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[Federal Register Volume 77, Number 137 (Tuesday, July 17, 2012)]
[Proposed Rules]
[Pages 41940-41952]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17357]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 39

RIN 3038-AD47

Clearing Exemption for Certain Swaps Entered Into by Cooperatives

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is proposing a rule pursuant to its authority under 
Section 4(c) of the Commodity Exchange Act (CEA) allowing cooperatives 
meeting certain conditions to elect not to submit for clearing certain 
swaps that such cooperatives would otherwise be required to clear in 
accordance with Section 2(h)(1) of the CEA.

DATES: Comments must be received on or before August 16, 2012.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD47, 
by any of the following methods:
    Commission Web Site: 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. ``Exempt Cooperatives'' must be clearly 
indicated on all comment submissions. Comments will be posted as 
received to http://www.cftc.gov. You should submit only information 
that you wish to make

[[Page 41941]]

available publicly. If you wish the Commission to consider information 
that is 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 CFTC Regulation 
145.9.\1\
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    \1\ 17 CFR 145.9. Commission regulations may be accessed through 
the Commission's Web site, http://www.cftc.gov.
_____________________________________-

    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse, or remove any or all of a 
submission from www.cftc.gov that it may deem to be inappropriate for 
publication, such as obscene language. All submissions that have been 
redacted or removed that contain comments on the merits of the 
rulemaking will be retained in the public comment file and will be 
considered as required under the Administrative Procedure Act and other 
applicable laws, and may be accessible under the Freedom of Information 
Act.

FOR FURTHER INFORMATION CONTACT: Erik F. Remmler, Associate Director, 
202-418-7630, Division of Clearing and Risk, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, 
DC 20581.

I. Background

    The CEA, as amended by Title VII of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (the ``Dodd-Frank Act''),\2\ 
establishes a comprehensive new regulatory framework for swaps. The CEA 
requires a swap: (1) To be submitted for clearing through a derivatives 
clearing organization (DCO) if the Commission has determined that the 
swap is required to be cleared, unless an exception to the clearing 
requirement applies; (2) to be reported to a swap data repository (SDR) 
or the Commission; and (3) if such swap is subject to a clearing 
requirement, to be executed on a designated contract market (DCM) or 
swap execution facility (SEF), unless no DCM or SEF has made the swap 
available to trade.
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376 (2010), available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
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    Section 2(h)(1)(A) of the CEA establishes a clearing requirement 
for swaps, providing that ``it shall be unlawful for any person to 
engage in a swap unless that person submits such swap for clearing to a 
[DCO] that is registered under [the CEA] or a [DCO] that is exempt from 
registration under [the CEA] if the swap is required to be cleared.'' 
\3\ However, Section 2(h)(7)(A) of the CEA provides that the clearing 
requirement of Section 2(h)(1)(A) shall not apply to a swap if one of 
the counterparties to the swap: ``(i) is not a financial entity; (ii) 
is using swaps to hedge or mitigate commercial risk; and (iii) notifies 
the Commission, in a manner set forth by the Commission, how it 
generally meets its financial obligations associated with entering into 
non-cleared swaps'' (referred to hereinafter as the ``end-user 
exception'').\4\ The Commission has promulgated Sec.  39.6 to implement 
certain provisions of Section 2(h)(7). Accordingly, any swap that is 
required to be cleared by the Commission pursuant to Section 2(h)(2) of 
the CEA must be submitted to a DCO for clearing by the counterparties 
unless the conditions of Sec.  39.6 are satisfied.
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    \3\ See Section 2(h)(1)(A) of the CEA, 7 U.S.C. 2(h)(1)(A).
    \4\ See Section 2(h)(7)(A) of the CEA, 7 U.S.C. 2(h)(7)(A).
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    Congress adopted the end-user exception in Section 2(h)(7) of the 
CEA to permit certain non-financial companies to continue using non-
cleared swaps to hedge risks associated with their underlying 
businesses, such as manufacturing, energy exploration, farming, 
transportation, or other commercial activities. Additionally, in 
Section 2(h)(7)(C)(ii) of the CEA, the Commission was directed to 
``consider whether to exempt from the definition of `financial entity' 
small banks, savings associations, farm credit system institutions and 
credit unions including:
    (I) Depository institutions with total assets of $10,000,000,000 or 
less;
    (II) Farm credit system institutions with total assets of 
$10,000,000,000 or less; or
    (III) Credit unions with total assets of $10,000,000,000 or less.''
    In Sec.  39.6(d), the Commission identifies which financial 
entities are small financial institutions and establishes an exemption 
for these small financial institutions pursuant to Section 
2(h)(7)(C)(ii) (the ``small financial institution exemption''). The 
small financial institution exemption largely adopts the language of 
Section 2(h)(7)(C)(ii) providing for an exemption for the types of 
Section 2(h)(7)(C)(ii) institutions having total assets of $10 billion 
or less.
    On December 23, 2010, the Commission published for public comment a 
notice of proposed rulemaking (NPRM) for Sec.  39.6.\5\ Several parties 
that commented on the Sec.  39.6 NPRM recommended that the Commission 
provide relief from clearing for cooperatives.\6\ These commenters 
primarily reasoned \7\ that the member ownership nature of cooperatives 
and the fact that cooperatives act on behalf of members that are non-
financial entities or small financial institutions justified an 
extension of the end-user exception to the cooperatives. In effect, 
they proposed that because a cooperative acts in place of its members 
when facing the larger financial markets on behalf of the members, the 
end-user exception that would be available to a cooperative's members 
should pass through to the cooperative. Accordingly, if the members 
themselves could elect the end-user exception, then the Commission 
should permit the cooperatives to do so as well.
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    \5\ See 75 FR 80747 (Dec. 23, 2010).
    \6\ See, e.g., Agricultural Leaders of Michigan (ALM), The Farm 
Credit Council (FCC), Allegheny Electric Cooperative, Inc. (AEC), 
Garkane Energy Cooperative, Inc. (GEC), National Council of Farmer 
Cooperatives, Dairy Farmers of America, and National Rural Utilities 
Cooperative Finance Corporation (CFC). All comments referred to in 
this NPRM were comments received on the Sec.  39.6 NPRM and can be 
found on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=937.
    \7\ Other reasons given for providing an exemption from clearing 
for cooperatives, including risk considerations, are discussed 
below.
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    However, Section 2(h)(7) of the CEA does not differentiate 
cooperatives from other types of entities and therefore, cooperatives 
that are ``financial entities,'' as defined in Section 2(h)(7)(i) of 
the CEA, would be prohibited from electing the end-user exception 
unless they qualify for the small financial institution exemption. Some 
commenters recommended including cooperatives that are ``financial 
entities'' with total assets in excess of $10 billion in the small 
financial institution exemption.\8\ However, as explained in greater 
detail in the final release for Sec.  39.6, Section 2(h)(7)(C)(ii) of 
the CEA focused on asset size and not on the structure of the financial 
entity. Accordingly, only cooperatives that are financial entities with 
total assets of $10 billion or less can qualify as small financial 
institutions.
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    \8\ See, e.g., FCC, CFC, AEC, ALM, and GEC.
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    Notwithstanding the foregoing, the Commission recognizes that the 
member ownership structure of cooperatives and the merits of 
effectively passing through the end-user exception available to members 
to the cooperative warrant consideration. Accordingly, the Commission 
is using the authority provided in Section 4(c) of the CEA to propose 
Sec.  39.6(f), which would permit cooperatives that meet certain 
qualifications to elect not to clear certain swaps that are otherwise

[[Page 41942]]

required to be cleared pursuant to Section 2(h)(1)(A) of the CEA 
(hereinafter referred to as the ``cooperative exemption'').

II. Cooperatives

    Cooperatives that are ``financial entities'' as defined in Section 
2(h)(7)(C)(i) of the CEA generally serve as the collective asset 
liability manager for their members. In this role, the cooperatives 
face the financial markets on behalf of their members. For example, 
they borrow money on a wholesale basis and then lend those funds to 
their members to meet their funding needs at a lower cost than would 
otherwise be available to the members individually. The commenters on 
the Sec.  39.6 NPRM noted that financial cooperatives also enter into 
swaps with members primarily in connection with originating loans to 
the members for the purpose of hedging interest rate risk associated 
with the loans.\9\ The cooperatives also enter into swaps with other 
financial entities, typically Swap Dealers (``SDs'') or Major Swap 
Participants (``MSPs''), to hedge the risks associated with the swaps 
they execute with their members or to hedge risks associated with their 
wholesale borrowing activities. The cooperatives use their size and 
resources on behalf of their members to provide more efficient 
financing and hedging than the members might achieve on their own.
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    \9\ See, e.g., FCC, CFC, AEC, ALM, and GEC.
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    Several commenters also noted that financial cooperative swap 
activities in connection with loans to members pose less risk to the 
financial system.\10\ The cooperatives often enter into swaps with 
other financial institutions, typically on a matched book basis, to 
hedge the underlying risk of those member swaps. According to 
commenters, such matched book swaps pose less risk to the cooperatives 
because the market risk is largely passed through. Similar comments 
were made with respect to small financial institutions and the 
Commission acknowledged this as one reason for adopting the small 
financial institution exemption.
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    \10\ See, e.g., FCC, CFC, AEC, ALM, and GEC.
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    Some cooperatives have more than $10 billion in total assets, but 
act on behalf of members that are non-financial entities, small 
financial institutions, or other cooperatives whose members consist of 
such entities.\11\ For example, there are four Farm Credit System (FCS) 
banks chartered under Federal law, each of which has assets in excess 
of $10 billion. The FCS banks are cooperatives primarily owned by their 
cooperative associations.\12\ The Farm Credit Act authorizes the banks 
``to make loans and commitments to eligible cooperative associations.'' 
\13\ The FCS association members are, in turn, authorized to make loans 
to farmers and ranchers, rural residents, and persons furnishing farm-
related services.\14\ In effect, FCS bank cooperatives lend to FCS 
associations, which lend to farmers, and farmers own the FCS 
associations, which own the FCS banks. In addition to the example of 
the FCS banks as provided in Federal law, other cooperatives formed 
under Federal and state laws also have a similar entity structure in 
that they are owned by their members and they exist primarily to serve 
those members.
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    \11\ See, e.g., FCC, CFC, AEC, ALM, and GEC.
    \12\ See 12 U.S.C. 2124(c) (providing that ``[v]oting stock may 
be issued or transferred and held only by * * * cooperative 
associations eligible to borrow from the banks'').
    \13\ Id. Sec.  2128(a).
    \14\ See id. Sec.  2075.
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III. The Proposed Cooperative Exemption Rule

A. Introduction

    In proposing an exemption for certain swaps entered into by 
cooperatives that are financial entities, the Commission is very much 
aware that central clearing of swaps is a primary focus of Title VII of 
the Dodd-Frank Act. Central clearing mitigates financial system risks 
that result from swaps and any exemption therefrom should be narrowly 
drawn to minimize the impact on the risk mitigation benefits of 
clearing and should also be in line with the end-user exception 
requirements of Section 2(h)(7) of the CEA. Accordingly, the Commission 
has sought to narrow the cooperative exemption appropriately.

B. Regulation 39.6(f)(1). Definition of Exempt Cooperative

    The proposed rule would apply only to cooperatives that are 
financial entities as defined in Section 2(h)(7)(C)(i) of the CEA. The 
end-user exception is generally available to commercial (i.e. non-
financial) cooperatives, or financial cooperatives that meet the 
requirements of the small financial institution exemption, that are 
seeking an exception for swaps that hedge or mitigate commercial risk.
    Proposed paragraph (f)(1) would provide that each member of the 
cooperative seeking to elect the cooperative exemption must be a non-
financial entity, a financial institution to which the small financial 
institution exemption applies, or itself a cooperative each of whose 
members fall into those categories. This provision would limit the 
cooperative exemption to cooperatives whose members are entities that 
could elect the end-user exception themselves. With this provision, the 
Commission is assuring that the cooperative exemption does not become 
overly broad and available to cooperatives with members that are non-
exempt financial entities as defined in Section 2(h)(7)(C) of the 
CEA.\15\
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    \15\ For example, the cooperative exemption would not be 
available to the Federal Home Loan Banks, whose membership includes 
financial entities that are not small financial institutions.
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C. Regulation 39.6(f)(2). Swaps to Which the Cooperative Exemption 
Applies

    Proposed paragraph (f)(2)(i) limits application of the cooperative 
exemption to swaps entered into with members of the exempt cooperative 
in connection with originating loans \16\ for members or swaps entered 
into by exempt cooperatives that hedge or mitigate risks associated 
with member loans or member loan-related swaps. This provision assures 
that the cooperative exemption is only used as a pass through for swaps 
with members who would themselves be able to elect the end-user 
exception and for swaps that hedge or mitigate risk in connection with 
member loans and swaps as would be required by Section 2(h)(7)(A)(ii) 
of the CEA for those member swaps. The primary rationale for the 
cooperative exemption is based on the unique relationship between 
cooperatives and their member owners. Expanding this exemption to 
include swaps with non-member entities with which a cooperative may do 
business (other than swaps used to hedge risks related to member loans 
or swaps) would go beyond the purpose of the exemption, which is to 
pass the member's end-user exception through to the cooperative because 
of the unique member-owner structure of cooperatives. Furthermore, 
allowing cooperatives to enter into non-cleared swaps with non-members 
or swaps that serve purposes other than hedging member loans or swaps 
would give the cooperatives, which are large financial entities, a 
market advantage over their competitors that is not justified by their 
cooperative structure or the provisions of the Dodd-Frank Act.
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    \16\ The meaning of ``in connection with originating a loan'' is 
similarly used in the definition of swap dealer in Sec.  1.3(ggg) of 
the CEA. See 77 FR 30596, 30744 (May 23, 2012). For purposes of 
consistency, that meaning is incorporated in the cooperative 
exception rule.
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    Additionally, for the cooperative exemption to benefit all members 
of cooperatives who would otherwise be able to elect the end-user 
exception themselves, the proposed exemption would be available to all 
qualifying

[[Page 41943]]

cooperatives, including those with total assets greater than $10 
billion.\17\ The Commission remains mindful that larger financial 
institutions pose greater risk to the financial system than small 
financial institutions, such as those identified in Section 
2(h)(7)(C)(ii) of the CEA, because larger financial institutions are 
more likely to be interconnected with a greater number of market 
participants and therefore more likely to transfer risk widely. In 
keeping with this concern and in recognition of the larger asset size 
of cooperatives that will be able to use the cooperative exemption, the 
Commission, in its proposal, is limiting the cooperative exemption to 
swaps in connection with member loans. Several commenters who requested 
an exemption for cooperatives justified the request in part on the 
basis that cooperatives principally use swaps in connection with 
originating loans to members. These commenters noted that such swaps 
are relatively low risk. To minimize the risk a cooperative exemption 
might pose to the financial system, the proposed rule would limit the 
exemption to swaps in connection with originating loans to members and 
swaps used by the cooperatives to hedge or mitigate risks related to 
member loans or risks arising from swaps entered into with members 
related to such loans.
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    \17\ Some financial cooperatives such as CoBank, and AgriBank 
FCB, have total assets in excess of $50 billion.
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D. Regulation 39.6(f)(3). Reporting

    Under Section 4(c) of the CEA, the Commission can subject such 
exemptive relief to appropriate terms and conditions.\18\ To this end, 
the Commission believes it is appropriate to impose certain reporting 
requirements on any entities that may be exempted from the clearing 
requirement by this rule. These reporting requirements are effectively 
identical to the reporting requirements for the end-user exception. For 
the end-user exception, Section 2(h)(7)(A)(iii) of the CEA requires 
that one of the counterparties to the swap must notify ``the Commission 
in a manner set forth by the Commission how it generally meets its 
financial obligations associated with entering into non-cleared 
swaps.'' Regulation 39.6(b) implements Section 2(h)(7)(A)(iii) by 
requiring one of the counterparties (the ``reporting counterparty'') to 
provide, or cause to be provided, to a registered SDR, or if no 
registered SDR is available, to the Commission, information about how 
the counterparty electing the exception generally expects to meet its 
financial obligations associated with non-cleared swaps. In addition, 
Sec.  39.6(b) requires the reporting counterparty to provide certain 
information that the Commission will use to monitor compliance with, 
and prevent abuse of, the end-user exception. The reporting 
counterparty would be required to provide the information at the time 
the electing counterparty elects the end-user exception.
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    \18\ See Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1).
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    Proposed Sec.  39.6(f)(3) would require the same reporting required 
for the end-user exception whenever the cooperative exemption is 
elected for the same reasons. For purposes of regulatory consistency, 
Sec.  39.6(f)(3) incorporates the provisions of Sec.  39.6(b) with only 
those changes needed to apply the provisions to the cooperative 
exemption.

IV. Section 4(c) of the Commodity Exchange Act

    Section 4(c)(1) of the CEA provides that, in order to promote 
responsible economic or financial innovation and fair competition, the 
Commission, by rule, regulation or order, after notice and opportunity 
for hearing, may exempt any agreement, contract, or transaction, or 
class thereof, including any person or class of persons offering, 
entering into, rendering advice or rendering other services with 
respect to the agreement, contract, or transaction, from the contract 
market designation requirement of Section 4(a) of the CEA, or any other 
provision of the CEA other than certain enumerated provisions.\19\ 
Through this exemptive regulation, the Commission proposes that 
cooperatives meeting certain conditions are the class of persons that 
should be exempted from the clearing requirement for certain types of 
swaps. As discussed in more detail above, such cooperatives act on 
behalf of their members in certain financial matters and to that 
extent, the proposed rule effectively provides for passing through the 
end-user exception available to such cooperatives' members to the 
cooperatives.
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    \19\ 7 U.S.C. 6(c).
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    The end-user exception provided in Section 2(h)(7) of the CEA is 
not available to an entity that is a ``financial entity'' as defined in 
Section 2(h)(7)(C)(i) unless such entity is exempt from the definition 
because it is a small financial institution as provided in Section 
2(h)(7)(C)(ii) of the CEA and Sec.  39.6(d). As explained in greater 
detail in the final release for Sec.  39.6, Section 2(h)(7)(C)(ii) of 
the CEA focused exclusively on asset size for determining what 
financial entities could qualify for the small financial institution 
exemption. Furthermore, the $10 billion limit identified in that 
section guides the Commission's consideration of the small financial 
institution exemption absent convincing evidence that a different asset 
level is warranted. Section 2(h)(7)(C)(ii) does not provide special 
consideration for cooperatives that meet the definition of ``financial 
entity'' and therefore the asset size limit applies to them.
    Cooperatives have a member ownership structure in which the 
cooperatives exist to serve their member owners and do not act for 
their own profit.\20\ Furthermore, the member owners of the cooperative 
collectively have full control and governance of the cooperative. In a 
real sense, the cooperative is not separable from its member owners. As 
described above, some cooperatives provide financial services to their 
members including lending and providing swaps to members and hedging 
those activities with other financial entities such as SDs. The 
memberships of some of these cooperatives consist of entities that each 
could elect the end-user exception if acting alone. However, some of 
those cooperatives meet the definition of ``financial entity'' and have 
assets in excess of $10 billion, and therefore the end-user exception 
is unavailable to them. Accordingly, the cooperative members would not 
benefit from the end-user exception if they use their cooperative as 
the preferred vehicle for hedging commercial risks in the greater 
financial marketplace. In light of this, the Commission is exercising 
its authority under Section 4(c) of the CEA to propose Sec.  39.6(f) 
and establish the cooperative exemption.
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    \20\ For example, the CFC was formed as a nonprofit corporation 
under the District of Columbia Cooperative Association Act of 1940 
to arrange financing for its members and their patrons and for the 
``primary and mutual benefit of the patrons of the Association and 
their patrons, as ultimate consumers.'' CFC Articles of 
Incorporation, Art. 1.
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    The Commission believes that there are benefits to having 
cooperatives execute risk hedging or mitigation strategies with, and on 
behalf of, their members. The FCC has commented that ``[t]o provide 
tailored financing products for farmers and farm-related businesses, 
Farm Credit System institutions rely on the safe use of derivatives to 
manage interest rate, liquidity, and balance sheet risk, primarily in 
the form of interest rate swaps.'' The FCS institutions include the 
four FCS cooperative banks, each of which has total assets in excess of 
$10 billion. Using the substantial, finance-focused resources of the 
cooperative to

[[Page 41944]]

undertake hedging activities for the numerous members of the 
cooperative promotes greater economic efficiency and lower costs for 
the members. The Commission believes that the use of swaps in this 
manner by cooperatives on behalf of their members constitutes financial 
innovation that is beneficial for the public.
    In light of the foregoing, the Commission believes that the 
adoption of proposed Sec.  39.6(f) and its attendant terms and 
conditions would promote responsible economic and financial innovation 
and fair competition.
    The Commission requests public comment on whether the proposed 
regulation satisfies the requirements for exemption under Section 4(c) 
of the CEA and on all aspects of the proposed regulation. The 
Commission welcomes any quantifiable data and analysis that would 
assist the Commission in this rulemaking. In particular, the Commission 
is requesting comment on the following questions:
     Has the Commission correctly limited the exemption to 
cooperatives in which each member is: A non-financial entity, a 
financial entity to which the small financial institution exemption 
applies, or a cooperative each of whose members fall into those 
categories?
     Are there cooperatives in which not all members are a non-
financial entity, a financial entity to which the small financial 
institution exemption applies, or a cooperative each of whose members 
fall into those categories? If so, should the proposed definition of 
``exempt cooperative'' be modified to include them? Would such 
inclusion undermine the narrow pass through focus of the rule? Is it 
possible that financial entities that do not currently operate as 
cooperatives and for which the clearing requirement is intended could 
reorganize or create cooperatives to take advantage of the proposed 
cooperative exemption? If so, how could the proposed rule be modified 
to prevent that from happening? Should affiliates of financial entities 
identified in Sections 2(h)(7)(C)(i)(I) through (VII) of the CEA be 
expressly excluded from the definition of exempt cooperative?
     The Commission invites comment on whether the types of 
swaps for which the cooperative exemption may be elected should be 
expanded or further limited and why. If so, please describe such 
expansion or limitation specifically. Is the provision allowing for 
swaps that hedge or mitigate risk ``related to loans to members'' too 
limited or not limited enough? What clarifying language could be added 
to more effectively identify such swaps that would be consistent with 
the rationale used for the proposed rule regarding the cooperative 
standing in place of its members when entering into hedging swaps with 
other financial entities? Are there practical or other considerations 
in identifying which swaps serve to hedge or mitigate the risk of 
member loans or member loan related swaps?
     Are there additional or alternative considerations that 
should be reviewed by the Commission regarding the proposed cooperative 
exemption?

V. Consideration of Costs and Benefits

A. Background

    In the wake of the financial crisis of 2008, Congress adopted the 
Dodd-Frank Act, which, among other things, requires the Commission to 
determine whether a particular swap, or group, category, type or class 
of swaps, shall be required to be cleared.\21\ Specifically, Section 
723(a)(3) of the Dodd-Frank Act amended Section 2(h)(1)(A) of the CEA 
to make it ``unlawful for any person to engage in a swap unless that 
person submits such swap for clearing to a [DCO] that is registered 
under the CEA or a [DCO] that is exempt from registration under [the 
CEA] if the swap is required to be cleared.'' This clearing requirement 
is designed to reduce counterparty risk associated with swaps and, in 
turn, mitigate the potential systemic impact of such risk and reduce 
the likelihood for swaps to cause or exacerbate instability in the 
financial system.\22\ It reflects a fundamental premise of the Dodd-
Frank Act: the use of properly regulated and functioning central 
clearing can reduce systemic risk.
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    \21\ See Section 2(h)(2) of the CEA, 7 U.S.C. 2(h)(2).
    \22\ When a bilateral swap is moved into clearing, the DCO 
becomes the counterparty to each of the original participants in the 
swap. This standardizes counterparty risk for the original swap 
participants in that they each bear the same risk attributable to 
facing the DCO as counterparty. In addition, DCOs exist for the 
primary purpose of managing credit exposure from the swaps being 
cleared and therefore DCOs are effective at mitigating counterparty 
risk through the use of risk management frameworks. These frameworks 
model risk and collect defined levels of initial and variation 
margin from the counterparties that are adjusted for changing market 
conditions and use guarantee funds and other risk management tools 
for the purpose of assuring that, in the event of a member default, 
all other counterparties remain whole. DCOs have demonstrated 
resilience in the face of past market stress. Most recently, they 
remained financially sound and effectively settled positions in the 
midst of turbulent events in 2007-2008 that threatened the financial 
health and stability of many other types of entities.
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    Notwithstanding the benefits of clearing, Section 2(h)(7) of the 
CEA provides the end-user exception if one of the swap counterparties: 
``(i) is not a financial entity; (ii) is using swaps to hedge or 
mitigate commercial risk; and (iii) notifies the Commission, in a 
manner set forth by the Commission, how it generally meets its 
financial obligations associated with entering into non-cleared 
swaps.'' Section 2(h)(7)(C)(ii) of the CEA directs the Commission to 
consider making the end-user exception available to small banks, 
savings associations, credit unions, and farm credit institutions, 
including those institutions with total assets of $10 billion or less, 
through an exemption from the definition of ``financial entity.'' \23\ 
In Sec.  39.6(d), the Commission establishes the small financial 
institution exemption for these institutions. The small financial 
institution exemption largely adopts the language of Section 
2(h)(7)(C)(ii) providing for an exemption for the institutions 
identified in Section 2(h)(7)(C)(ii) that have total assets of $10 
billion or less.
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    \23\ See CEA 2(h)(7)(C)(ii).
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    Through proposed Sec.  39.6(f), the Commission would use the 
authority provided in Section 4(c) of the CEA to permit ``exempt 
cooperatives,'' as defined in Sec.  39.6(f)(1), to elect not to clear 
certain swaps that are otherwise required to be cleared pursuant to 
Section 2(h)(1)(A) of the CEA, notwithstanding that these cooperatives 
are financial entities that do not qualify for the small financial 
institution exemption because their assets exceed $10 billion. 
Specifically, an ``exempt cooperative'' is a cooperative under Federal 
or state law that is a financial entity each member of which is 
eligible for the end-user exception, or is another cooperative composed 
of members, each of whom is eligible for the end-user exception. An 
exempt cooperative would not be required to clear swaps with members in 
connection with member loans, or swaps used by the exempt cooperative 
to hedge or mitigate risk arising in connection with such swaps with 
members or loans to members.
    On December 23, 2010, the Commission published for public comment 
an NPRM for Sec.  39.6 proposing the end-user exception.\24\ Several 
parties that commented on the Sec.  39.6 NPRM recommended that the 
Commission provide relief from clearing for cooperatives. These 
commenters reasoned \25\ that the member ownership nature of 
cooperatives and the fact that they act on behalf of members that are 
non-financial entities or small financial

[[Page 41945]]

institutions justified an extension of the end-user exception to the 
cooperatives. In effect, the commenters posit that because a 
cooperative takes the place of its members to face the larger financial 
markets on behalf of the members, the end-user exception that would be 
available to a cooperative's members should pass through to the 
cooperative. Accordingly, if the members themselves could elect the 
end-user exception, then the Commission should permit the cooperatives 
to do so as well.
---------------------------------------------------------------------------

    \24\ See 75 FR 80747.
    \25\ Other reasons given for providing an exemption from 
clearing for cooperatives, including risk considerations, are 
discussed above in this NPRM.
---------------------------------------------------------------------------

    The Commission is proposing such an exemption herein for certain 
cooperatives, and it is the costs and benefits of this exemption that 
the Commission considers in the discussion that follows.

B. Statutory Requirement To Consider the Costs and Benefits of the 
Commission's Action: CEA Section 15(a)

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
the following 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. Accordingly, the Commission considers the 
costs and benefits resulting from its own discretionary determinations 
with respect to the Section 15(a) factors.
    The costs and benefits of the Commission's action in this 
rulemaking are measured against the level of costs and benefits that 
would exist absent this rulemaking. Absent this rulemaking, all 
cooperatives that are financial entities as defined in Section 
2(h)(7)(C)(i) of the CEA and which are not otherwise exempt from that 
definition would be unable to elect the end-user exception pursuant to 
Section 2(h)(7)(A)(i) of the CEA, which specifies that to elect the 
end-user exception a counterparty must not be a financial entity. Thus, 
the foundation against which this rulemaking's costs and benefits are 
measured is the statutory requirement that cooperatives within the 
definition of financial entities and with assets exceeding $10 billion, 
remain subject to the clearing requirement of Section 2(h)(1)(A) of the 
CEA. Additionally, the Commission considers the rulemaking's costs and 
benefits relative to alternatives besides that of abstaining from 
action.
    As discussed in more detail below, the Commission is able to 
estimate certain reporting costs. The dollar estimates are offered as 
ranges with upper and lower bounds, which is necessary to accommodate 
the uncertainty that surrounds them. The Commission notes that the most 
likely outcome with respect to each estimate is a cost above the lower 
bound and below the upper bound.
    The discussion below considers the rule's costs and benefits as 
well as alternatives to the rule. The discussion concludes with a 
consideration of the rule's costs and benefits in light of the five 
factors specified in Section 15(a) of the CEA.

C. Costs and Benefits of the Proposed Rule

1. Costs and Benefits to Electing Entities
    Without this proposed 4(c) rule, cooperatives meeting the criteria 
of the proposed exemption would have to engage in cleared swaps 
pursuant to Section 2(h)(1)(A) of the CEA when they are either: (1) 
Transacting with a member who does not elect the end-user exception, or 
(2) transacting with another financial entity to hedge or mitigate risk 
related to loans with members or swaps with members related to such 
loans. Extending the end-user exception to such entities in these 
circumstances benefits them in that they will not have to bear the 
costs of clearing that each may incur. These costs include certain 
capital costs and fees associated with clearing.\26\
---------------------------------------------------------------------------

    \26\ Transacting swaps bilaterally is not without cost, of 
course, and the Commission notes that uncleared swaps have 
associated costs as well. For example, when a market participant 
faces a swap dealer or other counterparty in an uncleared swap, the 
uncleared swap contains an implicit line of credit upon which the 
market participant effectively draws when its swap position is out 
of the money. Counterparties charge for this implicit line of credit 
in the spread they offer on uncollateralized, uncleared swaps.
---------------------------------------------------------------------------

    Regarding fees, DCOs typically charge FCMs an initial transaction 
fee for each of the FCM customers' swaps that are cleared, as well as 
an annual maintenance fee for each of their customers' open positions. 
For example, not including customer-specific and volume discounts, the 
transaction fees for interest rate swaps at CME range from $1 to $24 
per million notional amount and the maintenance fees are $2 per year 
per million notional amount for open positions.\27\ LCH transaction 
fees for interest rate swaps range from $1 to $20 per million notional 
amount, and the maintenance fee ranges from $5 to $20 per swap per 
month, depending on the number of outstanding swap positions that an 
entity has with the DCO.\28\
---------------------------------------------------------------------------

    \27\ See CME pricing charts at: http://www.cmegroup.com/trading/cds/files/CDS-Fees.pdf; http://www.cmegroup.com/trading/interest-rates/files/CME-IRS-Customer-Fee.pdf; and http://www.cmegroup.com/trading/interest-rates/files/CME-IRS-Self-Clearing-Fee.pdf.
    \28\ See LCH pricing for clearing services related to OTC 
interest rate swaps at: http://www.lchclearnet.com/swaps/swapclear_for_clearing_members/fees.asp.
---------------------------------------------------------------------------

    It is within the FCM's discretion to determine whether or how to 
pass these fees on to their customers, but the Commission believes that 
FCMs generally pass these fees straight through to their customers. To 
the extent that this is true, allowing exempt cooperatives to elect not 
to clear swaps that meet the requirements of the proposed rule will 
result in the exempt cooperatives not having to pay such clearing 
related fees with respect to those swaps. The Commission requests 
comment on whether and how FCMs pass DCO fees on to their customers, 
and to what extent this creates clearing-related costs for exempt 
cooperatives entering into swaps meeting the conditions proposed in 
this rule. If possible, please provide quantitative information related 
to this issue.
    The proposed rule may also impact the capital that cooperatives 
that are financial entities are required to hold with respect to their 
swap positions pursuant to prudential regulatory capital requirements. 
As stated above, when compared to a situation in which the proposed 
exemption is not available, the proposed exemption will reduce the 
number of swaps that eligible cooperatives are required to clear. The 
Commission anticipates that reducing the number of swaps that such 
cooperatives clear will impact their capital ratios in such a way as to 
reduce the amount of capital that eligible cooperatives are required to 
hold. This creates both benefits and costs. Regarding benefits, this 
increases the cooperative's lending capacity, enabling them to lend 
more to their members without retaining or raising additional capital. 
As for costs, this allows eligible cooperatives to become more highly 
leveraged, which increases the counterparty risk that they pose to 
their members and other market participants with whom they transact. 
The Commission invites comment on the effects of required clearing on 
the capital requirements for financial cooperatives. To the extent 
possible, please quantify the anticipated effect of the proposed 
exemption on relevant capital ratios as well as the costs and benefits 
resulting from changes in the cooperatives' leverage and lending 
capacity.

[[Page 41946]]

    Clearing swaps creates an obligation for counterparties to the 
cleared swap to post both initial and variation margin related to that 
position. A clearing exemption may reduce the amount of capital that an 
entity has to post in order to cover its positions, particularly if 
that entity does not post margin directly to its counterparties with 
respect to some or all of its uncleared positions.\29\ However, in the 
case of unmargined swaps, dealers typically account for the 
counterparty risk that they face in the absence of margin by adjusting 
the terms of the swap. The additional cost embedded in an unmargined 
swap to account for additional counterparty risk is likely to be 
roughly equivalent to the cost associated with a line of credit that 
would be used to post margin for that position if it were cleared.\30\ 
The Commission, therefore, believes that this is an implicit cost in 
unmargined swaps that is made explicit by clearing swaps, rather than a 
new cost created by clearing. Therefore the exemption is not expected 
to significantly alter exempt cooperatives' costs in this area. The 
Commission invites comment regarding the expected effect of this 
proposed exemption on the amount and cost of collateral posted by 
entities eligible for the exemption. Wherever possible, please quantify 
costs and benefits.
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    \29\ This assessment assumes similar levels of netting and 
compression in both uncleared and cleared portfolios. These 
assumptions are not necessarily valid in all cases. Moving swaps 
into clearing can--depending on the number of counterparties a 
market participant originally faced with uncleared swaps, the margin 
agreements in place with those counterparties, and the number of 
DCOs that eventually clear those positions--reduce the amount of 
margin that an entity has to post.
    \30\ Mello, Antonio S., and John E. Parsons, ``Margins, 
Liquidity, and the Cost of Hedging.'' MIT Center for Energy and 
Environmental Policy Research, May 2012.
---------------------------------------------------------------------------

    Regarding reporting, cooperatives electing the cooperative 
exemption will have some reporting costs. The proposed rule requires 
that exempt cooperatives adhere to the reporting requirements of Sec.  
39.6(b). For each swap where the exemption is elected, either the 
cooperative or its counterparty (if the counterparty is an SD or MSP) 
must report: (1) That the election of the exemption is being made; (2) 
which party is the electing counterparty; and (3) certain information 
specific to the electing counterparty unless that information has 
already been provided by the electing counterparty through an annual 
filing. The third set of information comprises data that is likely to 
remain relatively constant for many, but not all, electing 
counterparties and therefore, does not require swap-by-swap reporting 
and can be reported less frequently. In addition, for entities that are 
registered with the SEC, the reporting party will also be required to 
report: (1) The SEC filer's central index key number; and (2) that an 
appropriate committee of the board of directors has approved the 
decision for that entity to enter into swaps that are exempt from the 
requirements of Sections 2(h)(1) and 2(h)(8) of the Act.
    When entering into swaps with members and electing the exemption, 
exempt cooperatives will be responsible to report this information. 
When cooperatives enter into swaps with SDs or MSPs, the SDs or MSPs 
will be responsible to report this information. Entities would bear 
costs related to the personnel hours committed to reporting the 
required information. As described below in the subsection entitled 
``Number of Exempt Cooperatives and Swaps'' in the section entitled 
``Paperwork Reduction Act,'' the Commission estimates that 
approximately ten cooperatives will be eligible for the cooperative 
exemption. For purposes of estimating costs, the Commission assumes 
that each potential exempt cooperative is likely to function as the 
reporting counterparty for at least some of their exempted swaps in any 
given year because they would be responsible for reporting when 
transacting exempted swaps with members.
    A review of information provided for five cooperatives that likely 
would be exempt cooperatives showed a range of swap usage from none to 
as many as approximately 200 swaps a year with most entering into less 
than 50 swaps a year. Using the high end of reported swaps for the five 
cooperatives for which information was available, an estimate of 50 
swaps per year was calculated. The Commission believes this estimate is 
high because some of the reported swaps may not meet the requirements 
of the proposed rule and several cooperatives for which information was 
not available to the Commission likely undertake little if any, swap 
activity. However, for purposes of the cost calculations, the 
Commission assumes that each of the ten potential exempt cooperatives 
will enter into 50 swaps each year. Accordingly, we estimate that 
exempt cooperatives may elect the cooperative exemption for 500 swaps 
each year. The Commission invites comment regarding the estimated 
number of swaps conducted by each cooperative that would be eligible 
under this proposed rule. In addition, the Commission invites comment 
regarding the per cooperative average and total notional value of swaps 
that would be eligible under the cooperative exemption.
    For each exempted swap, to comply with the swap-by-swap reporting 
requirements in Sec. Sec.  39.6(b)(1)(i) and (ii), the reporting 
counterparty will be required to check one box indicating the exemption 
is being elected and complete one field identifying the electing 
counterparty. The Commission expects that this information will be 
entered into the appropriate reporting system concurrently with 
additional information that is required under the CEA and other 
Commission regulations promulgated thereunder. Therefore, each 
reporting counterparty is likely to spend 15 seconds to two minutes per 
transaction in incremental time entering the swap-by-swap information 
into the reporting system, or in the aggregate, 1.5 hours to 17 hours 
per year for all 500 estimated swaps. A financial analyst's average 
salary is $208/hour, which corresponds to approximately $1-$7 per 
transaction or in aggregate, $300-$3,500 per year for all 500 estimated 
swaps.\31\
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    \31\ Wage estimates are taken from the SIFMA ``Report on 
Management and Professional Earnings in the Securities Industry 
2011.'' Hourly wages are calculated assuming 1,800 hours per year 
and a multiplier of 5.35 to account for overhead and bonuses. In 
light of the challenges of developing precise estimates, the results 
of calculations have been rounded.
---------------------------------------------------------------------------

    Regulation 39.6(b)(1)(iii) allows for certain counterparty specific 
information identified therein to be reported either swap-by-swap by 
the reporting counterparty or annually by the electing counterparty. 
For the end-user exception for which that section also applies, the 
alternative options may be useful in instances where electing 
counterparties enter into very few swaps each year and the reporting 
counterparties will report this information for them on a swap-by-swap 
basis. However, for the cooperative exemption, the exempt cooperative 
is the electing counterparty and will also likely be the reporting 
counterparty for swaps entered into with members. Furthermore, the 
Commission expects that, assuming the cooperative is the reporting 
counterparty, the time burden for the first swap entered into by an 
exempt cooperative in collecting and reporting the information required 
by Sec.  39.6(b)(1)(iii) will be approximately the same as the time 
burden for collecting and reporting the information for the annual 
filing. Given the cost equivalence for annual reporting to reporting a 
single swap if the exempt cooperative is both the electing and 
reporting counterparty, the Commission assumes that all ten exempt 
cooperatives will make an annual filing

[[Page 41947]]

of the information required for Sec.  39.6(1)(iii). The Commission 
estimates that it will take an average of 30 minutes to 90 minutes to 
complete and submit the annual filing. The average hourly wage for a 
compliance attorney is $390, which means that the annual per 
cooperative cost for the filing is likely to be between $200 and $590. 
If all ten eligible cooperatives were to undertake an annual filing, 
the aggregate cost would be $2,000 to $5,900.
    Furthermore, when an exempt cooperative is not functioning as the 
reporting counterparty (i.e. when transacting with a SD or MSP), it 
may, at certain times, need to communicate information to its reporting 
counterparties in order to facilitate reporting. That information may 
include, among other things, whether the electing counterparty has 
filed an annual report pursuant to Sec.  39.6(b) and information to 
facilitate any due diligence that the reporting counterparty may 
conduct. These costs will likely vary substantially depending on the 
number of different reporting counterparties with whom an electing 
counterparty conducts transactions, how frequently the electing 
counterparty enters into swaps, whether the electing counterparty 
undertakes an annual filing, and the due diligence that the reporting 
counterparty chooses to conduct. Therefore, the Commission believes 
that it is difficult to estimate these costs reliably at this time. 
Nevertheless, the Commission estimates that non-reporting electing 
counterparties will incur between five minutes and ten hours of annual 
burden hours, or in the aggregate, between approximately one hour and 
100 hours. The hourly wage for a compliance attorney is $390, which 
means that the annual aggregate cost for communicating information to 
the reporting counterparty is likely to be between $400 and $39,000. 
Given the unknowns associated with this cost estimate noted above, the 
Commission does not believe this wide range can be narrowed without 
further information.
2. Costs and Benefits for Counterparties to Electing Cooperatives
    Reduced clearing of swaps by exempt cooperatives likely will 
increase counterparty risk for both exempt cooperatives and their 
counterparties. Cooperatives will be more exposed to financial 
instability in their counterparties, and conversely, the cooperatives' 
counterparties may be exposed to any instability that might develop 
within the exempt cooperatives. This could be problematic for an exempt 
cooperative if one of the dealers with which the cooperative has large 
uncleared positions experiences financial instability, or if groups of 
members whose financial strength may be highly correlated and whose 
aggregate uncleared positions with the cooperative are large, encounter 
financial challenges. Conversely, if an exempt cooperative becomes 
insolvent and its positions with a SD or MSP are substantial, it is 
possible that its uncleared positions could be large enough to create 
or exacerbate instability at the SD or MSP, and could also create 
significant exposure for the members the cooperative serves. In this 
way, financial instability at one of the cooperative's counterparties 
could adversely impact the other counterparties of that cooperative. 
However, these risks may be mitigated through negotiated collateral 
agreements between exempt cooperatives and their counterparties. The 
Commission understands that many swaps in the uncleared market are 
subject to such agreements.\32\ The Commission invites comment on the 
size of exposures between potential exempt cooperatives and other 
financial entities, the size and number of positions between exempt 
cooperatives and their members, and the extent to which uncleared swaps 
between exempt cooperatives and financial entities, and transactions 
between exempt cooperatives and their members, are currently 
collateralized. Please quantify estimates, where possible.
---------------------------------------------------------------------------

    \32\ The 2012 ISDA Margin Survey indicates that 71% of all OTC 
derivatives transactions were subject to collateral agreements 
during 2011, but notes that the degree of collateralization may vary 
significantly depending on the type of derivative and counterparties 
entering into a transaction.
---------------------------------------------------------------------------

    In a similar vein, some members of exempt cooperatives are 
commercial entities that, in the absence of this exemption, could elect 
not to clear swaps by using the end-user exception. The proposed 
cooperative exemption does not affect the ability of those members to 
elect the end-user exemption, but it does constrain their ability to 
forego the end-user exception when entering into transactions with 
exempt cooperatives that are eligible for the proposed exemption. In 
other words, either the exempt cooperative or the member may elect not 
to clear the swap, and neither party may compel the other to clear the 
swap. To the extent that members are unconstrained in their choice of 
counterparties, this is not problematic. Members could still go to a SD 
or other financial entity, which has no clearing exemption election 
ability, to access the terms and counterparty protection that a cleared 
position provides. However, if members are constrained in their choice 
of counterparties (i.e. if they do not have sufficient size or 
experience to transact with a SD, or if they need the collateral that 
is already pledged with the loan to secure a corresponding swap) they 
will not be able to elect a cleared transaction when using swaps that 
are required to be cleared unless the cooperative agrees to clearing. 
The Commission invites comment regarding the extent to which this 
consideration represents a cost to members of cooperatives that would 
be eligible for the exemption under the criteria proposed in this rule. 
If possible, please quantify any such costs.
3. Costs and Benefits to the Public
    The public generally has an interest in required clearing because 
of its potential to reduce counterparty risk among large, 
interconnected institutions, and to facilitate rapid resolution of 
outstanding positions held by such institutions in the event of their 
default. By narrowly crafting the proposed cooperative exemption to 
incorporate qualifying criteria limiting both the types of institutions 
and the types of swaps that are eligible, the Commission expects the 
proposed exemption to appropriately conserve this public interest. 
Moreover, for this narrow category of swaps proposed for exemption, the 
potential remains for exempt cooperatives and their counterparties to 
mitigate residual counterparty risk through negotiated collateral 
agreements. The Commission invites comment regarding the extent to 
which this proposed exemption would impose costs or provide benefits on 
the public, including the expected impact of negotiated collateral 
agreements. Please provide quantification where possible.

D. Costs and Benefits Compared to Alternatives

    The proposed cooperative exemption includes two important limiting 
criteria. First, each member of a cooperative must independently be 
able to elect the end-user exception or be a cooperative whose members 
can elect the end-user exception. Second, the swaps for which exempt 
cooperatives may make use of the proposed rule only includes those 
entered into by the cooperative with its members in connection with 
originating loans or swaps that hedge or mitigate risks associated with 
such swaps or associated with member loans.
    The Commission considered including cooperatives consisting of 
members that could not elect the end-user exception. Such an exemption 
would assist in ensuring that a greater number of cooperatives and 
their members are able to elect not to clear

[[Page 41948]]

swaps. However, the Commission believes that such an exemption would 
significantly undermine Congress' intent to promote clearing and be 
inconsistent with the end-user exception provided for in Section 
2(h)(7) of the CEA. This alternative could allow any large financial 
entities such as SDs or MSPs, which Congress clearly intended the 
clearing requirement to apply to without exception, to form 
cooperatives with other entities that would be exempt from the clearing 
requirement. By contrast, with the proposed provision, the Commission 
is assuring that the cooperative exemption does not become overly broad 
and available to cooperatives with members that are financial entities 
as defined in Section 2(h)(7)(C) of the CEA.
    The Commission also considered exempting any swap transacted by an 
exempt cooperative. However, the Commission was concerned that 
financial entities such as SDs, MSPs, or non-member borrowers that are 
financial entities would be able to avoid clearing by entering into 
swaps through an exempt cooperative. For example, from a SD's 
perspective, taking a long position on a swap with another SD would 
require clearing. However, the two parties could have essentially the 
same economic arrangement if the first SD goes long on the swap with an 
exempt cooperative, and the second SD takes a short position on the 
same swap with the same exempt cooperative. The exempt cooperative 
would be even, and the two SDs would have created a synthetic swap that 
avoided the clearing requirement. The proposed provision avoids such a 
scenario by ensuring that the cooperative exemption is only used as a 
pass through for swaps with members who would themselves be able to 
elect the end-user exception and for swaps that hedge or mitigate risk 
in connection member loans or swaps as would be required by Section 
2(h)(7)(A)(ii) of the CEA.
    The Commission invites comment regarding the extent to which the 
requirements in the definition of exempt cooperative may be too 
restrictive for cooperatives that the commenter believes should have 
the benefit of the proposed cooperative exemption or are not 
restrictive enough to protect the public interest in requiring clearing 
of certain swaps. Similarly, the Commission invites comment on whether 
the limitation on the types of swaps for which the cooperative 
exemption may be elected should be expanded or further limited and why. 
Please describe such specific expansion or further limitation 
contemplated and the costs and benefits that could result therefrom.

E. Section 15(a) Factors

1. Protection of Market Participants and the Public
    As described above, allowing exempt cooperatives to exempt certain 
swaps from required clearing will reduce the DCO and FCM clearing fees 
that such entities may otherwise bear. This, in turn, provides benefits 
to the members of exempt cooperatives, who would otherwise absorb such 
costs as they are passed through by the cooperatives to their members 
in the form of fees or less desirable spreads on swaps or loans 
conducted with the cooperative. In addition, the exemption may reduce 
the amount of capital that exempt cooperatives must allocate to margin 
accounts with their FCM.
    The proposed rule is narrowly tailored to exempt only swaps that 
are associated with positions established in connection with loans made 
to customers, or that hedge or mitigate risk arising in connection with 
such member loans or swaps. Further, it is otherwise generally 
consistent with the requirements for the end-user exception as provided 
in Section 2(h)(7) of the CEA and Sec.  39.6. Given the proposed 
cooperative exemption's limited scope and the remaining potential for 
exempt cooperatives and their counterparties to mitigate residual 
counterparty risk through negotiated collateral agreements, the 
Commission does not anticipate that the proposed rule would materially 
compromise protection of market participants and the public. The 
Commission requests comment on the extent to which the limitations on 
the entities and transactions eligible for the proposed exemption will 
limit risk to market participants and the public. If possible, please 
quantify relevant estimates.
2. Efficiency, Competitiveness, and Financial Integrity of Swap Markets
    While the proposed rule would take swaps out of clearing, it limits 
any compromise of the financial integrity of the swap markets insomuch 
as it is narrowly tailored to include only cooperatives that are made 
up entirely of entities that could elect the end-user exception, and 
only swaps related to originating loans between the cooperative and 
such members. The Commission invites comment on the effects of the 
proposed rule on efficiency, competitiveness, and financial integrity 
of swap markets.
3. Price Discovery
    Clearing, in general, encourages better price discovery because it 
eliminates the importance of counterparty creditworthiness in pricing 
swaps cleared through a given DCO. That is, by making the counterparty 
creditworthiness of all swaps of a certain type essentially the same, 
prices should reflect factors related to the terms of the swap, rather 
than the idiosyncratic risk posed by the entities trading it.\33\ To 
the extent that the cooperative exemption reduces the number of swaps 
subject to required clearing, it will lessen the beneficial effects of 
required clearing for price discovery. However, the Commission assumes 
that the number of swaps eligible for this exemption, estimated above 
at 500 a year, will be a de minimis fraction of all those that are 
otherwise required to be cleared. The Commission invites comment on the 
effects of the proposed rule on price discovery.
---------------------------------------------------------------------------

    \33\ See Chen, K., et al. ``An Analysis of CDS Transactions: 
Implications for Public Reporting,'' September 2011, Federal Reserve 
Bank of New York Staff Reports, at 14.
---------------------------------------------------------------------------

4. Sound Risk Management Practices
    To the extent that a swap is removed from clearing, all other 
things being constant, it is a detriment to a sound risk management 
regime. To the extent that exempt cooperatives enter into uncleared 
swaps on the basis of this proposed rule, it likely increases the 
amount of counterparty risk that exempt cooperatives and their 
counterparties face. For the public, it increases the risk that 
financial distress at one or more cooperatives could spread to other 
financial institutions with which those cooperatives have concentrated 
positions. However, as discussed above, this additional risk may be 
reduced by the presence of bilateral margin agreements, which the 
Commission believes are often used in the absence of clearing. 
Furthermore, the Commission believes that, given the small number of 
swaps that will be exempted from clearing as a result of the proposed 
rule, estimated above to be 500 each year, these risks to the public 
will be minimized. The Commission invites comment regarding the effect 
of the proposed rule on the risk exposure of the cooperatives meeting 
the criteria proposed in this rule, their counterparties, and the 
public. Where possible, please quantify any costs or benefits that are 
relevant.

[[Page 41949]]

5. Other Public Interest Considerations
    The Commission has not identified any public interest 
considerations relevant to this proposed rule beyond those already 
noted above.

F. Public Comment on the Cost-Benefit Considerations

    The Commission invites public comment on all aspects of the cost-
benefit considerations. More specifically, the Commission also requests 
comment on the following.
    Would a cooperative exemption have any adverse impact on 
competition?
    Would a cooperative exemption have an impact on fees or other 
charges for any products and/or services?
    Would a cooperative exemption result in efficiencies or other 
benefits not described in this NPRM?
    Commenters are also invited to submit any data or other information 
that they may have quantifying or qualifying the costs and benefits of 
the proposal with their comment letters.

VI. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act \34\ (``RFA'') requires that 
agencies consider whether proposed rules will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis on the impact.
---------------------------------------------------------------------------

    \34\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    The proposed rule will not have a significant economic impact on a 
substantial number of small entities. The proposed rule would affect 
cooperatives, their members, and potentially the counterparties with 
whom they trade. These entities could be SDs, MSPs, and eligible 
contract participants (ECPs).\35\ The Commission has previously 
established certain definitions of ``small entities'' to be used by the 
Commission in evaluating the impact of its rules on small entities in 
accordance with the RFA. In that regard, the Commission has certified 
previously that SDs and MSPs are not small entities for purposes of the 
RFA.\36\ The Commission is making a similar determination for purposes 
of this proposal. The proposed rules would also affect SDRs, which the 
Commission has similarly determined not to be small entities for 
purposes of the RFA. The Commission is making the same determination 
with respect to the proposed rules.
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    \35\ It is possible that a cooperative or members thereof may 
not be ECPs. However, pursuant to Section 2(e) of the CEA, if a 
counterparty to a swap is not an ECP, then such swap must be entered 
into on, or subject to the rules of, a board of trade designated as 
a contract market under Section 5 of the CEA. All such swaps are 
required to be cleared by the board of trade. In effect all swaps 
entered into by a cooperative or a member that is not an ECP will 
need to be executed on a board of trade and therefore will be 
cleared.
    \36\ See 77 FR 30596, 30701 (May 23, 2012).
---------------------------------------------------------------------------

    The Commission has previously determined that ECPs are not small 
entities for purposes of the RFA.\37\ However, in its proposal of rule 
Sec.  39.6, the Commission received a joint comment (``Electric 
Associations Letter'') from the National Rural Electric Cooperative 
Association, the American Public Power Association and the Large Public 
Power Council (the ``Associations'') asserting that certain members of 
the Associations may both be ECPs under the CEA and small businesses 
under the RFA.\38\ These members of the Associations, as the Commission 
understands, have been determined to be small entities by the Small 
Business Administration (``SBA'') because they are ``primarily engaged 
in the generation, transmission, and/or distribution of electric energy 
for sale and [their] total electric output for the preceding fiscal 
year did not exceed 4 million megawatt hours.'' \39\ The Electric 
Associations Letter states that the Associations' members are ``not 
financial entities'' and ``engage in swaps only to mitigate or hedge 
commercial risks.'' \40\ Because the Associations' members that have 
been determined by the SBA to be small entities would be using swaps to 
hedge commercial risk, the Commission expects that they would be able 
to use the end-user exception from the clearing requirement and 
therefore would not be affected to any significant extent by this 
proposed exemption.
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    \37\ See 66 FR 20740, 20743 (Apr. 25, 2001).
    \38\ See joint letter from EEI, NRECA, and ESPA, dated Nov. 4, 
2011, (Electric Associations Letter), commenting on Swap Transaction 
Compliance and Implementation Schedule: Clearing and Trade Execution 
Requirements under Section 2(h) of the CEA, 76 FR 58186 (Sept. 20, 
2011).
    \39\ Small Business Administration, Table of Small Business Size 
Standards, Nov. 5, 2010.
    \40\ See Electric Associations Letter, at 2.
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    Accordingly, because nearly all of the entities that may be 
affected by the proposed cooperative exemption are not small entities, 
and because the few ECPs that have been determined by the SBA to be 
small entities are unlikely to be affected to any significant extent by 
the proposed exemption, the Chairman, on behalf of the Commission, 
hereby certifies, pursuant to 5 U.S.C. 605(b), that the proposed 
regulation would not have a significant economic impact on a 
substantial number of small entities. The Commission invites public 
comment on this determination.

B. Paperwork Reduction Act

1. Overview
    The Paperwork Reduction Act (PRA) \41\ imposes certain requirements 
on Federal agencies in connection with their conducting or sponsoring 
any collection of information as defined by the PRA. An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number issued by the Office of Management and Budget (OMB). Certain 
provisions of this proposed rule would result in new collection of 
information requirements, within the meaning of the PRA, for exempt 
cooperatives. These new reporting requirements for exempt cooperatives 
are not currently covered by any existing OMB control number and OMB 
has not yet assigned a control number for this new collection. The 
Commission therefore is submitting this proposal to the OMB for review 
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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    \41\ 44 U.S.C. 3501 et seq.
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    The title for this collection of information is ``Rule 39.6(f) 
Cooperative Clearing Exemption Notification.'' If adopted, this new 
collection of information would be mandatory for those parties availing 
themselves of the cooperative exemption. The Commission will protect 
proprietary information according to the Freedom of Information Act and 
17 CFR Part 145, ``Commission Records and Information.'' In addition, 
Section 8(a)(1) of the CEA strictly prohibits the Commission, unless 
specifically authorized by the CEA, from making public ``data and 
information that would separately disclose the business transactions or 
market positions of any person and trade secrets or names of 
customers.'' The Commission is also required to protect certain 
information contained in a government system of records according to 
the Privacy Act of 1974, 5 U.S.C. 552a.
2. Information Provided by Reporting Entities
    This proposed cooperative exemption rule would trigger certain 
reporting conditions under proposed Sec.  39.6(f)(3) that must be 
satisfied for exempt cooperatives. These conditions are designed to 
notify the Commission when the exemption from the clearing requirements 
in Section 2(h)(1)(A) of the CEA is being elected, address Commission 
concerns regarding exempt cooperative swap risk, and provide the 
Commission with information necessary to regulate swap markets. In 
particular,

[[Page 41950]]

the reporting conditions in proposed Sec.  39.6(f)(3), which requires 
compliance with reporting requirements under Sec.  39.6(b) for swaps 
for which the cooperative exemption is elected, would establish new 
collection of information requirements within the meaning of the PRA. 
Additionally, exempt cooperatives may be required to supplement their 
reporting systems for purposes of complying with the proposed reporting 
requirements.
    For each swap where the exemption is elected, either the 
cooperative or its counterparty (if the counterparty is an SD or MSP) 
must report: (1) That the election of the exemption is being made; (2) 
which party is the electing counterparty; and (3) certain information 
specific to the electing counterparty unless that information has 
already been provided by the electing counterparty through an annual 
filing. The third set of information comprises data that is likely to 
remain relatively constant for many, but not all, electing 
counterparties and therefore, does not require swap-by-swap reporting 
and can be reported less frequently. In addition, for entities that are 
registered with the SEC, the reporting party will also be required to 
report: (1) The SEC filer's central index key number; and (2) that an 
appropriate committee of the board of directors has approved the 
decision for that entity to enter into swaps that are exempt from the 
requirements of Section 2(h)(1)(A) of the CEA.
    When entering into swaps with members and electing the exemption, 
exempt cooperatives will likely be responsible to report this 
information. When cooperatives enter into swaps with SDs or MSPs, the 
SDs or MSPs will be responsible to report this information. However, 
the cooperatives would bear costs related to the personnel hours 
committed to reporting the required information.
    The Commission provides estimates of the time burden required for 
exempt cooperatives to comply with the proposed requirements below.\42\ 
The estimates include quantifiable costs, including one-time and annual 
burden hours and costs per cooperative, and costs that are incurred on 
a swap-by-swap basis. The dollar estimates are offered as ranges with 
upper and lower bounds, which is necessary to accommodate uncertainty 
regarding the estimates.
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    \42\ See 5 CFR 1320.3(b) for the definition of the term 
``burden.''
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3. Number of Exempt Cooperatives and Swaps
    The total reporting related costs of the cooperative exemption 
would depend on the number of cooperatives electing the cooperative 
exemption, as well as the number of swaps for which cooperatives would 
elect to use the exemption. In addition, as described in more detail 
below, the cost will also depend on whether the cooperatives choose the 
annual reporting option permitted by the proposed rule.
    To identify the number of cooperatives that could elect the 
cooperative exemption, the Commission first considered what types of 
cooperatives may be financial entities with total assets in excess of 
$10 billion since non-financial cooperatives or cooperatives that are 
financial entities with assets of $10 billion or less can use the end-
user exception in the alternative and the costs of reporting thereunder 
have already been addressed in the end-user exception rulemaking. Given 
the comments received for the end-user exception NPRM regarding 
cooperatives and consideration of other financial cooperatives the 
Commission is aware of, the Commission believes that cooperatives that 
may meet the definition of exempt cooperative could be farm credit 
system cooperatives, credit unions, and financial cooperatives that 
provide financing in the rural electric space. Based on a review of 
data available from the regulators for these entities and information 
provided by commenters, the Commission believes there are approximately 
ten cooperatives that will meet the definition of ``financial entity'' 
in Section 2(h)(7)(C)(i)(VIII) of the CEA and which will not be exempt 
from that definition as small financial institutions because they have 
total assets in excess of $10 billion. Each of these is likely to 
function as the reporting counterparty for at least some of their 
exempted swaps in any given year since they would likely be responsible 
for reporting when transacting exempted swaps with members.
    A review of information provided for five cooperatives that likely 
would be exempt cooperatives showed a range of swap usage from none to 
as many as approximately 200 swaps a year with most entering into less 
than 50 swaps a year. Using the high end of reported swaps for the five 
cooperatives for which information was available, an estimate of 50 
swaps per year was calculated. The Commission believes this estimate is 
high because some of the reported swaps may not meet the requirements 
of the proposed rule and several cooperatives for which information was 
not available to the Commission likely undertake little, if any, swap 
activity. However, for purposes of the cost calculations, we will 
assume that each of the ten potential exempt cooperatives will enter 
into 50 swaps per year. Accordingly, we estimate that exempt 
cooperatives may elect the cooperative exemption for 500 swaps each 
year.
4. Proposed Sec.  39.6(f)(3) Reporting Requirements Cost Estimate
a. Ongoing Reporting Burden Hours and Costs
    Proposed Sec.  39.6(f)(3) would require exempt cooperatives that 
are reporting counterparties to comply with the reporting requirements 
in paragraph (b) of Sec.  39.6, which require delivering specified 
information to a registered SDR or, if no registered SDR is available, 
the Commission. Counterparties must also undertake reporting pursuant 
to Sec.  39.6(b) if the end-user exception is elected.
    Assuming that the exempt cooperative is the reporting counterparty, 
it would have to report the information required in Sec.  39.6(b)(1)(i) 
and (ii) for each swap for which it elects the cooperative exemption. 
To comply with Sec.  39.6(b)(1)(i) and (ii), each reporting 
counterparty would be required to check one box in the SDR or 
Commission reporting data fields indicating that the exempt cooperative 
is electing not to clear the swap. The Commission expects that each 
reporting counterparty would likely spend 15 seconds to two minutes per 
transaction entering this information into the reporting system, or in 
the aggregate, 1.5 hours to 17 hours per year for all 500 estimated 
swaps. Using a financial analyst's average salary of $208/hour, these 
burden hour costs would equal between less than $1 and $7 for each 
transaction, or approximately $300 to $3,500 per year for all 500 
transactions.\43\
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    \43\ Wage estimates are taken from the SIFMA ``Report on 
Management and Professional Earnings in the Securities Industry 
2011.'' Hourly wages are calculated assuming 1,800 hours per year 
and a multiplier of 5.35 to account for overhead and bonuses. In 
light of the challenges of developing precise estimates, the results 
of all calculations have been rounded.
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    Regulation 39.6(b)(1)(iii) allows for certain counterparty specific 
information identified therein to be reported either swap-by-swap by 
the reporting counterparty or annually by the electing counterparty. 
For the end-user exception, the alternative options may be useful in 
instances where electing counterparties enter into very

[[Page 41951]]

few swaps each year and the reporting counterparties will report this 
information for them on a swap-by-swap basis. However, for the 
cooperative exemption, the exempt cooperative is the electing 
counterparty and will also likely be the reporting counterparty for 
swaps entered into with members. Furthermore, the Commission expects 
that, assuming the cooperative is the reporting counterparty, the time 
burden for the first swap entered into by an exempt cooperative in 
collecting and reporting the information required by Sec.  
39.6(b)(1)(iii) will be approximately the same as the time burden for 
collecting and reporting the information for the annual filing. Given 
the cost equivalence for annual reporting to reporting a single swap if 
the exempt cooperative is the electing counterparty and the reporting 
counterparty, the Commission assumes that all ten exempt cooperatives 
will make an annual filing of the information required for Sec.  
39.6(1)(iii). The Commission estimates that it will take an average of 
30 minutes to 90 minutes to complete and submit the annual filing. The 
average hourly wage for a compliance attorney is $390, which means that 
the annual per cooperative cost for the filing is likely to be between 
$200 and $590. If all ten eligible cooperatives were to undertake an 
annual filing, the aggregate cost would be $2,000 to $5,900.
b. Other Costs
i. Updating Reporting Procedures
    The Commission believes that cooperatives electing the cooperative 
exemption would have established reporting systems to comply with other 
Commission rules regarding swap reporting generally. Reporting 
counterparties may need to modify their reporting systems in order to 
accommodate the additional data fields required by this rule. The 
Commission estimates that those modifications would create a one-time 
expense of approximately one to ten burden hours per reporting 
counterparty. The Commission estimates that the hourly wage for a 
senior programmer is $341, which means that the one-time, per entity 
cost for modifying reporting systems to comply with proposed Sec.  
39.6(f)(3) would likely be between $340 and $3,400, and the aggregate 
one-time cost for all ten potential exempt cooperatives is estimated to 
be $3,400 to $34,100.
ii. Burden on Non-Reporting Cooperatives
    When an exempt cooperative is not functioning as the reporting 
counterparty (i.e. when transacting with a SD or MSP), it may, at 
certain times, need to communicate information to its reporting 
counterparties in order to facilitate reporting. That information may 
include, among other things, whether the exempt cooperative has filed 
an annual report pursuant to Sec.  39.6(b) and information to 
facilitate any due diligence that the reporting counterparty may 
conduct. These costs will likely vary substantially depending on the 
number of different reporting counterparties with whom an exempt 
cooperative conducts transactions, how frequently the exempt 
cooperative enters into swaps, whether the exempt cooperative 
undertakes an annual filing, and the due diligence that the reporting 
counterparty chooses to conduct. Therefore, the Commission believes 
that it is difficult to estimate these costs reliably at this time. 
Nevertheless, the Commission estimates that a non-reporting exempt 
cooperative will incur between five minutes and ten hours of annual 
burden hours. The hourly wage for a compliance attorney is $390, which 
means that the annual aggregate cost for communicating information to 
the reporting counterparty is likely to be between $400 and $39,000. 
Given the unknowns associated with this cost estimate noted above, the 
Commission does not believe this wide range can be narrowed without 
further information.
c. Reporting Cost Summary
    The reporting costs described above are summarized in the following 
table.

                                       Summary of Reporting-Related Costs
----------------------------------------------------------------------------------------------------------------
                                   Aggregate hours per annum
           Reporting                          \44\                     Cost range \45\               Notes
----------------------------------------------------------------------------------------------------------------
(1) Swap-by-Swap Reporting to    1.5-17.......................  $300 to $3,500...............  This assumes that
 SDR or Commission (Sec.  Sec.                                  ($208/hour)..................   all exempt
  39.6(b)(1)(i) and (ii)).                                                                      cooperatives
                                                                                                will be
                                                                                                reporting
                                                                                                counterparties.
(2) Electing Counterparty        5-15.........................  $2,000-$5,900................  This assumes that
 Annual Reporting (Sec.                                         ($390/hour)..................   all exempt
 39.6(b)(1)(iii)).                                                                              cooperatives
                                                                                                will be
                                                                                                reporting
                                                                                                counterparties
                                                                                                and will elect
                                                                                                annual reporting
                                                                                                for Sec.
                                                                                                39.6(b)(1)(iii)
                                                                                                information.
(3) Updating Reporting           10-100.......................  $3,400-$34,100...............  This assumes that
 Procedures (Sec.   39.6(f)(3)).                                ($341/hour)..................   all exempt
                                                                                                cooperatives
                                                                                                will have to
                                                                                                update reporting
                                                                                                procedures. This
                                                                                                is a one-time
                                                                                                cost in the
                                                                                                first year.
(4) Non-Reporting                1.0-100......................  $400-$39,000.................  This estimate
 Counterparties (Sec.                                           ($390/hour)..................   assumes all
 39.6(f)(3)).                                                                                   exempt
                                                                                                cooperatives are
                                                                                                non-reporting
                                                                                                counterparties
                                                                                                for some swaps
                                                                                                and each spends
                                                                                                between five
                                                                                                minutes to ten
                                                                                                hours each year
                                                                                                on this task.
                                --------------------------------------------------------------------------------
    Estimated Reporting Total..  18-232.......................  $6,100-$82,500...............  Sum of rows (1)
                                 (125 midpoint)...............  ($44,300 midpoint)...........   through (4).
----------------------------------------------------------------------------------------------------------------

3. Information Collection Comments
    The Commission invites public comment on any aspect of the 
reporting burdens discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), 
the Commission solicits comments in order to: (i) Evaluate whether the 
proposed collection of information is necessary for the proper 
performance of the functions of the Commission, including whether the 
information will have practical utility; (ii) evaluate the accuracy of 
the Commission's estimate of the burden of the proposed collection of 
information; (iii) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(iv) minimize the burden of the collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
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    \44\ Hours estimates reflect total burden hours for the ten 
exempt cooperatives, rounded to nearest half-hour.
    \45\ The total burden costs are aggregate costs for the ten 
exempt cooperatives, rounded to nearest hundred dollars.

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[[Page 41952]]

    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs (``OIRA'') in OMB, by fax at (202) 395-6566, or by 
email at OIRAsubmissions@omb.eop.gov. Please provide the Commission 
with a copy of submitted comments so that they can be considered in 
connection with a final rule. Refer to the Addresses section of this 
release 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 www.RegInfo.gov. OMB is 
required to make a decision concerning the collection of information 
between 30 and 60 days after publication of this release in the Federal 
Register. Consequently, a comment to OMB is most assured of being fully 
effective if received by OMB (and the Commission) within 30 days after 
publication.

List of Subjects in 17 CFR Part 39

    Business and industry, Clearing, Commodity futures, Cooperatives, 
Reporting requirements, Swaps.

    For the reasons stated in the preamble, the Commission proposes to 
amend 17 CFR part 39 as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

    1. The authority citation for part 39 continues to read as follows:

    Authority:  7 U.S.C. 2 and 7a-1 as amended by Pub. L. 111-203, 
124 Stat. 1376.

    2. Amend Sec.  39.6, to add paragraph (f) to read as follows:

Sec.  39.6  Exceptions to the clearing requirement.

* * * * *
    (f) Exemption for cooperatives. Exempt cooperatives may elect not 
to clear certain swaps identified in paragraph (f)(2) of this section 
that are otherwise subject to the clearing requirement of section 
2(h)(1)(A) of the Act if the following requirements are satisfied.
    (1) For the purposes of this paragraph, an exempt cooperative means 
a cooperative:
    (i) Formed and existing pursuant to Federal or state law as a 
cooperative;
    (ii) That is a ``financial entity,'' as defined in section 
2(h)(7)(C)(i) of the Act, solely because of section 2(h)(7)(C)(i)(VIII) 
of the Act; and
    (iii) Each member of which is not a ``financial entity,'' as 
defined in section 2(h)(7)(C)(i) of the Act, or if any member is a 
financial entity solely because of section 2(h)(7)(C)(i)(VIII) of the 
Act, such member is:
    (A) Exempt from the definition of ``financial entity'' pursuant to 
paragraph (d) of this section; or
    (B) A cooperative formed under Federal or state law as a 
cooperative and each member thereof is either not a ``financial 
entity,'' as defined in section 2(h)(7)(C)(i) of the Act, or is exempt 
from the definition of ``financial entity'' pursuant to paragraph (d) 
of this section.
    (2) An exempt cooperative may elect not to clear a swap that is 
subject to the clearing requirement of section 2(h)(1)(A) of the Act if 
the swap:
    (i) Is entered into with a member of the exempt cooperative in 
connection with originating a loan or loans for the member, which means 
the requirements of Sec.  1.3(ggg)(5)(i), (ii), and (iii) are 
satisfied; provided that, for this purpose, the term ``insured 
depository institution'' as used in those sections is replaced with the 
term ``exempt cooperative'' and the word ``customer'' is replaced with 
the word ``member;'' or
    (ii) Hedges or mitigates commercial risk, in accordance with 
paragraph (c) of this section, related to loans to members or arising 
from a swap or swaps that meet the requirements of paragraph (f)(2)(i) 
of this section.
    (3) An exempt cooperative that elects the exemption provided in 
paragraph (f) of this section shall comply with the requirements of 
paragraph (b) of this section. For this purpose, the exempt cooperative 
shall be the ``electing counterparty,'' as such term is used in 
paragraph (b), and for purposes of paragraph (b)(1)(iii)(A), the 
reporting counterparty shall report that an exemption is being elected 
in accordance with paragraph (f) of this section.

    Issued in Washington, DC, on July 10, 2012, by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Clearing Exemption for Certain Swaps Entered Into by 
Cooperatives--Commission Voting Summary and Statements of Commissioners

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

Appendix 1--Commission Voting Summary

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

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rule that would permit certain 
cooperatives to choose not to clear member-related swaps.
    One of the primary goals of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank Act) was to lower risk to 
the financial system by requiring standardized swaps between 
financial entities to be cleared.
    Congress provided that non-financial entities, such as farmers, 
ranchers, manufacturers and other end users, should be able to 
choose whether or not to clear those swaps that hedge or mitigate 
commercial risks.
    Cooperatives act on behalf of and are an extension of their 
members. Thus, I believe it is appropriate that those cooperatives 
made up entirely of members that could individually qualify for the 
end-user exception should qualify as well themselves as end users in 
certain circumstances.
    The proposed cooperative exemption is narrowly tailored, and 
extends only to:
     Swaps entered into with members of the cooperative in 
connection with originating loans for members; and
     Swaps entered into by a cooperative to hedge or 
mitigate risks associated with member loans or member loan related 
swaps.

[FR Doc. 2012-17357 Filed 7-16-12; 8:45 am]
BILLING CODE 6351-01-P
```