```

[Federal Register Volume 76, Number 26 (Tuesday, February 8, 2011)]
[Proposed Rules]
[Pages 6715-6727]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2643]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AC96

Swap Trading Relationship Documentation Requirements for Swap 
Dealers and Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing regulations to implement new statutory provisions 
established under Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act). Section 731 of the Dodd-Frank 
Act added a new section 4s(i) to the Commodity Exchange Act (CEA), 
which requires the Commission to prescribe standards for swap dealers 
and major swap participants related to the timely and accurate 
confirmation, processing, netting, documentation, and valuation of 
swaps. The proposed rules would establish requirements for swap trading 
relationship documentation for swap dealers and major swap 
participants.

DATES: Submit comments on or before April 11, 2011.

ADDRESSES: You may submit comments, identified by RIN number 3038-AC96 
and Swap Trading Relationship Documentation Requirements for Swap 
Dealers and Major Swap Participants, by any of the following methods:
     Agency Web site, via its Comments Online process at http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Please submit your comments using only one method.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that may be exempt from disclosure

[[Page 6716]]

under the Freedom of Information Act, a petition for confidential 
treatment of the exempt information may be submitted according to the 
established procedures in Sec.  145.9 of the Commission's regulations, 
17 CFR 145.9.
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Associate 
Director, 202-418-5684, sjosephson@cftc.gov; Frank N. Fisanich, Special 
Counsel, 202-418-5949, ffisanich@cftc.gov; or Jocelyn Partridge, 
Special Counsel, 202-418-5926, jpartridge@cftc.gov; Division of 
Clearing and Intermediary Oversight, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\ 
Title VII of the Dodd-Frank Act \2\ amended the Commodity Exchange Act 
(CEA) \3\ to establish a comprehensive regulatory framework to reduce 
risk, increase transparency, and promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and comprehensive regulation of swap dealers and major 
swap participants; (2) imposing clearing and trade execution 
requirements on standardized derivative products; (3) creating rigorous 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
Commission's rulemaking and enforcement authorities with respect to all 
registered entities and intermediaries subject to the Commission's 
oversight.
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \3\ 7 U.S.C. 1 et seq.
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    Section 731 of the Dodd-Frank Act amends the CEA by adding a new 
section 4s, which sets forth a number of requirements for swap dealers 
and major swap participants. Specifically, section 4s(i) of the CEA 
establishes swap documentation standards for those registrants.
    Section 4s(i)(1) requires swap dealers and major swap participants 
to ``conform with such standards as may be prescribed by the Commission 
by rule or regulation that relate to timely and accurate confirmation, 
processing, netting, documentation, and valuation of all swaps.'' Under 
section 4s(i)(2), the Commission is required to adopt rules ``governing 
documentation standards for swap dealers and major swap participants.'' 
The Commission is proposing the regulations governing swap 
documentation discussed below, pursuant to the authority granted under 
sections 4s(h)(1)(D), 4s(h)(3)(D), 4s(i), and 8a(5) of the CEA.\4\ The 
Dodd-Frank Act requires the Commission to promulgate these provisions 
by July 15, 2011.\5\
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    \4\ Section 8a(5) of the CEA authorizes the Commission to 
promulgate such regulations as, in the judgment of the Commission, 
are reasonably necessary to effectuate any of the provisions or to 
accomplish any of the purposes of the CEA.
    \5\ This is the sixth rulemaking to be proposed regarding 
internal business conduct standards for swap dealers and major swap 
participants. Prior notices of proposed rulemaking are available on 
the Commission's Web site at http://www.cftc.gov.
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    The proposed regulations reflect consultation with staff of the 
following agencies: (i) The Securities and Exchange Commission; (ii) 
the Board of Governors of the Federal Reserve System; (iii) the Office 
of the Comptroller of the Currency; and (iv) the Federal Deposit 
Insurance Corporation. Staff from each of these agencies has had the 
opportunity to provide oral and/or written comments to the proposal, 
and the proposed regulations incorporate elements of the comments 
provided.
    In designing these rules, the Commission has taken care to minimize 
the burden on those parties that will not be registered with the 
Commission as swap dealers or major swap participants. To the extent 
that market participants believe that additional measures should be 
taken to reduce the burden or increase the benefits of documenting swap 
transactions, the Commission welcomes all comments.

II. Proposed Regulations

    The proposed regulations would set forth certain requirements for 
documenting the swap trading relationship between swap dealers, major 
swap participants, and their counterparties. Documentation of swaps is 
a critical component of the bilaterally-traded, over-the-counter (OTC) 
derivatives market and has been the focus of significant domestic and 
international attention in recent years.

A. Background on Documentation and Standardization

    The OTC derivatives markets traditionally have been characterized 
by privately negotiated transactions entered into by two 
counterparties, in which each party assumes and manages the credit risk 
of the other. While OTC derivatives are traded by a diverse set of 
market participants, such as banks, hedge funds, pension funds, and 
other institutional investors, as well as corporate, governmental, and 
other end-users, a relatively few number of dealers are, by far, the 
most significantly active participants. As such, the default of a 
dealer may result in significant losses for the counterparties of that 
dealer, either from the counterparty exposure to the defaulting dealer 
or from the cost of replacing the defaulted trades in times of market 
stress.\6\
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    \6\ See Financial Stability Board, ``Implementing OTC 
Derivatives Market Reforms: Report of the OTC Derivatives Working 
Group,'' (Oct. 10, 2010), available at http://www.financialstabilityboard.org/publications/r_101025.pdf.
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    OTC derivatives market participants typically have relied on the 
use of industry standard legal documentation, including master netting 
agreements, definitions, schedules, and confirmations, to document 
their swap trading relationships. This industry standard documentation, 
such as the widely used ISDA Master Agreement and related definitions, 
schedules, and confirmations specific to particular asset classes, 
offers a framework for documenting the transactions between 
counterparties for OTC derivatives products.\7\ The standard 
documentation is designed to set forth the legal, trading, and credit 
relationship between the parties and to facilitate cross-product 
netting of transactions in the event that parties have to close-out 
their position with one another.
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    \7\ The International Swaps and Derivatives Association (ISDA) 
is a trade association for the OTC derivatives industry (http://www.isda.org).
---------------------------------------------------------------------------

    One important method of addressing the credit risk that arises from 
OTC derivatives transactions is the use of bilateral close-out netting. 
Parties seek to achieve enforceable bilateral netting by documenting 
all of their transactions under master netting agreements.\8\ Following 
the occurrence of a default by one of the counterparties (such as 
bankruptcy or insolvency), the

[[Page 6717]]

exposures from individual transactions between the two parties are 
netted and consolidated into a single net ``lump sum'' obligation. A 
party's overall exposure is therefore limited to this net sum. That 
exposure then may be offset by the available collateral previously 
provided being applied against the net exposure. As such, it is 
critical that the netting provisions between the parties are legally 
enforceable and that the collateral may be used to meet the net 
exposure. In recognition of the risk-reducing benefits of close-out 
netting, many jurisdictions provide favorable treatment of netting 
arrangements in bankruptcy,\9\ and favorable capital and accounting 
treatment to parties that have enforceable netting agreements in 
place.\10\
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    \8\ Enforceable bilateral netting arrangements are a common 
commercial practice and are an important part of risk management and 
minimization of capital costs.
    \9\ See e.g., 11 U.S.C. 561 (protecting contractual right to 
terminate, liquidate, accelerate, or offset under a master netting 
agreement and across contracts).
    \10\ See 12 CFR 3, Appendix C; 12 CFR 208, Appendix F; 12 CFR 
225, Appendix G; and 12 CFR 325, Appendix D (banking regulations 
regarding qualifying master netting agreements).
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    There is also a risk that inadequate documentation of open swap 
transactions could result in collateral and legal disputes, thereby 
exposing counterparties to significant counterparty credit risk. By way 
of contrast, adequate documentation between counterparties offers a 
framework for establishing the trading relationship between the 
parties. The use of common legal documentation also encourages 
standardization of traded products. This, in turn, may facilitate 
central clearing and trading as sufficient standardization is a 
prerequisite for central clearing and trading on an exchange or 
electronic platform.
    In response to the global economic crisis, in September 2009, G-20 
Leaders agreed in Pittsburgh to critical elements relating to OTC 
derivatives reform, including a provision that ``[a]ll standardized OTC 
derivative contracts should be traded on exchanges or electronic 
trading platforms, where appropriate, and cleared through central 
counterparties. * * *'' \11\ In June 2010 in Toronto, the G-20 Leaders 
reaffirmed this commitment, and expressly stated their objective of 
increasing standardization in the OTC derivatives markets.\12\ With the 
passage of the Dodd-Frank Act in July 2010, Congress expressly 
recognized the link between standardized swaps and clearing, as 
well.\13\
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    \11\ See Group of Twenty, ``Leaders' Statement: The Pittsburgh 
Summit,'' (Sept. 24-25, 2009), available at http://www.pittsburghsummit.gov/mediacenter/129639.htm.
    \12\ See The G-20 Toronto Summit Declaration (Jun. 26-27, 2010), 
available at
    http://www.g20.utoronto.ca/2010/g20_declaration_en.pdf. In 
Annex II, the declaration stated, ``We pledged to work in a 
coordinated manner to accelerate the implementation of over-the-
counter (OTC) derivatives regulation and supervision and to increase 
transparency and standardization.''
    \13\ ``It is expected that the standardized, plain vanilla, high 
volume swaps contracts--which according to the Treasury Department 
are about 90 percent of the $600 trillion swaps market--will be 
subject to mandatory clearing.'' 156 Cong. Rec. S5921 (daily ed. 
Jul. 15, 2010) (statement of Sen. Lincoln).
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    In addition, increasing standardization of swap documentation 
should improve the market in a number of other ways, including: 
Facilitating automated processing of transactions; increasing the 
fungibility of the contracts, which enables greater market liquidity; 
improving valuation and risk management; increasing the reliability of 
price information; reducing the number of problems in matching trades; 
and facilitating reporting to swap data repositories.\14\
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    \14\ These benefits were articulated by the Financial Stability 
Board's OTC Derivatives Working Group in its report, ``Implementing 
OTC Derivatives Market Reforms,'' (Oct. 10, 2010), available at 
http://www.financialstabilityboard.org/publications/r_101025.pdf.
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    Product and process standardization are also key conditions for 
increased automation and central clearing of OTC derivatives. As a 
result of targeted supervisory encouragement since 2005,\15\ credit 
derivative market participants have standardized CDS product design and 
post-trade processes in tandem, leading to greater operational 
efficiencies, encouraging higher volumes of standardized transactions, 
and most significantly, providing the requisite operational environment 
for the implementation of centralized risk-reducing infrastructure, 
including central counterparty clearing.
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    \15\ Since 2005, the Federal Reserve Bank of New York (FRBNY) 
has led a targeted, supervisory effort to enhance operational 
efficiency and performance in the OTC derivatives market, among 
other things, by increasing standardization. Known as the OTC 
Derivatives Supervisors' Group (ODSG), the FRBNY leads an on-going 
effort with OTC derivatives dealers' primary supervisors, trade 
associations, industry utilities, and private vendors, through which 
market participants (including buy-side participants) regularly set 
goals and commitments to bring infrastructure, market design, and 
risk management improvements to all OTC derivatives asset classes.
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    Many standardized processes have been established for CDS legal 
documentation and trading conventions, and in turn, the standardization 
of product design has enabled market participants to implement 
infrastructure that automates and centralizes trading, recordkeeping, 
trade compression, and clearing. For example, the standardization of 
coupons in the single-name CDS product was largely motivated by the 
desire to create an efficient process for offsetting contracts. The 
market-wide adoption of fixed coupons allowed single-name CDS 
instruments to be centrally cleared, in effect standardizing 
counterparty credit risk management in these products. The ``Big Bang 
Protocol'' further standardized a number of critical operational 
processes.\16\ The protocol: (i) ``Hardwired'' a standard auction 
mechanism into CDS trading documentation, eliminating the need for ad 
hoc protocols; (ii) incorporated the resolutions of the ISDA 
Determinations Committees into the terms of standard CDS documentation; 
and (iii) instituted a common standard effective date for CDS 
transactions. Codifying key standardized processes into CDS products 
has brought greater certainty to managing the risk of CDS transactions 
and has provided the structural foundation for greater automation, 
higher volumes in standardized transactions, and ultimately the 
establishment of centralized risk-reducing infrastructure, such as 
central counterparties.
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    \16\ See 2009 ISDA Credit Derivatives Determinations Committees 
and Auction Settlement CDS Protocol, available at: http://www.isda.org/bigbangprot/docs/Big-Bang-Protocol.pdf.
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B. Proposed Swap Trading Relationship Documentation Rule

    To promote the ``timely and accurate * * * documentation * * * of 
all swaps'' under Sec.  4s(i)(1) of the CEA, proposed Sec.  23.504(a) 
would require that swap dealers and major swap participants establish, 
maintain, and enforce written policies and procedures reasonably 
designed to ensure that each swap dealer or major swap participant and 
its counterparties have agreed in writing to all of the terms governing 
their swap trading relationship and have executed all agreements 
required by proposed Sec.  23.504.
    Proposed Sec.  23.504(b)(1) would specify that the swap trading 
relationship documentation include written agreement by the parties on 
terms relating to payment obligations, netting of payments, events of 
default or other termination events, netting of obligations upon 
termination, transfer of rights and obligations, governing law, 
valuation, and dispute resolution procedures. Proposed Sec.  
23.504(b)(2) would establish that all confirmations of swap 
transactions, as required under previously proposed Sec.  23.501, would 
be considered to be part of the required swap trading relationship 
documentation.

[[Page 6718]]

    Swap trading relationship documentation under proposed Sec.  
23.504(b)(3)(i) and (ii) also would include credit support arrangements 
containing initial and variation margin requirements at least as high 
as those set by the Commission (for swap dealers and major swap 
participants that are not banks) and by prudential regulators (for 
entities that are banks). These credit support arrangements also would 
be required to identify the forms of eligible assets that may be used 
as margin and asset valuation haircuts.
    Under proposed Sec.  23.504(b)(3)(iii) and (iv), the credit support 
arrangements between swap dealers and major swap participants would 
include documentation of the treatment of any assets used as margin for 
uncleared swaps. These provisions are intended to work together with 
the rules previously proposed under section 4s(l) of the CEA,\17\ and 
thus require documentation as to whether the funds and other property 
are to be segregated with an independent third party, in accordance 
with Sec.  23.601(e). The provisions also are designed to work together 
with rules to be proposed under section 4s(e) of the CEA that relate to 
margin requirements.
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    \17\ See 75 FR 75432, Notice of Proposed Rulemaking, Protection 
of Collateral of Counterparties to Uncleared Swaps; Treatment of 
Securities in a Portfolio Margining Account in a Commodity Broker 
Bankruptcy, Dec. 3, 2010.
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    Under Sec.  23.601, as previously proposed, swap dealers and major 
swap participants trading uncleared swaps would be required to notify 
each counterparty that the counterparty has the right to require 
segregation of the funds or other property that it supplies as 
``initial margin,'' a term defined in previously proposed Sec.  
23.600.\18\ At the request of the counterparty, the swap dealer or 
major swap participant would be required to segregate such initial 
margin with an independent third party. Under section 4s(l) of the CEA, 
this segregation requirement would not apply to variation margin 
payments. Proposed Sec.  23.602(a)(2), however, would permit the swap 
dealer or major swap participant and the counterparty to agree that 
variation margin also may be held in a segregated account. Under 
proposed Sec.  23.601(e), swap dealers and major swap participants 
would notify each counterparty of the opportunity to revisit their 
segregation decision once per calendar year.
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    \18\ See 75 FR 75438 (``Initial margin means money, securities, 
or property posted by a party to a swap as performance bond to cover 
potential future exposures arising from changes in the market value 
of the position.'').
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    Swap dealers and major swap participants also must comply with 
proposed Sec.  23.603(a), which would provide that segregated initial 
margin may only be invested consistent with the standards for 
investment of customer funds that the Commission applies to exchange-
traded futures (see Sec.  1.25 of Commission regulations), and with 
proposed Sec.  23.603(b), which would provide that swap dealers and 
major swap participants and their counterparties may enter into any 
commercial arrangement, in writing, regarding the investment of 
segregated initial margin and the related allocation of the gains and 
losses resulting from such investments. The Commission anticipates that 
documentation of the foregoing matters would be included in the trading 
relationship documentation required pursuant to proposed Sec.  
23.504(b)(3)(iii).
    Swap dealers and major swap participants could maintain standard 
templates for documenting their trading relationships as a way of 
complying with the requirements of Sec.  23.504. The Commission would 
also consider it a sound practice for swap dealers and major swap 
participants to require senior management in the business trading and 
risk management units to approve all templates, and any material 
modifications to them. The Commission recognizes the work that the 
industry has undertaken over the past several years to update and 
standardize the documentation it relies upon for various asset classes, 
and the Commission encourages market participants to adopt standardized 
confirmation templates, standardized master confirmation 
agreements,\19\ standardized product definitions, and other 
standardized documentation developed by the industry. Standardized 
documentation and definitions promote standardized products, which may 
lead to greater liquidity and more efficient pricing. In addition, 
increased product standardization may bring systemic risk-reduction 
benefits as the risks associated with standardized products are better 
understood by the entire marketplace.
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    \19\ Standard Master Confirmation Agreements that have been 
published include:
    2004 Sovereign Master Credit Derivatives Confirmation Agreement.
    2003 Master Credit Derivatives Confirmation Agreement (Asia-
Pacific).
    2003 Master Credit Derivatives Confirmation Agreement (European-
North American).
    2009 Americas Master Equity Derivatives Confirmation Agreement.
    2008 Americas Master Designated/Exchange-Traded Contract Option 
Confirmation Agreement.
    2007 Americas Master Variance Swap Confirmation Agreement.
    2004 Americas Interdealer Master Equity Derivatives Confirmation 
Agreement.
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C. Proposed Swap Valuation Provisions

    Swap valuation disputes have long been recognized as a significant 
problem in the OTC derivatives market.\20\ The ability to determine 
definitively the value of a swap at any given time lies at the center 
of many of the OTC derivatives market reforms contained in the Dodd-
Frank Act and is a cornerstone of risk management. Swap valuation is 
also crucial for determining capital and margin requirements applicable 
to swap dealers and major swap participants and therefore plays a 
primary role in risk mitigation for uncleared swaps.
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    \20\ See ISDA Collateral Committee, ``Commentary to the Outline 
of the 2009 ISDA Protocol for Resolution of Disputed Collateral 
Calls,'' June 2, 2009 (stating ``Disputed margin calls have 
increased significantly since late 2007, and especially during 2008 
have been the driver of large (sometimes > $1 billion) 
uncollateralized exposures between professional firms.'').
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    The Commission recognizes that swap valuation is not always an easy 
task. In some instances, there is widespread agreement on valuation 
methodologies and the source of formula inputs for frequently traded 
swaps. These swaps are the proverbial ``low-hanging fruit,'' and many 
have been accepted for clearing (i.e., commonly traded interest rate 
swaps and credit default swaps). However, parties often dispute 
valuations of thinly traded swaps where there is not widespread 
agreement on valuation methodologies or the source for formula inputs. 
Many of these swaps are thinly traded either because of their limited 
use as risk management tools or because they are simply too customized 
to have comparable counterparts in the market. As many of these swaps 
are valued by dealers internally by ``marking-to-model,'' their 
counterparties may dispute the inputs and methodologies used in the 
model. As uncleared swaps are bilateral, privately negotiated 
contracts, on-going swap valuation for purposes of initial and 
variation margin calculation and swap terminations or novations, has 
also been largely a process of on-going negotiation between the 
parties. The inability to agree on the value of a swap became 
especially acute during the 2007-2009 financial crisis when there was 
widespread failure of the market inputs needed to value many swaps.\21\
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    \21\ The failure of the market to set a price for mortgage-
backed securities led to wide disparities in the valuation of CDS 
referencing mortgage-backed securities (especially collateralized 
debt obligations). Such wide disparities led to large collateral 
calls from dealers on AIG, hastening its downfall. See CBS News, 
``Calling AIG? Internal Docs Reveal Company Silent About Dozens Of 
Collateral Calls,'' Jun. 23, 2009, available at: http://www.cbsnews.com/stories/2009/06/23/cbsnews_investigates/main5106672.shtml.

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[[Page 6719]]

    The Commission believes that prudent risk management requires that 
market participants be able to value their own swaps in a predictable 
and objective manner; the failure to do so may lead to systemic risk. 
Accordingly, to promote the ``timely and accurate * * * valuation of 
all swaps'' under Sec.  4s(i)(1) of the CEA, proposed Sec.  
23.504(b)(4) would require that the swap trading documentation include 
written documentation in which the parties agree on the methods, 
procedures, rules and inputs for determining the value of each swap at 
any time from execution to the termination, maturity, or expiration of 
the swap. The agreed methods, procedures, rules and inputs would be 
required to constitute a complete and independently verifiable 
methodology for valuing each swap entered into between the parties. 
Proposed Sec.  23.504(b)(4)(iii) would require that the methodology 
include complete alternative methods for determining the value of the 
swap in the event that one or more inputs to the methodology become 
unavailable or fail, such as during times of market stress or 
illiquidity. All agreements on valuation would be considered part of 
the swap trading relationship documentation.
    This proposed rule is an important complement to previously 
proposed Sec.  23.502 (portfolio reconciliation), which requires swap 
dealers and major swap participants to resolve a dispute over the 
valuation of a swap within one business day. By requiring agreement 
with each counterparty on the methods and inputs for valuation of each 
swap, it is expected that Sec.  23.504(b)(4) will assist swap dealers 
and major swap participants to resolve valuation disputes in a timely 
manner, thereby reducing risk.

D. Submission of Swaps for Clearing

    Under proposed Sec.  23.504(b)(6), upon acceptance of a swap by a 
registered derivatives clearing organization (DCO), each swap dealer 
and major swap participant would be required to create a record 
containing certain items of information,\22\ along with a statement 
that in accordance with the rules of the DCO, the original swap is 
extinguished and is replaced by equal and opposite swaps between 
clearing members and the DCO. This provision would require that all 
terms of the cleared swap conform to the templates established under 
the DCO's rules, and that all terms of the swap, as carried on the 
books of the clearing member, conform to the terms of the cleared swap 
established under the DCO's rules.
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    \22\ Such information includes the date and time the swap was 
accepted for clearing, the name of the DCO clearing the swap, the 
name of the clearing member clearing the swap for the swap dealer or 
major swap participant, and, if known, the name of the clearing 
member clearing the swap for the counterparty.
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    Proposed Sec.  23.504(b)(6), while addressing the issues prescribed 
under Sec.  4s(i)(1) of the CEA, is intended to correspond to proposed 
Sec.  39.12(b)(4).\23\ The purpose of these provisions is to encourage 
the standardization of swaps and to avoid differences that could 
compromise the benefits of clearing between the terms of a swap as 
carried at the DCO level and at the clearing member level. Any such 
differences would raise both customer protection and systemic risk 
concerns. From a customer protection standpoint, if the terms of the 
swap at the customer level differ from those at the clearing level, 
then the customer will not receive the full transparency and liquidity 
benefits of clearing, and legal and basis risk will be introduced into 
the customer position. Similarly, from a systemic perspective, any 
differences could diminish overall price discovery and liquidity and 
increase uncertainties and unnecessary costs into the insolvency 
resolution process. Standardizing the terms of a swap upon clearing 
would facilitate trading and promote the mitigation of risk for all 
participants in the swap markets.
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    \23\ The proposed Notice of Proposed Rulemaking, Risk Management 
Requirements for Derivatives Clearing Organizations under part 39 
are available on the Commission's Web site at http://www.cftc.gov.
---------------------------------------------------------------------------

    Standardization also will impose structure on the general economic 
function of the contract and will facilitate automated processing and 
the ability for participants to replicate the trade easily. This allows 
market participants to trade in and out of contracts easily and lowers 
transaction costs, which in turn enables greater market liquidity and 
expansion of the market to more participants.

E. Documentation Audit and Recordkeeping

    In keeping with prudent risk management, Sec.  23.504(c) would 
require an annual audit of the swap trading relationship documentation 
required by Sec.  23.504 to ensure compliance with approved 
documentation policies and procedures and Commission regulations. 
Proposed Sec.  23.504(d) would require swap dealers and major swap 
participants to keep records in compliance with this section.

F. Reporting Swap Valuation Disputes

    Proposed Sec.  23.504(e) would require that swap dealers and major 
swap participants promptly notify the Commission, any applicable 
prudential regulator, and the Securities and Exchange Commission with 
regard to security-based swap agreements if any swap valuation dispute 
is not resolved within one business day, if the dispute is with a 
counterparty that is a swap dealer or major swap participant; or within 
five business days, if the dispute is with a counterparty that is not a 
swap dealer or major swap participant. This proposed rule would 
complement previously proposed Sec.  23.502, which requires portfolio 
reconciliation and resolution of valuation disputes. It also would 
allow authorities to recognize and respond to outstanding swap 
valuation disputes, which if left uncollateralized, may lead to 
systemic risk.

G. Proposed End User Exception Documentation Rule

    Proposed Sec.  23.505 would work together with the swap data 
recordkeeping and reporting requirements rules and end-user exception 
to mandatory clearing rules, both previously proposed by the 
Commission.\24\ Under these previously proposed rules, ``a swap 
otherwise subject to mandatory clearing is subject to an elective 
exception from clearing if one party to the swap is not a financial 
entity, is using the swaps to hedge or mitigate commercial risk, and 
notifies the Commission * * * how it generally meets its financial 
obligations associated with entering into non-cleared swaps (the `end-
user clearing exception').'' \25\ Under previously proposed Sec.  39.6, 
the end-user clearing exception is elected by providing ten additional 
items of information to a swap data repository (SDR) through a ``check-
the-box notification process.'' \26\ As explained in the swap data 
recordkeeping and reporting rules, swap dealers and major swap 
participants will have the responsibility for reporting to SDRs ``with 
respect to the majority of swaps.'' \27\ In order to ensure that swap 
dealers and major swap participants comply with all mandatory clearing 
requirements and in light of their unique reporting obligations, it is 
critical that they possess documentation

[[Page 6720]]

sufficient to support a reasonable belief that their counterparties 
meet the statutory requirements for electing an exception from 
mandatory clearing. Accordingly, the Commission is proposing Sec.  
23.505.
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    \24\ See Swap Data Recordkeeping and Reporting Requirements, 75 
FR 76573, Dec. 8, 2010, and End-User Exception to Mandatory Clearing 
of Swaps, 75 FR 80747, Dec. 23, 2010.
    \25\ 75 FR at 80748.
    \26\ 75 FR at 80749 and 80755.
    \27\ 75 FR at 76593; see also section 4r of the CEA.
---------------------------------------------------------------------------

    Proposed Sec.  23.505 would require swap dealers and major swap 
participants to obtain documentation from any counterparty seeking to 
exercise its rights under the end-user clearing exception from the 
mandatory clearing requirement under section 2h(7) of the CEA. For 
swaps subject to the mandatory clearing requirement, the proposed rule 
would require that swap dealers and major swap participants comply with 
any mandatory clearing requirement by obtaining documentation 
sufficient to provide the swap dealer or major swap participant with a 
reasonable basis to believe that its counterparty meets the statutory 
conditions required for an exception from a mandatory clearing 
requirement, as defined in section 2h(7) of the CEA.

H. Application of Proposed Regulations to Existing Swap Documentation

    The Commission recognizes that amending all existing trading 
relationship documentation would present a substantial undertaking for 
the market. Therefore, the Commission invites comment on the 
implementation of proposed Sec.  23.504. While much of the existing 
swap documentation among swap dealers, major swap participants, and 
their counterparties likely would be in compliance with Sec.  
23.504(b), the Commission requests comment on an appropriate interval 
following the effective date of the regulations after which to require 
compliance. This interval is expected to be somewhat shorter for swap 
documentation among swap dealers and major swap participants, and 
somewhat longer for swap documentation between swap dealers, major swap 
participants, and counterparties that are not swap dealers or major 
swap participants.
    The Commission also recognizes that many swap dealers and major 
swap participants may have dormant trading relationships with 
counterparties where swap documentation has been executed, but no 
trades are presently in effect thereunder or there are trades that will 
run-off over a short period of time, and there is no intention to enter 
into new trades. Therefore, the Commission invites comment on whether 
to provide a safe harbor for dormant trading relationships.

I. Comment Requested

    The Commission requests comment on all aspects of proposed 
Sec. Sec.  23.504 and 23.505. The Commission recognizes that there will 
be differences in the size and scope of the business of particular swap 
dealers and major swap participants. Therefore, comments are solicited 
on whether certain provisions of the proposed regulations should be 
modified or adjusted to reflect the differences among swap dealers and 
major swap participants or differences among asset classes. In 
particular, the Commission requests comment on the following questions:
     How long would swap dealers and major swap participants 
require to bring their existing documentation into compliance with 
Sec.  23.504? Will compliance take less time for existing documentation 
between such registrants and longer for existing documentation between 
registrants and non-registrants? Would three months following the 
effective date of the rules be long enough for registrants to bring 
existing documentation among themselves into compliance? Would six 
months following the effective date of the rules be long enough for 
registrants to bring existing documentation with non-registrants into 
compliance?
     Should Sec.  23.504 include a safe harbor for swaps 
entered into on, or subject to the rules of, a board of trade 
designated as a contract market?
     Should Sec.  23.504 require that the governing body of 
each swap dealer or major swap participant approve the policies and 
procedures for agreeing with each counterparty to all the terms 
governing the trading relationship?
     Should any other aspects of the trading relationship be 
required to be included in Sec.  23.504?
     Should the requirement for agreement on events of default 
or termination events be further defined? For example, should parties 
be required to specify all cross default implications and potential 
claims with regard to their respective affiliates and any other present 
or future debt obligations or transactions?
     Should Sec.  23.504 specifically delineate the types of 
payment obligation terms that must be included in the trading 
relationship documentation?
     Should specific requirements for dispute resolution be 
included in Sec.  23.504 (such as time limits), and if so, what 
requirements are appropriate for all swaps?
     Should the valuation agreement in Sec.  23.504(b)(4) 
require greater specificity? If so, what level of detail should be 
required?
     Should the valuation methodology provision in Sec.  
23.504(b)(4) expressly prohibit use of internal and/or proprietary 
inputs and methods and if not, why are inputs and methods developed and 
verifiable only by one party to the swap transaction acceptable given 
the safety and soundness and transparency objectives of the Dodd-Frank 
Act?
     If internal and/or proprietary inputs or procedures are 
permitted under Sec.  23.504(b)(4), should the swap dealer or major 
swap participant be required to disclose such information and the 
sources thereof to the counterparty and regulators in sufficient detail 
for them to undertake comparative analysis of such information and 
verify the valuation calculations?
     Under proposed Sec.  23.504(b)(6)(v), should all the terms 
of the cleared swap be required to conform to the templates established 
by the DCO or are there particular terms or rights under the swap that 
could be retained without prejudice to the need to standardize swaps 
for the purposes of clearing?
     Is the requirement that each swap dealer and major swap 
participant conduct an independent internal or external audit of no 
less than 5% of the swap trading relationship documentation required by 
the rule executed during the previous twelve month period appropriate?
     Would a failure of swap trading relationship documentation 
to comply with the requirements of proposed Sec.  23.504 create 
uncertainty regarding the enforceability of swaps transacted under such 
non-compliant documentation? If so, how should this uncertainty be 
addressed in the rules?
     Are the requirements of proposed Sec.  23.505 appropriate? 
How should swap dealers and major swap participants verify that their 
counterparties are properly claiming an exception from a given 
mandatory clearing requirement?
     Are there any anticompetitive implications to the proposed 
rules? If so, how could the proposed rules be implemented to achieve 
the purposes of the CEA in a less anticompetitive manner?

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that agencies 
consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities.\28\ The 
Commission previously has established certain definitions of ``small 
entities'' to be used in evaluating the impact of its regulations on 
small entities in accordance with the RFA.\29\

[[Page 6721]]

The proposed rules would affect swap dealers and major swap 
participants.
---------------------------------------------------------------------------

    \28\ 5 U.S.C. 601 et seq.
    \29\ 47 FR 18618, Apr. 30, 1982.
---------------------------------------------------------------------------

    Swap dealers and major swap participants are new categories of 
registrants. Accordingly, the Commission has not previously addressed 
the question of whether such persons are, in fact, small entities for 
purposes of the RFA. The Commission previously has determined, however, 
that futures commission merchants should not be considered to be small 
entities for purposes of the RFA.\30\ The Commission's determination 
was based, in part, upon the obligation of futures commission merchants 
to meet the minimum financial requirements established by the 
Commission to enhance the protection of customers' segregated funds and 
protect the financial condition of futures commission merchants 
generally.\31\ Like futures commission merchants, swap dealers will be 
subject to minimum capital and margin requirements and are expected to 
comprise the largest global financial firms. The Commission is required 
to exempt from swap dealer designation any entities that engage in a de 
minimis level of swaps dealing in connection with transactions with or 
on behalf of customers. The Commission anticipates that this exemption 
would tend to exclude small entities from registration. Accordingly, 
for purposes of the RFA for this rulemaking, the Commission is hereby 
proposing that swap dealers not be considered ``small entities'' for 
essentially the same reasons that futures commission merchants have 
previously been determined not to be small entities and in light of the 
exemption from the definition of swap dealer for those engaging in a de 
minimis level of swap dealing.
---------------------------------------------------------------------------

    \30\ Id. at 18619.
    \31\ Id.
---------------------------------------------------------------------------

    The Commission also has previously determined that large traders 
are not ``small entities'' for RFA purposes.\32\ In that determination, 
the Commission considered that a large trading position was indicative 
of the size of the business. Major swap participants, by statutory 
definition, maintain substantial positions in swaps or maintain 
outstanding swap positions that create substantial counterparty 
exposure that could have serious adverse effects on the financial 
stability of the United States banking system or financial markets. 
Accordingly, for purposes of the RFA for this rulemaking, the 
Commission is hereby proposing that major swap participants not be 
considered ``small entities'' for essentially the same reasons that 
large traders have previously been determined not to be small entities.
---------------------------------------------------------------------------

    \32\ Id. at 18620.
---------------------------------------------------------------------------

    Moreover, the Commission is carrying out Congressional mandates by 
proposing this regulation. Specifically, the Commission is proposing 
these regulations to comply with the Dodd-Frank Act, the aim of which 
is to reduce systemic risk presented by swap dealers and swap market 
participants through comprehensive regulation. The Commission does not 
believe that there are regulatory alternatives to those being proposed 
that would be consistent with the statutory mandate. Accordingly, the 
Chairman, on behalf of the Commission, hereby certifies pursuant to 5 
U.S.C. 605(b) that the proposed rules will not have a significant 
economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \33\ imposes certain requirements 
on Federal agencies (including the Commission) in connection with their 
conducting or sponsoring any collection of information as defined by 
the PRA. This proposed rulemaking would result in new collection of 
information requirements within the meaning of the PRA. The Commission 
therefore is submitting this proposal to the Office of Management and 
Budget (OMB) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. The title for this collection of information is ``Swap Trading 
Relationship Documentation Requirements for Swap Dealers and Major Swap 
Participants.'' An agency may not conduct or sponsor, and a person is 
not required to respond to, a collection of information unless it 
displays a currently valid control number. The OMB has not yet assigned 
this collection a control number.
---------------------------------------------------------------------------

    \33\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The collection of information under these proposed rules is 
necessary to implement new section 4s(i) the CEA, which expressly 
requires the Commission to adopt rules governing documentation 
standards for swap dealers and major swap participants and explicitly 
obligates such registrants to conform to the documentation standards 
established by the Commission. The required recordkeeping is 
particularly essential to ensuring that each swap dealer and major swap 
participant documents all of the terms of its swap trading 
relationships with its counterparties. Obligating certain swap market 
participants to memorialize, in writing, their mutual agreement with 
respect to margin requirements, margin assets, payment and netting, 
termination events, the calculation and netting of obligations upon 
termination, transfer of rights and obligations, governing law, 
valuation methods and inputs, and dispute resolution procedures would 
decrease the likelihood of significant counterparty disputes; promote 
transaction standardization; enhance the parties' abilities to engage 
in risk-reducing exercises such as bilateral offset, portfolio 
reconciliation, and portfolio compression; provide for more timely and 
orderly resolution of events of default; and enhance the stability of 
the market place as a whole. The proposed regulations also would ensure 
that certain important information regarding cleared swaps would be 
preserved and would assist in ensuring compliance with the mandatory 
clearing requirements of the Act and Commission regulations by 
requiring the maintenance of documentation demonstrating that the 
statutory conditions for an exception to those requirements have been 
satisfied. The reporting requirement established by the proposed rules 
would ensure that the Commission is provided with timely notification 
of swap valuation disputes that relevant market participants have been 
unable to resolve promptly.
    The proposed regulation would be an important part of the 
Commission's regulatory program for swap dealers and major swap 
participants. The information required to be preserved would be used by 
representatives of the Commission and any examining authority 
responsible for reviewing the activities of the swap dealer or major 
swap participant to ensure compliance with the CEA and applicable 
Commission regulations.
    If the proposed regulations are adopted, responses to this 
collection of information would be mandatory. The Commission will 
protect proprietary information according to the Freedom of Information 
Act and 17 CFR part 145, ``Commission Records and Information.'' In 
addition, section 8(a)(1) of the CEA strictly prohibits the Commission, 
unless specifically authorized by the CEA, from making public ``data 
and information that would separately disclose the business 
transactions or market positions of any person and trade secrets or 
names of customers.'' The Commission also is required to protect 
certain information contained in a government system of records 
according to the Privacy Act of 1974, 5 U.S.C. 552a.
1. Information Provided By Reporting Entities/Persons
    Proposed Sec.  23.504 generally would require swap dealers and 
major swap participants to develop and retain

[[Page 6722]]

written swap trading relationship documentation (including the parties' 
agreement with respect to the terms specified in the regulation; credit 
support arrangements; valuation methods, procedures and inputs; records 
of important information regarding their cleared swaps; and written 
policies and procedures for maintaining the documentation required by 
the proposed rule). It also would require swap dealers and major swap 
participants to report to the Commission and, as applicable, to the 
Securities and Exchange Commission or prudential regulators, swap 
valuation disputes that have not been resolved between the parties 
within designated time frames. Proposed Sec.  23.505 would require swap 
dealers and major swap participants to obtain documentation sufficient 
to provide a reasonable basis on which to believe that a counterparty 
meets the statutory conditions necessary for an exception from the 
mandatory clearing requirements, where applicable.
    The information collection burden associated with the proposed 
regulations is estimated to be 6,168 hours per year, at an initial 
annual cost of $684,300 for each swap dealer and major swap 
participant. The aggregate information collection burden is estimated 
to be 1,850,400 hours per year, at an initial annual aggregate cost of 
$205,290,000. Burden means the total time, effort or financial 
resources expended by persons to generate, maintain, retain, disclose, 
or provide information to or for a Federal agency. The Commission has 
characterized the annual costs as initial costs as the Commission 
anticipates that the cost burdens will be reduced dramatically over 
time as the agreements and other records required by the proposed 
regulations become increasingly standardized within the industry.
    The Commission anticipates that the majority of the information 
collection burden would arise from the recordkeeping obligations 
contained in Sec.  23.504(b). Proposed Sec.  23.504(b) would require 
each swap dealer and major swap participant to create and maintain 
written trading relationship documentation that contains the parties' 
agreement with respect to all of the terms of the parties' trading 
relationship including, without limitation, the terms delineated in 
Sec.  23.504(b)(1); the parties' credit support arrangements, including 
the margin-related terms described in Sec.  23.504(b)(3); and the 
parties' agreement with respect to the particular procedures and inputs 
that will be used to determine the value of a swap from execution to 
termination, maturity, or expiration in a manner that can be 
independently replicated as required by Sec.  23.504(b)(4). It also 
requires swap dealers and major swap participants to make and maintain 
records of cleared swaps containing the data contained in proposed 
Sec.  23.504(b)(6).
    Maintenance of written credit support arrangements and other 
trading relationship documentation that contain the terms required to 
be memorialized by the proposed Sec. Sec.  23.504(b)(1) and (3) is 
prudent business practice and the Commission anticipates that swap 
dealers and major swap participants already maintain some form of this 
documentation with each of their counterparties in the ordinary course 
of their business. Moreover, proposed Sec.  23.504(b)(2) provides that 
the swap transaction confirmations described under previously proposed 
Sec.  23.501 would be considered part of the parties' trading 
relationship documentation and thus, pre-existing swap confirmations 
that include the terms required by Sec.  23.504 would obviate the need 
for the parties to develop new documentation with respect to those 
terms.\34\ Accordingly, any additional expenditure related to 
Sec. Sec.  23.504(b)(1) and (3) likely would be limited to the time 
initially required to review and, as needed, to re-negotiate and amend, 
existing trading relationship documentation to ensure that it 
encompasses all of the required terms and to develop a system for 
maintaining any newly created records. Many of the amended provisions 
are likely to apply to multiple counterparties, thereby reducing the 
per counterparty hour burden.
---------------------------------------------------------------------------

    \34\ The information collection burden associated with the 
maintenance of confirmations of swaps transactions was calculated 
and accounted for in previously proposed regulations. See 
Confirmation, Portfolio Reconciliation, and Portfolio Compression 
Requirements for Swap Dealers and Major Swap Participants, 75 FR 
81519, Dec. 28, 2010.
---------------------------------------------------------------------------

    With respect to the valuation agreement requirement established by 
proposed Sec.  23.504(b)(4), the Commission believes that swap dealers 
and major swap participants are likely to have existing, internal 
mechanisms for valuing their swaps transactions and thus, the hour 
burden associated with this obligation would be limited to the time 
needed to negotiate agreements with counterparties on mutually 
acceptable valuation methods, should their individual valuation 
procedures differ, and to commit the agreement to writing as part of 
the parties' swap trading relationship documentation. It is likely that 
the need for new valuation agreements may be limited further to 
instances of complex or highly customized swaps transactions, as the 
valuation methods for ``plain vanilla'' swaps are likely to be somewhat 
standardized.
    The Commission estimates the initial annual hour burden associated 
with negotiating, drafting, and maintaining the swap trading 
relationship documentation described above that is required by proposed 
Sec.  23.504(b) (excluding the cleared swap records required by 
proposed Sec.  23.504(b)(6)), to be 10 hours per counterparty, or an 
average of 5,400 hours per swap dealer or major swap participant. As 
stated above, the Commission expects that this annual per registrant 
burden would be reduced considerably over time as there would be little 
need to modify the swap trading relationship documentation on an 
ongoing basis. Once a swap dealer or major swap participant modifies 
its pre-existing documentation with each of its counterparties, the 
annual burden associated with the swap trading relationship 
documentation would be minimal. In addition, because all swap dealers 
and major swap participants would be required to maintain the swap 
trading relationship documentation established by the proposed 
regulation, the Commission believes that it is likely that many of the 
terms of such documentation would become progressively more 
standardized within the industry, further reducing the bilateral 
negotiation and drafting responsibilities associated with the 
regulation.
    With respect to the required records of cleared swaps, the 
Commission estimates that swap dealers and major swap participants will 
spend an average of 2 hours per trading day, or 504 hours per year, 
maintaining the required data for these transactions. The Commission 
notes that the specific information required for each transaction is 
limited and is of the type that would be maintained in a prudent market 
participant's ordinary course of business. The Commission also notes 
that the statement required to be preserved for each cleared swap 
likely would become common to each derivatives clearing organization.
    In addition to the above, the Commission anticipates that swap 
dealers and major swap participants will spend an average of 16 hours 
per year drafting and, as needed, updating the written policies and 
procedures required by proposed Sec.  23.504(a); 4 hours per year 
maintaining records of the results of the annual documentation 
compliance audits mandated by proposed Sec.  23.504(c); and 220 hours 
per year, or 1 hour per end user, maintaining records of the

[[Page 6723]]

documentation required by proposed Sec.  23.505.
    The only reporting requirement contained in the proposed rules is 
the obligation of swap dealers and major swap participants to report 
swap valuation disputes that are not resolved between the participants 
within designated time periods. The Commission expects that swap 
dealers and major swap participants will spend an average of 24 hours 
per year satisfying this requirement.
    The hour burden calculations below are based upon a number of 
variables such as the number of swap dealers and major swap 
participants in the marketplace, the average number of counterparties 
of each of these registrants, and the average hourly wage of the 
employees of these registrants that would be responsible for satisfying 
the obligations established by the proposed regulation. Swap dealers 
and major swap participants are new categories of registrants. 
Accordingly, it is not currently known how many swap dealers and major 
swap participants will become subject to these rules, and this will not 
be known to the Commission until the registration requirements for 
these entities become effective after July 16, 2011, the date on which 
the Dodd-Frank Act becomes effective. While the Commission believes 
there will be approximately 200 swap dealers and 50 major swap 
participants, it has taken a conservative approach, for PRA purposes, 
in estimating that there will be a combined number of 300 swap dealers 
and major swap participants who will be required to comply with the 
recordkeeping requirements of the proposed rules. The Commission 
estimated the number of affected entities based on industry data.
    Similarly, due to the absence of prior experience in regulating 
swap dealers and major swap participants and with regulations similar 
to the proposed rules, the actual, average number of counterparties 
that a swap dealer or major swap participant is likely to have and the 
average size of its portfolio with particular counterparties is 
uncertain. Consistent with other proposed rulemakings, the Commission 
has estimated that each of the 14 major swap dealers has an average 
7,500 counterparties and the other 286 swap dealers and major swap 
participants have an average of 200 counterparties per year, for an 
average of 540 total counterparties per registrant.
    The Commission anticipates that the written policies and procedures 
required by the proposed regulations, along with the recordkeeping and 
reporting requirements, typically would be drafted and maintained by 
in-house counsel and financial or operational managers within the 
firm.\35\ According to the Bureau of Labor Statistics findings, the 
mean hourly wage of an employee under occupation code 23-1011, 
``Lawyers,'' that is employed by the ``Securities and Commodity 
Contracts Intermediation and Brokerage Industry'' is $82.22.\36\ The 
mean hourly wage of an employee under occupation code 11-3031, 
``Financial Managers,'' (which includes operations managers) in the 
same industry is $74.41.\37\ Because swap dealers and major swap 
participants include large financial institutions whose employees' 
salaries may exceed the mean wage provided, however, the Commission 
generally has estimated the cost burden of the proposed regulations 
based upon an average salary of $100 per hour. To account for the 
possibility that the services of outside counsel may be required to 
satisfy the requirements associated with negotiating, drafting, and 
maintaining the required trading relationship documentation (except the 
cleared swap records), the Commission has used an average salary of 
$125 per hour to calculate this burden for one half of the necessary 
hours.
---------------------------------------------------------------------------

    \35\ The written policies and procedures also may be drafted and 
maintained by the chief compliance officer of the swap dealer or 
major swap participant. According to recent Bureau of Labor 
Statistics findings, the mean hourly wage of any employee under 
occupation code 13-1401, ``Compliance Officers, Except Agriculture, 
Construction, Health and Safety, and Transportation,'' that is 
employed by the ``Securities and Commodity Contracts Intermediation 
and Brokerage Industry is $38.77. http://www.bls.gov/oes/current/oes131041.htm.
    \36\ http://www.bls.gov/oes/2099/mayowe23.1011.htm.
    \37\ http://www.bls.gov/oes/current/oes113031.htm.
---------------------------------------------------------------------------

    Based upon the above, the estimated hour burden was calculated as 
follows:
    Drafting and Updating Policies and Procedures. This hour burden 
arises from the time necessary to develop and periodically update the 
policies and procedures required by the proposed regulations.
    Number of registrants: 300.
    Frequency of collection: Initial drafting, updating as needed.
    Estimated number of annual responses per registrant: 1.
    Estimated aggregate number of annual responses: 300.
    Estimated annual hour burden per registrant: 16 hours.
    Estimated aggregate annual hour burden: 4,800 burden hours [300 
registrants x 16 hours per registrant].
    Swap Trading Relationship Documentation (excluding cleared swaps 
records). This hour burden arises from the proposed obligation that 
swap dealers and major swap participants execute and maintain swap 
trading relationship documentation.
    Number of registrants: 300.
    Frequency of collection: At least once per counterparty.
    Estimated number of annual responses per registrant: 540 [one set 
of agreements per counterparty].
    Estimated aggregate number of annual responses: 162,000 [300 
registrants x 540 counterparties].
    Estimated annual hour burden per registrant: 5,400 [540 
counterparties x 10 hours per counterparty].
    Estimated aggregate annual hour burden: 1,620,000 [300 registrants 
x 5,400 hours per registrant].
    Cleared Swap Recordkeeping. This hourly burden arises from the 
proposed requirement that swap dealers and major swap participants make 
and maintain records of specified information related to each swap 
accepted for clearing by a derivatives clearing organization.
    Number of registrants: 300.
    Frequency of collection: Daily.
    Estimated number of annual responses per registrant: 252 [252 
trading days per year].\38\
---------------------------------------------------------------------------

    \38\ Consistent with the Commission's proposed regulations that 
would require swap dealers and major swap participants to compile 
and maintain certain transaction records (including daily trading 
records), the Commission has estimated the hour burden associated 
with the cleared swap recordkeeping requirement by approximating the 
number of hours per trading day that an employee of a swap dealer or 
major swap participant likely would spend compiling and retaining 
the relevant records. See Reporting, Recordkeeping, and Daily 
Trading Record Requirements for Swap Dealers and Major Swap 
Participants, 75 FR 76666, Dec. 9, 2010.
---------------------------------------------------------------------------

    Estimated aggregate number of annual responses: 75,600 [300 
registrants x 252 trading days].
    Estimated annual hour burden per registrant: 504 [252 trading days 
x 2 hours per trading day].
    Estimated aggregate hour burden: 151,200 [300 registrants x 504 
hours].
    Audit Recordkeeping. This hourly burden arises from the proposed 
requirement that swap dealers and major swap participants make and 
maintain records of the results of their annual internal or external 
audits to examine for compliance with the requirements of the proposed 
regulations.
    Number of registrants: 300.
    Frequency of collection: Annually.
    Estimated number of annual responses per registrant: 1.
    Estimated aggregate number of annual responses: 300 [300 
registrants x 1].
    Estimated annual hour burden per registrant: 4.

[[Page 6724]]

    Estimated aggregate annual hour burden: 1,200 [300 registrants x 4 
hours].
    Valuation Dispute Reporting. This hourly burden arises from the 
proposed requirement that swap dealers and major swap participants 
submit reports of certain unresolved valuation disputes.
    Number of registrants: 300.
    Frequency of collection: As applicable.
    Estimated number of annual responses per registrant: 240.
    Estimated aggregate number of annual responses: 72,000 [300 
registrants x 240 responses].
    Estimated annual hour burden per registrant: 24.
    Estimated aggregate annual hour burden: 7,200 [300 registrants x 24 
hours].
    End user Exception Documentation Recordkeeping. This hourly burden 
arises from the proposed requirement that swap dealers and major swap 
participants make and maintain records of its end user exception 
documentation. x
    Number of registrants: 300.
    Frequency of collection: Once per applicable counterparty.
    Estimated number of annual responses per registrant: 220.\39\
---------------------------------------------------------------------------

    \39\ The Commission estimates that half of the counterparties 
that are not swap dealers or major swap participants may claim the 
end user exception on an annual basis.
---------------------------------------------------------------------------

    Estimated aggregate number of annual responses: 66,000 [300 
registrants x 220 responses].
    Estimated annual hour burden per registrant: 220 [220 responses x 1 
hour per response].
    Estimated aggregate annual hour burden: 66,000 [300 registrants x 
220 responses].
    In addition to the per hour burden discussed above, the Commission 
anticipates that swap dealers and major swap participants may incur 
certain start-up costs in connection with the proposed recordkeeping 
obligations. Such costs would include the expenditures related to 
developing and installing new recordkeeping technology or re-
programming or updating existing recordkeeping technology and systems 
to enable the swap dealer or major swap participant to collect, 
maintain, and re-produce any newly required records. The Commission 
believes that swap dealers and major swap participants generally could 
adapt their current infrastructure to accommodate the new or amended 
technology and thus, no significant infrastructure expenditures would 
be needed. The Commission estimates the programming burden hours 
associated with technology improvements to be 40 hours.
    According to recent Bureau of Labor Statistics findings, the mean 
hourly wages of computer programmers under occupation code 15-1021 and 
computer software engineers under program codes 15-1031 and 1032 are 
between $34.10 and $44.94.\40\ Because swap dealers and major swap 
participants generally will be large entities that may engage employees 
with wages above the mean, the Commission has conservatively chosen to 
use a mean hourly programming wage of $60 per hour. Accordingly, the 
start-up burden associated with the required technological improvements 
would be $2,400 [$60 x 40 hours per affected registrant] or $720,000 in 
the aggregate.
---------------------------------------------------------------------------

    \40\ http://www.bls.gov/oes/current/oes113031.htm.
---------------------------------------------------------------------------

2. Information Collection Comments
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the recordkeeping burdens discussed above. The 
Commission specifically requests comment on the variables used in the 
above-referenced hourly burden calculations. For example, the 
Commission requests comment on the following:
     What is the total number of swap dealers and major swap 
participants in the marketplace?
     What is the average number of counterparties that a swap 
dealer or major swap participant is likely to have?
     What percentage of those counterparties are other swap 
dealers or major swap participants?
     What percentage of those counterparties is likely to meet 
the statutory qualifications required for an exception from the 
mandatory clearing requirement, as defined in section 2h(7) of the CEA 
and Sec.  39.6?
     What is the average size (number of swaps) of a portfolio 
that a swap dealer or major swap participant is likely to have with a 
particular type of counterparty?
     To what extent do swap dealers and major swap participants 
currently enter into agreements that would satisfy the requirements of 
proposed Sec.  23.504?
     To what extent would swap dealers and major swap 
participants be able to standardize the swap trading relationship 
documentation required by Sec.  23.504?
     To what extent would swap dealers and major swap 
participants be required to utilize the services of outside counsel in 
negotiating and drafting the swap trading relationship documentation 
and valuation and termination rights agreements that would be required 
by proposed Sec.  23.504?
    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments in order to: (i) Evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information will have practical 
utility; (ii) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information; (iii) determine 
whether there are ways to enhance the quality, utility, and clarity of 
the information to be collected; and (iv) minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at 
OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy 
of submitted comments so that all comments can be summarized and 
addressed in the final rule preamble. Refer to the Addresses section of 
this notice of proposed rulemaking for comment submission instructions 
to the Commission.
    A copy of the supporting statements for the collections of 
information discussed above may be obtained by visiting RegInfo.gov. 
OMB is required to make a decision concerning the collection of 
information between 30 and 60 days after publication of this document 
in the Federal Register. Therefore, a comment is best assured of having 
its full effect if OMB receives it within 30 days of publication.

C. Cost-Benefit Analysis

    Section 15(a) of the CEA \41\ requires the Commission to consider 
the costs and benefits of its actions before issuing a rulemaking under 
the CEA. By its terms, section 15(a) does not require the Commission to 
quantify the costs and benefits of a new regulation or to determine 
whether the benefits of the rule outweigh its costs; rather, it 
requires that the Commission ``consider'' the costs and benefits of its 
actions.
---------------------------------------------------------------------------

    \41\ 7 U.S.C. 19(a).
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    Section 15(a) further specifies that costs and benefits of a 
proposed rulemaking shall be evaluated in light of five broad areas of 
market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and

[[Page 6725]]

financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission may, in its discretion, give greater 
weight to any one of the five enumerated considerations and could, in 
its discretion, determine that, notwithstanding its costs, a particular 
regulation was necessary or appropriate to protect the public interest 
or to effectuate any of the provisions or to accomplish any of the 
purposes of the CEA.
    Summary of proposed requirements. The proposed regulations would 
implement new section 4s(i) of the CEA, which was added by section 731 
of the Dodd-Frank Act. The proposed regulations would establish certain 
documentation requirements applicable to swap dealers and major swap 
participants and related recordkeeping and reporting obligations.
    Costs. With respect to costs, the Commission has determined that 
the cost that would be borne by swap dealers and major swap 
participants to institute the policies and procedures, make and 
maintain the records, and perform the event-based reporting necessary 
to satisfy the new regulatory requirements are far outweighed by the 
benefits that would accrue to the financial system as a whole as a 
result of the implementation of the rules.
    For example, memorializing the specific terms of the swap trading 
relationship and swap transactions between counterparties is prudent 
business practice and, in fact, many market participants already use 
standardized documentation. Accordingly, it is believed that many, if 
not most, swap dealers and major swap participants currently execute 
and maintain trading relationship documentation of the type required by 
proposed Sec.  23.504 in the ordinary course of their businesses, 
including documentation that contains several of the terms that would 
be required by the proposed rules. Thus, the hour and dollar burdens 
associated with the swap trading relationship documentation 
requirements may be limited to amending existing documentation to 
expressly include any additional terms required by the proposed rules.
    The Commission recognizes that swap dealers and major swap 
participants may face certain costs, such as the legal fees associated 
with negotiating and drafting the required documentation modifications, 
as they and their counterparties come into compliance with the new 
regulations. However, the Commission also believes that, to the extent 
that any substantial amendments or additions to existing documentation 
would be needed, such revisions would likely apply to multiple 
counterparties, thereby reducing the per counterparty burden imposed 
upon swap dealers and major swap participants. The Commission further 
expects the per hour and dollar burdens to be incurred predominantly in 
the first year or two after the effective date of the final 
regulations. Once a swap dealer or major swap participant has changed 
its pre-existing documentation with each of its counterparties to 
comply with the proposed rules, there likely will be little need to 
further modify such documentation on an ongoing basis. In addition, the 
Commission anticipates that standardized swap trading relationship 
documentation will develop quickly and progressively within the 
industry, dramatically reducing the cost to individual participants.
    The Commission expects the per hour burden associated with the 
remaining requirements of Sec. Sec.  23.504 and 23.505 to be relatively 
minimal. The same is true of the sole reporting requirement contained 
in Sec.  23.504. Such reporting is event-based and the Commission 
expects that instances of valuation disputes will decrease over time as 
valuation agreements are committed to writing pursuant to the proposed 
regulations.
    Finally, the Commission notes that most swap dealers and major swap 
participants have back office personnel, operational systems, and 
resources capable of maintaining the required records, performing the 
periodic reporting, and otherwise adjusting to the new regulatory 
framework without material diversion of resources away from commercial 
operations or substantial capital investment.
    Benefits. With respect to benefits, the Commission has determined 
that the proposed regulations that would require a swap dealer or major 
swap participant to document its swap trading relationship with each of 
its counterparties will promote standardization of documents and 
transactions, facilitate central trading and clearing, promote legal 
and financial certainty, decrease the number and scope of counterparty 
disputes, promote the timely resolution of disputes when they occur, 
and enhance the parties' abilities to engage in risk-reducing 
activities and will result in reduced risk, increased transparency, and 
greater liquidity and market integrity in the swaps marketplace. 
Moreover, the cleared swap records that are required to be preserved 
and the mandatory reporting of unresolved valuation disputes will be 
valuable tools in the Commission's oversight of the affected 
registrants. Therefore, the Commission believes it is prudent to 
prescribe these proposed regulations.
    Public Comment. The Commission invites public comment on its cost-
benefit considerations. Commentators are also invited to submit any 
data or other information that they may have quantifying or qualifying 
the costs and benefits of the proposed rules with their comment 
letters.

List of Subjects in 17 CFR Part 23

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

    For the reasons stated in this release, the Commission proposes to 
amend 17 CFR part 23, as proposed to be added in FR Doc. 2010-29024, 
published in the Federal Register on November 23, 2010 (75 FR 71379), 
and as proposed to be amended in FR Doc. 2010-32264, published in the 
Federal Register on December 28, 2010 (75 FR 81519) as follows:

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

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

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

    2. Revise the table of contents for part 23, subpart I to read as 
follows:

Subpart I--Swap Documentation

Sec.
23.500 Definitions.
23.501 Swap confirmation.
23.502 Portfolio reconciliation.
23.503 Portfolio compression.
23.504 Swap trading relationship documentation.
23.505 End user exception documentation.

    3. Add Sec.  23.504 and Sec.  23.505 to part 23, subpart I, to read 
as follows:

Sec.  23.504  Swap trading relationship documentation.

    (a) Policies and procedures. Each swap dealer and major swap 
participant shall establish, maintain, and enforce written policies and 
procedures reasonably designed to ensure that, prior to or 
contemporaneously with entering into a swap transaction with any 
counterparty, other than a derivatives clearing organization, the swap 
dealer or major swap participant executes written swap trading 
relationship documentation with its counterparty that complies with the 
requirements of this section. The

[[Page 6726]]

policies and procedures shall be approved in writing by senior 
management of the swap dealer and major swap participant, and a record 
of the approval shall be retained.
    (b) Swap trading relationship documentation. (1) The swap trading 
relationship documentation shall be in writing and shall include all 
terms governing the trading relationship between the swap dealer or 
major swap participant and its counterparty, including, without 
limitation, terms addressing payment obligations, netting of payments, 
events of default or other termination events, calculation and netting 
of obligations upon termination, transfer of rights and obligations, 
governing law, valuation, and dispute resolution procedures.
    (2) The swap trading relationship documentation shall include all 
confirmations of swap transactions under Sec.  23.501.
    (3) The swap trading relationship documentation shall include 
credit support arrangements, which shall contain, in accordance with 
applicable requirements under Commission regulations or regulations 
adopted by prudential regulators and without limitation, the following:
    (i) Initial and variation margin requirements;
    (ii) Types of assets that may be used as margin and asset valuation 
haircuts;
    (iii) Investment and rehypothecation terms for assets used as 
margin for uncleared swaps; and
    (iv) Custodial arrangements for margin assets, including whether 
margin assets are to be segregated with an independent third party, in 
accordance with Sec.  23.601(e).
    (4) The swap trading relationship documentation shall include 
written documentation in which the parties agree on the methods, 
procedures, rules, and inputs for determining the value of each swap at 
any time from execution to the termination, maturity, or expiration of 
such swap. To the maximum extent practicable, the valuation of each 
swap shall be based on objective criteria, such as recently-executed 
transactions or valuations provided by independent third parties such 
as derivatives clearing organizations.
    (i) Such methods, procedures, rules, and inputs shall be agreed for 
each swap prior to or contemporaneously with execution and shall be 
stated with the specificity necessary to allow the swap dealer, major 
swap participant, counterparty, the Commission, and any applicable 
prudential regulator to determine the value of the swap independently 
in a substantially comparable manner.
    (ii) Such methods, procedures, and rules shall include alternative 
methods for determining the value of the swap in the event of the 
unavailability or other failure of any input required to value the 
swap, provided that the alternative methods for valuing the swap comply 
with the requirements of this section.
    (iii) Provided that the requirements of this paragraph, including 
the independent valuation requirement of paragraph (b)(4)(i) of this 
section, are satisfied, a swap dealer or major swap participant is not 
required to disclose to the counterparty confidential, proprietary 
information about any model it may use internally to value a swap for 
its own purposes.
    (5) [Reserved]
    (6) Upon acceptance of a swap by a derivatives clearing 
organization, the swap trading relationship documentation shall include 
a record of the following information:
    (i) The date and time the swap was accepted for clearing;
    (ii) The name of the derivatives clearing organization;
    (iii) The name of the clearing member clearing for the swap dealer 
or major swap participant;
    (iv) The name of the clearing member clearing for the counterparty, 
if known; and
    (v) A statement that in accordance with the rules of the 
derivatives clearing organization:
    (A) The original swap is extinguished;
    (B) The original swap is replaced by equal and opposite swaps 
between clearing members and the derivatives clearing organization;
    (C) All terms of the cleared swap conform to templates established 
under the derivatives clearing organization's rules; and
    (D) All terms of the swap, as carried on the books of the clearing 
member, conform to the terms of the cleared swap established under the 
derivatives clearing organization's rules.
    (c) Audit of swap trading relationship documentation. At least once 
during each calendar year, each swap dealer and major swap participant 
shall have an independent internal or external auditor examine no less 
than 5% of the swap trading relationship documentation required by this 
section created during the previous twelve month period to ensure 
compliance with Commission regulations and the written policies and 
procedures established pursuant to this section. A record of the 
results of each audit shall be retained.
    (d) Recordkeeping. Each swap dealer and major swap participant 
shall maintain all documents required to be created pursuant to this 
section in accordance with Sec.  1.31 of this chapter and shall make 
them available promptly upon request to any representative of the 
Commission or any applicable prudential regulator, or with regard to 
swaps defined in section 1a(47)(A)(v) of the Act, to any representative 
of the Commission, the Securities and Exchange Commission, or any 
applicable prudential regulator.
    (e) Reporting. Each swap dealer and major swap participant shall 
promptly notify the Commission and any applicable prudential regulator, 
or with regard to swaps defined in section 1a(47)(A)(v) of the Act, the 
Commission, the Securities and Exchange Commission, and any applicable 
prudential regulator, of any swap valuation dispute not resolved 
within:
    (1) One (1) business day, if the dispute is with a counterparty 
that is a swap dealer or major swap participant; or
    (2) Five (5) business days, if the dispute is with a counterparty 
that is not a swap dealer or major swap participant.

Sec.  23.505  End user exception documentation.

    (a) For swaps excepted from a mandatory clearing requirement. Each 
swap dealer and major swap participant shall obtain documentation 
sufficient to provide a reasonable basis on which to believe that its 
counterparty meets the statutory conditions required for an exception 
from a mandatory clearing requirement, as defined in section 2h(7) of 
the Act and Sec.  39.6 of this chapter. Such documentation shall 
include:
    (1) The identity of the counterparty;
    (2) That the counterparty has elected not to clear a particular 
swap under section 2h(7) of the Act and Sec.  39.6 of this chapter;
    (3) That the counterparty is a non-financial entity, as defined in 
section 2h(7)(C) of the Act;
    (4) That the counterparty is hedging or mitigating a commercial 
risk; and
    (5) That the counterparty generally meets its financial obligations 
associated with non-cleared swaps.
    (b) Recordkeeping. Each swap dealer and major swap participant 
shall maintain all documents required to be obtained pursuant to this 
section in accordance with Sec.  1.31 of this chapter and shall make 
them available promptly upon request to any representative of the 
Commission or any applicable prudential regulator, or with regard to 
swaps defined in section 1a(47)(A)(v) of

[[Page 6727]]

the Act, to any representative of the Commission, the Securities and 
Exchange Commission, or any applicable prudential regulator.

    Issued in Washington, DC on January 13, 2011 by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Swap Trading Relationship Documentation Requirements for 
Swap Dealers and Major Swap Participants--Commissioners Voting Summary 
and Statements of Commissioners

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

Appendix 1--Commissioners Voting Summary

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

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rulemaking that establishes swap trading 
relationship documentation requirements for swap dealers and major 
swap participants. The proposed regulations are consistent with the 
express mandate of the Dodd-Frank Act to prescribe standards for the 
timely and accurate confirmation, processing, netting, documentation 
and valuation of swap transactions. One of the primary goals of the 
Dodd-Frank Act was to establish a comprehensive regulatory framework 
that would reduce risk, increase transparency and promote market 
integrity within the financial system. The proposed regulations 
accomplish this objective by establishing procedures that will 
promote legal certainty regarding terms of swap transactions, early 
resolutions of valuation disputes, enhanced understanding of one 
counterparty's risk exposure to another, reduced operational risk 
and increased operational efficiency. One of the key chapters from 
the 2008 financial crisis was when large financial players, 
including AIG, had valuation disputes and other problems regarding 
documentation standards. These rules will directly address many of 
these issues, highlighting issues for senior management and 
regulators earlier and lowering risk to the public.

Appendix 3--Commissioner Scott D. O'Malia

    I respectfully dissent from the Commission's decision to propose 
requirements regarding the inclusion of Title II of the Dodd-Frank 
Act (Title II) and the Federal Deposit Insurance Act (FDIA) in the 
swap documentation used by swap dealers (Dealers) and major swap 
participants (MSP). This proposal would require Dealers and MSP to 
include a provision in their swap documentation which will prevent 
their counterparties from exercising certain private, contractual 
rights in the event that a swap becomes subject to the processes of 
either Title II or FDIA. In particular, the proposal requires 
counterparties to explicitly consent to the resolution processes set 
forth in Title II or FDIA, which includes a one-day stay on the 
termination, liquidation or netting of swaps with a ``covered 
financial company'' as that term is defined under Title II. Title II 
also provides the Federal Deposit Insurance Company (FDIC) with an 
unchecked authority to repudiate contracts and preference which 
creditors receive payments. Finally, the proposal asks whether swap 
agreements which contain cross default provisions should also 
subject counterparty affiliates to a ``covered financial company'' 
designation or treat them as an insured depository institution under 
FDIA.
    The Commission's proposal relies on its authorities in Title VII 
of the Dodd-Frank Act regarding swap documentation. Asking parties 
to agree upon and include valuation language in their swap 
agreements under this authority is one thing, but dictating that one 
party forego its legal contractual rights simply because its 
counterparty becomes subject to an overly vague and far reaching 
statute intended to address ``systemic risk to the financial 
system'' is quite another. If the FDIC authority to require this 
provision under Title II was clear, then there would be no need for 
the Commission to prop up the banking regulator's ability to 
exercise its resolution authority. In its best attempt to justify 
the proposal, the Commission claims that it is merely trying to put 
counterparties on notice of the already existing requirements of 
Title II and FDIA, but neither the proposal regarding an explicit 
consent to transfer, nor the discussion regarding affiliates and 
cross default agreements is a reflection of language already 
included in Title II or FDIA. At the very least, if the CFTC had any 
specific role under Title II or FDIA, then it would be clear how we 
would inform the treatment of the market participants that we 
regulate and their transactions in the case of a default. We do not.
    By raising these objections, I hope that market participants 
will become fully aware of the legal regime that they will be 
subject to by virtue of entering into a swap agreement. I don't 
believe it is in our best interest to adopt seemingly redundant and 
unnecessary requirements into our regulations or to adopt 
requirements under the guise of our Title VII authorities that 
clearly exceeds the already broad statutory authority Congress 
decided to provide the FDIC under both Title II and FDIA. As a 
result, I cannot support this proposal.

[FR Doc. 2011-2643 Filed 2-7-11; 8:45 am]
BILLING CODE 6351-01-P
```