps at any time during 

the calendar quarter. 

(4) Each swap dealer or major swap 

participant shall establish, maintain, 

and enforce written procedures 

reasonably designed to resolve any 

discrepancies in the material terms or 

valuation of each swap identified as part 

of a portfolio reconciliation process in a 

timely fashion. A difference between the 

lower valuation and the higher 

valuation of less than 10% of the higher 

valuation need not be deemed a 

discrepancy. 

(c) Reconciliation of cleared swaps. 

Nothing in this section shall apply to a 


emcdonald on DSK2BSOYB1PROD with PROPOSALS
81532 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

swap that is cleared by a derivatives 

clearing organization. 

(d) Recordkeeping. A record of each 

swap portfolio reconciliation, including 

a record of each discrepancy and the 

length of time for resolution of each 

discrepancy not resolved within one 

business day, shall be maintained in 

accordance with § 1.31 and shall be 

made available promptly upon request 

to any representative of the Commission 

or any applicable prudential regulator, 

or with regard to swaps defined in 

section 1a(47)(A)(v) of the Act, to any 

representative of the Commission, the 

Securities and Exchange Commission, 

or any applicable prudential regulator. 

§ 23.503 Portfolio compression. 

(a) Bilateral offset. Each fully 

offsetting swap between a swap dealer 

or major swap participant and another 

swap dealer or major swap participant 

shall be terminated no later than the 

close of business on the business day 

following the day on which the 

counterparties entered into the fully 

offsetting swap. 

(b) Bilateral compression. Each swap 

dealer and major swap participant shall 

engage in a bilateral portfolio 

compression exercise for each swap in 

which the counterparty is also a swap 

dealer or major swap participant at least 

once per calendar year, except to the 

extent that the swap dealer or major 

swap participant and the counterparty 

have participated in a multilateral 

compression exercise involving such 

swap during the same calendar year. 

(c) Multilateral compression. Each 

swap dealer and major swap participant 

shall engage in the following portfolio 

compression exercises for each swap in 

which its counterparty is also a swap 

dealer or major swap participant: 

(1) Each swap dealer and major swap 

participant shall participate in all 

multilateral portfolio compression 

exercises required by Commission 

regulation or order. 

(2) Each swap dealer and major swap 

participant shall participate in all 

multilateral portfolio compression 

exercises that are initiated, offered, or 

sponsored by any of the following 

entities to the extent that any swap in 

the portfolio of the swap dealer or major 

swap participant is eligible for inclusion 

in the exercise: 

(i) Any derivatives clearing 

organization of which the swap dealer 

or major swap participant is a member; 

or 

(ii) Any self-regulatory organization of 

which the swap dealer or major swap 

participant is a member. 

(3) Each swap dealer and major swap 

participant shall comply with the 

following with respect to each 

multilateral portfolio compression 

exercise in which it participates: 

(i) Transactions included. Each swap 

dealer and major swap participant shall 

include in the multilateral portfolio 

compression exercise all swaps in 

which its counterparty is also a swap 

dealer or major swap participant that are 

eligible to be included in the particular 

exercise, unless including the swap 

would be reasonably likely to 

significantly increase the risk exposure 

of the swap dealer or major swap 

participant. 

(ii) Counterparty, market, and cash 

payment risk tolerances. 

Notwithstanding § 23.503(c)(3)(i), a 

swap dealer or a major swap participant 

may establish counterparty, market, 

cash payment, or other risk tolerances or 

exclude specific potential 

counterparties, provided that the swap 

dealer or major swap participant does 

not use such risk tolerances or 

counterparty exclusions to evade the 

requirements of this regulation. 

(iii) Acceptance of unwind proposal. 

No swap dealer or major swap 

participant shall unreasonably 

withhold, delay, or condition consent to 

an unwind proposal. 

(d) Policies and procedures. 

(1) Each swap dealer and major swap 

participant shall establish, maintain, 

and enforce written policies and 

procedures for engaging in the bilateral 

and multilateral portfolio compression 

exercises required by this section with 

respect to all swaps in which its 

counterparty is also a swap dealer or 

major swap participant. 

(2) Each swap dealer and major swap 

participant shall establish, maintain, 

and enforce written policies and 

procedures for periodically terminating 

fully offsetting swaps and for 

periodically engaging in portfolio 

compression exercises with respect to 

swaps in which its counterparty is an 

entity other than a swap dealer or major 

swap participant, to the extent that the 

outstanding swaps are able to be 

terminated through a portfolio 

compression exercise. 

(e) Recordkeeping. (1) Each swap 

dealer and major swap participant shall 

make and maintain a record of each 

bilateral offset and each bilateral or 

multilateral portfolio compression 

exercise in which it participates, 

including the beginning and completion 

dates of the offset or exercise; the 

included swaps and counterparties 

thereto; the swaps that were eligible for 

inclusion in the exercise, but were 

excluded by the swap dealer or major 

swap participant and the reason for the 

exclusion; the counterparty, market, 

cash payment, or other risk tolerance 

levels set by the swap dealer or major 

swap participant; and the results of the 

compression, including the 

identification of the swaps that were 

terminated and any new swaps and the 

counterparties thereto that resulted from 

the exercise. 

(2) All records required to be 

maintained pursuant to this section 

shall be maintained in accordance with 

§ 1.31 and shall be made available 

promptly upon request to any 

representative of the Commission or any 

applicable prudential regulator, or with 

regard to swaps defined in section 

1a(47)(A)(v) of the Act, to any 

representative of the Commission, the 

Securities and Exchange Commission, 

or any applicable prudential regulator. 

Issued in Washington, DC on December 16, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Appendices to Confirmation, Portfolio 

Reconciliation, and Portfolio 

Compression Requirements for Swap 

Dealers and Major Swap Participants— 

Commissioners Voting Summary and 

Statements of Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commissioners Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Dunn, Sommers, Chilton and 

O’Malia voted in the affirmative. No 

Commissioner voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed rulemaking that 

establishes essential business conduct 

standards for swap dealers and major swap 

participants. Today’s rule establishes 

confirmation, portfolio reconciliation and 

portfolio compression requirements for such 

parties. The proposed regulations are 

consistent with Congress’s direction through 

the Dodd-Frank Act to prescribe standards 

for the timely and accurate confirmation, 

processing, netting and valuation of swap 

transactions. One of the primary goals of 

Dodd-Frank Act was to establish a 

comprehensive regulatory framework that 

would reduce risk, increase transparency and 

promote market integrity. The proposed 

regulations accomplish this goal by 

establishing procedures that will promote 

legal certainty regarding swap transactions, 

early resolutions of valuation disputes, 

enhanced understanding of one 

counterparty’s risk exposure to another, 

reduced operational risk and increased 

operational efficiency. 

[FR Doc. 2010–32264 Filed 12–27–10; 8:45 am] 

BILLING CODE 6351–01–P 


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