58186 Federal Register / Vol. 76, No. 182 / Tuesday, September 20, 2011 / Proposed Rules 

entities affected (whether registered or 

unregistered) along with appropriate 

compliance dates. 

Such a schedule would have 

complemented and informed existing 

proposals and provided structure to future 

determinations. Additionally, a proposal 

regarding such a schedule should have 

adequately analyzed the costs and benefits of 

alternatives, including appropriate 

quantification. Unfortunately, the two rule 

proposals that the Commission approved 

today fail to either propose a comprehensive 

schedule or provide an adequate cost benefit 

analysis. 

The Commission’s proposals also fail to 

request comment on a number of issues that 

I believe are important considerations in 

developing an implementation plan. As a 

result, I am encouraging commenters to 

submit responses to the questions below as 

part of their comments on the two rule 

proposals. 

Swap Transaction Compliance and 

Implementation Schedule: Clearing and 

Trade Execution Requirements under Section 

2(h) of the CEA 

• Should the Commission provide 

guidance on how it will make and 

communicate a mandatory clearing 

determination prior to considering the first 

such determination? If so, what information 

should be included in guidance? 

• As section II(E) of the proposal states: 

‘‘When issuing a mandatory clearing 

determination, the Commission would set an 

effective date by which all market 

participants would have to comply. In other 

words, the proposed compliance schedules 

would be used only when the Commission 

believes that phasing is necessary based on 

the considerations outlined in this release. 

The Commission will provide the public 

with notice of its intent to rely upon the 

compliance schedule pursuant to the process 

outlined in § 39.5(b)(5).’’ To afford more 

certainty to market participants, should the 

Commission instead create a presumption 

that it will rely on the compliance schedule 

for each mandatory clearing determination 

that it issues, unless it finds that the 

compliance schedule is not necessary to 

achieve the benefits set forth in the proposal 

(e.g., facilitating the transition to the new 

regulatory regime established by the DoddFrank Act in an orderly manner that does not 

unduly disrupt markets and transactions)? 

• What, if any, other issues not addressed 

in current proposed or final rulemakings 

should the Commission have taken into 

consideration when proposing the 

compliance schedule? For example, should 

the Commission have considered the extent 

to which its clearing and trade execution 

requirements apply to entities and 

transactions located outside the United 

States? Also, should the Commission have 

considered the extent to which such 

requirements apply to transactions between 

affiliates (whether domestic or cross-border)? 

If applicable, how should the Commission 

adjust the proposed compliance schedule to 

account for such issues? 

• What, if any, adjustments should the 

Commission make to the proposed 

compliance schedule for trade execution 

requirements if the Commission makes a 

determination that a group, category, type, or 

class of swaps, rather than a specific swap, 

is subject to mandatory clearing? Would such 

adjustments vary depending on the manner 

in which the Commission defines group, 

category, type, or class? 

Swap Transaction Compliance and 

Implementation Schedule: Trading 

Documentation and Margining Requirements 

Under Section 4s of the CEA 

• What, if any, other issues not addressed 

in current proposed or final rulemakings 

should the Commission have taken into 

consideration when proposing the 

compliance schedule? For example, should 

the Commission have considered the extent 

to which its documentation and margin 

requirements apply to entities and 

transactions located outside the United 

States? Also, should the Commission have 

considered the extent to which such 

requirements apply to transactions between 

affiliates (whether domestic or cross-border)? 

If applicable, how should the Commission 

adjust the proposed compliance schedule to 

account for such issues? 

Finally, I want to be clear that I support 

completing the final Dodd-Frank rulemakings 

in a reasonable time frame. I believe that the 

timely implementation of such rulemakings 

is important. Knowing when and how the 

markets are required to do what is vital to the 

success of implementing the new market 

structure required under the Dodd-Frank Act. 

When billions of dollars are at stake, you 

simply do not rely on guesses and estimates 

based on vague conditions. 

[FR Doc. 2011–24128 Filed 9–19–11; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 37, 38, and 39 

RIN 3038–AD60 

Swap Transaction Compliance and 

Implementation Schedule: Clearing 

and Trade Execution Requirements 

under Section 2(h) of the CEA 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is proposing regulations that 

would establish a schedule to phase in 

compliance with certain new statutory 

provisions enacted under Title VII of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank 

Act). These provisions include the 

clearing requirement under new section 

2(h)(1)(A) of the Commodity Exchange 

Act (CEA or Act), and the trade 

execution requirement under new 

section 2(h)(8)(A) of the CEA. The 

proposed schedules would provide 

relief in the form of additional time for 

compliance with these requirements. 

This relief is intended to facilitate the 

transition to the new regulatory regime 

established by the Dodd-Frank Act in an 

orderly manner that does not unduly 

disrupt markets and transactions. The 

Commission requests comment on the 

proposed compliance schedules for 

these clearing and trade execution 

requirements. 

DATES: Submit comments on or before 

November 4, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AD60 

and Swap Transaction Compliance and 

Implementation Schedule: Clearing and 

Trade Execution Requirements under 

Section 2(h) of the CEA, by any of the 

following methods: 

• Agency Web site, via its Comments 

Online process at http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one method. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that may be exempt from disclosure 

under the Freedom of Information Act, 

a petition for confidential treatment of 

the exempt information may be 

submitted according to the established 

procedures in § 145.9 of the 

Commission’s regulations, 17 CFR 

145.9. 

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

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

deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been redacted 

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 

mstockstill on DSK4VPTVN1PROD with PROPOSALS

Federal Register / Vol. 76, No. 182 / Tuesday, September 20, 2011 / Proposed Rules 58187 

1See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). 

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

3See Reopening and Extension of Comment 

Periods for Rulemakings Implementing the DoddFrank Wall Street Reform and Consumer Protection 

Act, 76 FR 25274, May 4, 2011. 

4The transcripts from the roundtable are 

available at http://www.cftc.gov/ucm/groups/ 

public/@newsroom/documents/file/ 

csjac_transcript050311.pdf (‘‘Day 1 Roundtable 

Tr.’’) and http://www.cftc.gov/ucm/groups/public/ 

@newsroom/documents/file/ 

csjac_transcript050211.pdf (‘‘Day 2 Roundtable 

Tr.’’). 

5See ‘‘CFTC Staff Concepts and Questions 

Regarding Phased Implementation of Effective Dates 

for Final Dodd-Frank Rules,’’ available at http:// 

www.cftc.gov/ucm/groups/public/@newsroom/ 

documents/file/staffconcepts050211.pdf. 

6Such comments are available at http:// 

comments.cftc.gov/PublicComments/ 

CommentList.aspx?id=1000. 

7E.g., Letter from Karrie McMillan, Investment 

Company Institute, dated Jun. 10, 2011 at 8–11; 

Letter from Financial Services Forum, Futures 

Industry Association, International Swaps and 

Derivatives Association, and Securities Industry 

and Financial Markets Association, dated May 4, 

2011 at 7–9; Letter from Jeff Gooch, MarkitSERV, 

dated Jun. 10, 2011 at 1–2 and 6; Letter from 

Electric Trade Association, dated May 4, 2011 at 5; 

Letter from John R. Gidman, Association of 

Institutional Investors, dated Jun. 10, 2011 at 3. 

8Letter from the Coalition of Physical Energy 

Companies, dated Mar. 14, 2011 at 4. 

9Letter from the Futures Industry Association, 

the Financial Services Forum, the International 

Swaps and Derivatives Association and the 

Securities Industry and Financial Markets 

Association, dated May 4, 2011 at 5. 

10Letter from the Bank of Tokyo-Mitsubishi UFJ, 

Ltd., et al., dated May 6, 2011 at 6. 

11Letter from the Financial Services Roundtable, 

dated May 12, 2011 at 4. 

12For example, Javelin stated that it could be 

open for business and generally be in compliance 

with the clearing and trade execution requirements 

within 6 months. Day 1 Roundtable Tr. at 104–105. 

Citadel suggested moving towards a voluntary 

clearing launch between day 180 and day 240, and 

eventually moving towards a mandatory clearing 

date. Day 1 Roundtable Tr. at 73–74. Moreover, the 

Swap Financial Group offered a different 

perspective stating that it generally thought 

implementation of Dodd-Drank could be 

accomplished in a year or two. Day 2 Roundtable 

Tr. at 269. 

13These comments are more fully discussed later 

in the preamble. 

14The Commission also is proposing Swap 

Transaction Compliance and Implementation 

Schedule: Trade Documentation and Margining 

Requirements under section 4s of the CEA. 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Dhaval Patel, Counsel, Office of the 

General Counsel, 202–418–5125, 

dpatel@cftc.gov, or Camden Nunery, 

Office of the Chief Economist, 

cnunnery@cftc.gov, 202–418–5723, 

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 amends the CEA 2

to establish a comprehensive new 

regulatory framework for swaps. The 

legislation was enacted to reduce risk, 

increase transparency, and promote 

market integrity within the financial 

system by, among other things: (1) 

Providing for the registration and 

comprehensive regulation of swap 

dealers and major swap participants; (2) 

imposing clearing and trade execution 

requirements on standardized derivative 

products; (3) creating robust 

recordkeeping and real-time reporting 

regimes; and (4) enhancing the 

rulemaking and enforcement authorities 

of the Commission with respect to, 

among others, all registered entities and 

intermediaries subject to the 

Commission’s oversight. 

To implement the Dodd-Frank Act, 

the Commission has to-date issued 55 

advance notices of proposed rulemaking 

or notices of proposed rulemaking, two 

interim final rules, 12 final rules, and 

one proposed interpretive order. By the 

beginning of May 2011, the Commission 

had published in the Federal Register a 

significant number of notices of 

proposed rulemaking, which 

represented a substantially complete 

mosaic of the Commission’s proposed 

regulatory framework under Title VII of 

the Dodd-Frank Act. In recognition of 

that fact and with the goal of giving 

market participants additional time to 

comment on the proposed new 

regulatory framework for swaps, either 

in part or as a whole, the Commission 

reopened or extended the comment 

period of many of its proposed 

rulemakings through June 3, 2011.3 In 

total, the Commission has received over 

20,000 comments in response to its 

Dodd-Frank Act rulemaking proposals. 

To give the public an opportunity to 

comment further on implementation 

phasing, on May 2–3, 2011, the 

Commission, along with the Securities 

and Exchange Commission (SEC), held 

a joint, two-day roundtable on issues 

related to implementation.4 In 

connection with this roundtable, 

Commission staff proposed thirteen 

concepts to be considered regarding 

implementation phasing, and staff asked 

a series of questions based on the 

concepts outlined.5 The Commission 

received numerous comments in 

response to both its roundtable and the 

staff concepts and questions.6

These comments were submitted by a 

number of existing and potential market 

infrastructures, including 

clearinghouses, trading platforms, and 

swap data repositories. Comments also 

were submitted by entities that may 

potentially be swap dealers (SDs) or 

major swap participants (MSPs), as well 

as those financial entities that may not 

be required to register with the 

Commission, but whose swap 

transactions may be required to comply 

with the clearing requirement under 

section 2(h)(1)(A) of the CEA, and a 

trade execution requirement under 

section 2(h)(8)(A) of the CEA. The 

Commission also received many 

comments from non-financial entities. 

One of the key themes to emerge from 

the comments received by the 

Commission is that some market 

participants may require more time to 

bring their swap transactions into 

compliance with certain new regulatory 

requirements.7 For example, one 

commenter requested a ‘‘meaningful’’ 

period after finalization of the suite of 

rulemakings that is applicable to it 

before actual compliance will be 

required.8 Similarly, several trade 

associations recommended the 

Commission allow ‘‘sufficient’’ time for 

infrastructure and business practices to 

develop before requiring compliance 

with the new requirements.9 A group of 

international banks commented that the 

Commission should defer compliance 

until December 31, 2012, at which point 

the regulatory timetable as per the 

September 2009 G20 Pittsburgh 

statement will have reached a 

conclusion.10 Another commenter noted 

that some entities may be able to 

comply relatively quickly with certain 

documentation requirements that are 

largely consistent with current business 

practices while other requirements may 

need a longer implementation period.11

Although commenters varied in their 

recommendations regarding the time it 

would take to bring their swaps into 

compliance with the new regulatory 

requirements,12 many commenters 

agreed on phasing in compliance with 

these requirements by type of market 

participant based on a variety of factors, 

including a market participant’s 

experience, resources, and the size and 

complexity of its transactions.13 The 

Commission has taken these comments 

into consideration in developing the 

proposed compliance schedules. 

The swap transaction compliance 

requirements that are the subject of this 

proposed rulemaking include 

compliance with the clearing 

requirement and the corresponding 

trade execution requirement under 

sections 2(h)(1)(A) and 2(h)(8)(A) of the 

CEA, respectively.14 The Commission’s 

mstockstill on DSK4VPTVN1PROD with PROPOSALS

58188 Federal Register / Vol. 76, No. 182 / Tuesday, September 20, 2011 / Proposed Rules 

15The proposed compliance schedules do not 

address the effective dates of the clearing and trade 

execution requirements in the Dodd-Frank Act, 

including the application of the Commission’s 

Effective Date Order to such requirements. See 

Effective Date for Swap Regulation, 76 FR 42508, 

Jul. 19, 2011. 

16Section 712(f) of the Dodd-Frank Act states: 

‘‘Beginning on the date of enactment of this Act and 

notwithstanding the effective date of any provision 

of this Act, the [Commission] * * * may, in order 

to prepare for the effective dates of the provisions 

of this Act—(1) promulgate rules, regulations, or 

orders permitted or required by this Act * * *.’’ 

17Section 2(h)(7) of the CEA provides an 

exception to the clearing requirement (‘‘the enduser exception’’) when one of the counterparties to 

a swap (i) Is not a financial entity, (ii) is using the 

swap to hedge or mitigate commercial risk, and (iii) 

notifies the Commission how it generally meets its 

financial obligations associated with entering into 

a non-cleared swap. 

18Under section 2(h)(2)(B)(ii), the Commission 

must consider swaps listed for clearing by a DCO 

as of the date of enactment of the Dodd-Frank Act. 

19 76 FR 44464, Jul. 26, 2011. 

20 76 FR at 44469. 

21End-User Exception to Mandatory Clearing of 

Swaps, 75 FR 80747, Dec. 23, 2010. 

22 75 FR at 80748. 

23Section 712(d)(1) provides: ‘‘Notwithstanding 

any other provision of this title and subsections (b) 

and (c), the Commodity Futures Trading 

Commission and the Securities and Exchange 

Commission, in consultation with the Board of 

Governors [of the Federal Reserve System], shall 

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

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

‘major swap participant’, ‘major security-based 

swap participant’, and ‘security-based swap 

agreement’ in section 1a(47)(A)(v) of the 

Commodity Exchange Act (7 U.S.C. 1a(47)(A)(v)) 

and section 3(a)(78) of the Securities Exchange Act 

of 1934 (15 U.S.C. 78c(a)(78)).’’ Section 721(c) 

provides: ‘‘To include transactions and entities that 

have been structured to evade this subtitle (or an 

amendment made by this subtitle), the Commodity 

Futures Trading Commission shall adopt a rule to 

further define the terms ‘swap’, ‘swap dealer’, 

‘major swap participant’, and ‘eligible contract 

participant’.’’ 

24Further Definition of ‘‘Swap Dealer,’’ 

‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap 

Participant,’’ ‘‘Major Security-Based Swap 

Participant,’’ and ‘‘Eligible Contract Participant’’; 

Proposed Rule, 75 FR 80174, Dec. 21, 2010 and 

Further Definition of ‘‘Swap,’’ ‘‘Security-Based 

Swap,’’ and ‘‘Security-Based Swap Agreement’’; 

proposed compliance schedules are 

designed to afford affected market 

participants a reasonable amount of 

time to bring their transactions into 

compliance with such requirements. 

The proposed schedules also would 

provide relief in the form of additional 

time for compliance with these 

transaction compliance requirements 

and are further explained below.15 This 

relief is intended to facilitate the 

transition to the new regulatory regime 

established by the Dodd-Frank Act in an 

orderly manner that does not unduly 

disrupt markets and transactions. 

II. Proposed Regulation 

A. Authority to Implement Proposed 

Regulations 

In this Notice of Proposed 

Rulemaking, the Commission relies on 

its general authority to establish 

compliance dates with the rules and 

regulations enacted pursuant to the 

Dodd-Frank Act. Section 712(f) also 

authorizes the Commission to 

promulgate rules to prepare for the 

effective dates of the provisions of the 

Dodd-Frank Act.16 In addition, the 

Commission relies on section 8(a)(5) of 

the CEA, which 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. In accordance with this authority, 

the proposed regulations would amend 

parts 37, 38, and 39 of the Commission’s 

regulations to phase in compliance 

dates for the clearing and trade 

execution requirements under section 

2(h) of the CEA. 

B. Implementation Phasing of the 

Clearing Requirement under Section 

2(h)(1) 

1. Background on Mandatory Clearing 

Determinations 

Section 723(a)(3) of the Dodd-Frank 

Act amended the CEA to provide, under 

new section 2(h)(1)(A), that ‘‘it shall be 

unlawful for any person to engage in a 

swap unless that person submits such 

swap for clearing to a derivatives 

clearing organization that is registered 

under this Act or a derivatives clearing 

organization that is exempt from 

registration under this Act if the swap 

is required to be cleared.’’ 17 Section 

2(h)(2) charges the Commission with the 

responsibility for determining whether a 

swap is required to be cleared, through 

one of two avenues: (1) Pursuant to a 

Commission-initiated review; or (2) 

pursuant to a submission from a 

derivatives clearing organization (DCO) 

of each swap, or any group, category, 

type, or class of swaps that the DCO 

‘‘plans to accept for clearing.’’ 18

On July 26, 2011, the Commission 

published in the Federal Register a final 

rule regarding the process for review of 

swaps for mandatory clearing.19 Under 

§ 39.5(b)(6), the Commission will review 

a DCO’s submission and determine 

whether the swap, or group, category, 

type, or class of swaps, described in the 

submission is required to be cleared. 

This determination will be made not 

later than 90 days after a complete 

submission has been received from a 

DCO, unless the submitting DCO agrees 

to an extension. Under § 39.5(c), 

Commission-initiated reviews of swaps 

that have not been accepted for clearing 

by a DCO will take place on an ongoing 

basis. However, as explained in the 

preamble to the final rule, the 

‘‘Commission anticipates that the initial 

mandatory clearing determinations 

would only involve swaps that are 

already being cleared or that a DCO 

wants to clear.’’ 20

Because the Commission initially will 

consider mandatory clearing 

determinations based on those swaps 

that DCOs are currently clearing or that 

a DCO would like to clear, the initial 

sequence of mandatory clearing 

determinations will be based on the 

market’s view of which swaps can be 

cleared and which asset classes are 

ready for clearing, as reflected by the 

fact that a DCO is either currently 

clearing a group, category, type, or class 

of swaps or is intending to do so. For 

example, multiple registered DCOs 

currently clear interest rate, credit, and 

commodity swaps. For these swaps, the 

Commission will begin the review 

process for issuing mandatory clearing 

determinations in the near term. 

The Commission observes that before 

market participants could be required to 

comply with a mandatory clearing 

determination, the Commission must 

adopt its final rules related to the enduser exception to mandatory clearing 

established by section 2(h)(7) of the 

CEA. In December 2010, the 

Commission proposed rules governing 

this elective exception to mandatory 

clearing.21 The proposed rule generally 

provides that a swap otherwise subject 

to mandatory clearing is subject to an 

elective exception from clearing if one 

party to the swap is not a financial 

entity, is using swaps to hedge or 

mitigate commercial risk, and notifies 

the Commission how it generally meets 

its financial obligations associated with 

entering into non-cleared swaps (the 

‘‘end-user clearing exception’’).22

Because this proposed rule would 

establish the process by which a nonfinancial entity would elect not to clear 

a swap subject to a clearing 

requirement, this rule would need to be 

finalized prior to requiring compliance 

with a mandatory clearing 

determination. 

In addition, the Commission 

recognizes that the swap transaction 

compliance schedules that are the 

subject of this proposal reference terms 

such as ‘‘swap,’’ ‘‘swap dealer,’’ and 

‘‘major swap participant’’ that are the 

subject of rulemaking under sections 

712(d)(1) and 721(c) of the Dodd-Frank 

Act.23 The Commission and the SEC 

have proposed rules that would further 

define each of these terms.24 As such, 

mstockstill on DSK4VPTVN1PROD with PROPOSALS

Federal Register / Vol. 76, No. 182 / Tuesday, September 20, 2011 / Proposed Rules 58189 

Mixed Swaps; Security-Based Swap Agreement 

Recordkeeping, 76 FR 29818, May 23, 2011. 

25See Effective Date for Swap Regulation, 76 FR 

42508, Jul. 19, 2011. 

26Notably, under section 712(f) of the DoddFrank Act, these definitions would not have to be 

finalized for the Commission to review swap 

submissions from DCOs. 

27Protection of Cleared Swaps Customer 

Contracts and Collateral; Conforming Amendments 

to the Commodity Broker Bankruptcy Provisions, 76 

FR 33818, Jun. 9, 2011. 

28See discussion below at p. 21 and above at p. 

7. It would be possible for the Commission to issue 

a mandatory clearing determination but postpone 

the overall compliance date for all market 

participants for some period of time. Additionally, 

market participants may begin clearing their swap 

transactions as soon as a DCO begins accepting such 

swaps for clearing, regardless of whether the 

Commission determines that such swaps are 

required to be cleared. 

29Letter from Karrie McMillan, Investment 

Company Institute, dated Jun. 10, 2011 at 9–10. 

30See Letter from Financial Services Forum, 

Futures Industry Association, International Swaps 

and Derivatives Association, and Securities 

Industry Association, dated May 4, 2011 at 9; Letter 

from Karrie McMillan, Investment Company 

Institute, dated Jun. 10, 2011 at 10–11. 

31Letter from Richard H. Baker, Managed Funds 

Association, dated Mar. 24, 2011 at Appendix 1, 

page 1 and Appendix 2, page 2. 

32Letter from Chris Koppenheffer, Swaps & 

Derivatives Market Association, dated Jun. 1, 2011 

at 2. 

33Section 2(h)(1)(B). 

34This rulemaking does not address the manner 

in which it may be determined or established that 

a DCM or a SEF has made a swap available for 

trading. 

35Core Principles and Other Requirements for 

Designated Contract Markets, 75 FR 80572, Dec. 22, 

2010. 

and in a manner consistent with the 

temporary relief provided in the 

Commission’s Effective Date Order,25

the Commission must adopt its final 

rules regarding the further definitions in 

question prior to requiring compliance 

with a mandatory clearing 

determination.26

Lastly, the Commission notes that it 

has yet to adopt final rules relating to 

the protection of cleared swaps 

customer contracts and collateral. These 

rules are essential for establishing the 

customer protection regime associated 

with client clearing for swaps through 

Commission-registered futures 

commission merchants (FCMs) at 

DCOs.27 The Commission believes that 

finalizing the rules regarding the 

segregation of customer collateral prior 

to requiring compliance with a 

mandatory clearing determination is 

necessary to effectuate the purposes of 

new section 4d(f) of the CEA. 

2. Compliance Schedule for Clearing 

Requirement—§ 39.5(e) 

Proposed § 39.5(e) would provide the 

Commission with the authority to phase 

in compliance with a clearing 

requirement upon issuance of a 

mandatory clearing determination. The 

proposed compliance schedule is based 

on the type of market participants 

entering into the swaps subject to the 

clearing requirement. The triggering 

event for the application of this 

compliance schedule would be the 

Commission’s issuance of a 

determination that the swap, or group, 

category, type, or class of swaps, is 

required to be cleared.28

In proposing phased implementation 

schedules for the clearing requirement, 

the Commission seeks to balance several 

goals. First, the Commission believes 

that certain market participants may 

require additional time to bring their 

swaps into compliance with the new 

regulatory requirement for mandatory 

clearing of a swap or class of swaps. 

This is particularly true for market 

participants that may not be registered 

with the Commission and those market 

participants that may have hundreds or 

thousands of managed accounts, 

referred to as ‘‘third-party subaccounts’’ 

for the purposes of this proposal. Under 

this proposal, these parties would be 

afforded additional time to document 

new client clearing arrangements, 

connect to market infrastructure such as 

DCOs, and prepare themselves and their 

customers for the new regulatory 

requirements. As one commenter noted, 

‘‘[i]n the context of asset managers, the 

account set up process has to be 

multiplied over hundreds of 

subaccounts. Processing all of these 

subaccounts will take time even for the 

largest and most technologically 

advanced asset managers.’’ 29

Moreover, several commenters 

emphasized the need to have adequate 

time to educate their clients regarding 

the new regulatory requirements.30 For 

instance, market participants not 

registered with the Commission may not 

be familiar with the new regulatory 

requirements. In addition, market 

participants with third-party 

subaccounts would have to educate 

additional clients. Accordingly, both 

types of participants should be given 

additional time to prepare for 

compliance with the new requirements. 

Another goal of the proposed 

compliance schedule is to have 

adequate representation of market 

participants involved at the outset of 

implementing a new mandatory clearing 

regime for swaps. The Commission 

believes that having a cross-section of 

market participants involved at the 

outset of formulating and designing the 

rules and infrastructure under which 

mandatory clearing is implemented will 

best meet the needs of all market 

participants. 

Several commenters have 

recommended that the Commission take 

such an approach. For example, one 

commenter emphasized the importance 

of the initiation of so-called ‘‘buy-side’’ 

clearing access for credit default swaps 

in 2009 and recommended that ‘‘[a]t the 

time that a class of products is ready for 

clearing, all market participants 

(including buy-side participants) should 

be permitted (but not required) to clear 

those products * * *.’’ 31 In another 

example, one commenter recommended 

that in phasing mandatory clearing the 

Commission should aim for open access 

to establish an ‘‘all to all market’’ with 

both sides of the trade involved with the 

initial implementation.32 In further 

response to these comments, the 

Commission notes that market 

participants can begin (and continue) 

voluntarily clearing swaps through 

eligible DCOs at any time. 

C. Implementation Phasing of the Trade 

Execution Requirement Under Section 

2(h)(8) 

1. Background on Trade Execution 

Requirement 

Section 723 of the Dodd Frank Act 

amended the CEA to provide, under 

new section 2(h)(8)(A), that with respect 

to a swap that is subject to the clearing 

requirement of section 2(h)(1)(A), 

‘‘counterparties shall (i) execute the 

transaction on a board of trade 

designated as a contract market under 

section 5 [a DCM]; or (ii) execute the 

transaction on a swap execution facility 

[SEF] registered under section 5h or a 

swap execution facility exempt from 

registration under section 5h(f) of this 

Act.’’ Under section 2(h)(8)(B), the only 

exceptions to the trade execution 

requirement are if no DCM or SEF 

‘‘makes the swap available to trade’’ or 

the swap is subject to the clearing 

exception under section 2(h)(7) (i.e., the 

end-user exception).33

Based on the natural phasing 

provided for in the statute, a trade 

execution requirement is triggered for a 

swap when (1) The Commission has 

issued a determination that the swap is 

required to be cleared and (2) any DCM 

or SEF has made the swap available to 

trade.34

The Commission observes that before 

market participants could be required to 

comply with a trade execution 

requirement the Commission must 

adopt final rules related to SEFs and 

DCMs. The Commission has proposed 

rules related to the new core principles 

for DCMs and the changes to the 18 

original DCM core principles.35 While 

mstockstill on DSK4VPTVN1PROD with PROPOSALS

58190 Federal Register / Vol. 76, No. 182 / Tuesday, September 20, 2011 / Proposed Rules 

36Core Principles and other Requirements for 

Swap Execution Facilities, 76 FR 1214, Jan. 7, 2011. 

As part of the SEF rulemaking, the Commission 

proposed regulation § 37.10, which would require 

each SEF to conduct an annual review of whether 

it has made a swap available for trading and to 

provide a report to the Commission regarding its 

assessment. Id. at 1222 and 1241. 

37CEA section 2(h)(7)(A)(i) limits availability of 

the end-user clearing exception to counterparties to 

the swap that are not a financial entity. The term 

financial entity is defined in CEA section 

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

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

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

security-based swap participant; (v) a commodity 

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

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

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

employee benefit plan as defined in paragraphs (3) 

and (32) of section 3 of the Employee Retirement 

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

(viii) a person predominantly engaged in activities 

that are in the business of banking or financial in 

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

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

38 If a security-based swap dealer or a major 

security-based swap participant is not yet required 

to register with the SEC at such time as the 

Commission issues mandatory clearing 

determination, then the security-based swap dealer 

or a major security-based swap participant would 

be treated as a Category 2 Entity. 

39 It should be noted that many commodity pools 

meet the definition of private fund under section 

202(a) of the Investment Advisors Act of 1940. Such 

a commodity pool would only be a Category 1 

Entity if it met the other criteria of an active fund. 

40 In calculating the numerical threshold, the 

Commission intends for funds to calculate all swaps 

it executes not just those that are the subject of a 

mandatory clearing determination. 

41The Commission is unaware of any positionlevel or transaction-level data on private fund swap 

activity in a publicly available form. In order to 

determine private fund activity levels, the staff 

consulted with academics focusing their research in 

this area, with industry participants, and with 

groups that represent the industry. 

none of the new rules proposed for 

DCMs relate directly to the trade 

execution requirement under section 

2(h)(8), the Commission believes that it 

is necessary for DCMs to have their new 

policies, procedures, and rulebooks in 

place prior to the DCMs making a swap 

available for trading. 

With regard to SEFs, the Commission 

also observes that it would have to 

adopt final rules allowing for SEF 

registration, including procedures for 

provisional registration, prior to any 

SEF making a swap that is required to 

be cleared available for trading.36 The 

finalization of these rules would enable 

SEFs to register with the Commission 

and ensure that they have developed 

their new policies, procedures, and 

rulebooks. 

2. Compliance Schedule for the Trading 

Execution Requirement—§§ 37.12 and 

38.11 

Proposed regulations §§ 37.12 and 

38.11 provide for the phased 

implementation of a trade execution 

requirement by setting forth a 

compliance schedule tied to the 

schedule proposed for the clearing 

requirement. 

The proposed compliance schedules 

for the trade execution requirement 

would be triggered upon the later of (1) 

The applicable deadline established 

under the compliance schedule for the 

associated clearing mandate; or (2) 30 

days after the swap is made available for 

trading on either a SEF or a DCM. 

Consequently, market participants 

always will have at least thirty days 

after a DCM or SEF has made a swap 

available for trading to comply with a 

trade execution requirement. Prior to a 

Commission-issued mandatory clearing 

determination, both DCMs and SEFs 

would be permitted to offer swaps for 

trading by market participants on a 

voluntarily basis. However, those swaps 

would not be required to be traded on 

a DCM or SEF, pursuant to section 

2(h)(8) of the CEA until the associated 

clearing requirement took effect. 

D. Three-Part Implementation Phasing 

The Commission proposes 

compliance schedules for phasing 

implementation that afford relief in the 

form of additional time for compliance 

with any clearing requirement or trade 

execution requirement by category of 

market participant. The Commission 

based its proposed categorization of 

entities on the definition of ‘‘financial 

entity’’ in section 2(h)(7)(C) of the 

CEA.37 Under this statutory provision, 

Congress identified financial entities 

that would not be eligible to claim an 

exception from a clearing requirement 

under section 2(h)(1) of the CEA. 

Phase 1—Category 1 Entities 

The proposed compliance schedule 

would define ‘‘Category 1 Entities’’ to 

include a swap dealer, a security-based 

swap dealer, a major swap participant, 

a major security-based swap participant, 

or an active fund. 

Category 1 Entities include those 

dealers and major participants in the 

swap and security-based swap markets 

that will be registered with the 

Commission or the Securities and 

Exchange Commission (SEC).38 Title VII 

of the Dodd-Frank Act requires these 

market participants to register with 

either the CFTC or SEC as a result of 

their swaps or security-based swaps 

activities. Based on their level of market 

experience and based on their status as 

registrants with either the CFTC or the 

SEC, the Commission believes they 

should be capable of complying with a 

clearing requirement and a trade 

execution requirement sooner than 

other market participants and that 90 

days is a reasonable timeframe for these 

entities to come into compliance with 

these requirements. 

The Commission also is proposing to 

include those entities it defines as 

‘‘active funds’’ in the first category of 

market participants. The proposed 

definition of ‘‘active fund’’ would mean 

‘‘any private fund as defined in section 

202(a) of the Investment Advisors Act of 

1940, that is not a third-party 

subaccount and that executes 20 or 

more swaps per month based on a 

monthly average over the 12 months 

preceding the Commission issuing a 

mandatory clearing determination under 

section 2(h)(2) of the Act.’’39

The Commission is relying on the 

definition of private fund from section 

2(h)(7)(C) of the CEA, as well as section 

402 of the Dodd-Frank Act. However, 

the Commission is limiting the 

definition in two ways. First, the 

definition excludes third-party 

subaccounts, as discussed further 

below. Second, the definition is limited 

to those private funds that execute 20 or 

more swaps per month based on the 

average over the 12 months preceding 

the Commission’s issuance of a 

mandatory clearing determination.40 In 

choosing this threshold, the 

Commission’s goal was to ensure the 

involvement of a cross-section of market 

participants at the outset of both 

clearing and trading requirement 

implementation. The Commission also 

sought to address some commenters’ 

concerns regarding adequate ‘‘buy-side’’ 

representation early in the mandatory 

clearing process. Based on a preliminary 

assessment, the Commission believes 

the proposed numerical threshold for 

active funds is appropriate because a 

private fund that conducts this volume 

of swaps would be likely to have: (1) 

Sufficient resources to enter into 

arrangements that comply with the 

clearing and trade execution 

requirement earlier than other types of 

market participants; and (2) sufficient 

market experience to contribute 

meaningfully to the ‘‘buy-side’’ 

perspective as industry standards are 

being developed.41 In defining ‘‘active 

fund’’ accordingly, the Commission 

believes it has included those market 

participants that are likely to be among 

the most experienced participants with 

expertise and resources needed to come 

into transaction compliance quickly. 

The Commission proposes to phase in 

compliance with the mandatory clearing 

requirement for any swap transaction 

between a Category 1 Entity and another 

Category 1 Entity, or any other entity 

mstockstill on DSK4VPTVN1PROD with PROPOSALS

Federal Register / Vol. 76, No. 182 / Tuesday, September 20, 2011 / Proposed Rules 58191 

42The intent of this clause is to facilitate clearing 

by counterparties that desire to comply with a 

clearing mandate earlier than they would otherwise 

be required to under the compliance schedule. The 

Commission solicits comment on whether there 

would be a better way to accomplish this objective. 

43See footnote 42. 

44 Day 2 Roundtable Tr. at 62. 

45 Investment Company Institute, Jun. 10, 2011 

letter, at 12. 

that desires to clear the transaction 42

within the first 90 days after the 

Commission issues any mandatory 

clearing determination. With respect to 

the trade execution requirement, the 

Commission proposes to phase in 

compliance with this requirement either 

at the same time as the clearing 

requirement or thirty days after the 

swap is made available for trading, 

whichever is later. The Commission 

proposes phasing in all Category 1 

Entities first because these market 

participants are likely to be the most 

active and experienced market 

participants whose involvement in the 

early stages of building and rolling out 

the clearing and trading requirements is 

critical. The Commission is attempting 

to include in this category those market 

participants with the expertise and 

resources to implement mandatory 

clearing and trading most quickly. The 

Commission also believes Category 1 

Entities likely will have the most 

existing connectivity to clearinghouses 

and trading platforms and would be able 

to come into compliance sooner than 

other categories of participants. 

Phase 2—Category 2 Entities 

The proposed compliance schedule 

would define ‘‘Category 2 Entities’’ to 

include a commodity pool; a private 

fund as defined in section 202(a) of the 

Investment Advisors Act of 1940 other 

than an active fund; an employee 

benefit plan as defined in paragraphs (3) 

and (32) of section 3 of the Employee 

Retirement Income and Security Act of 

1974; or a person predominantly 

engaged in activities that are in the 

business of banking, or in activities that 

are financial in nature as defined in 

section 4(k) of the Bank Holding 

Company Act of 1956, provided that the 

entity is not a third-party subaccount. 

The Commission proposes to phase in 

compliance for swap transactions 

between a Category 2 Entity and 

Category 1 Entity, another Category 2 

Entity, or any other entity that desires 

to clear the transaction.43 The 

Commission is proposing to afford swap 

transactions between these types of 

market participants 180 days to come 

into compliance with a clearing 

requirement. With respect to the trade 

execution requirement, the Commission 

proposes to phase in compliance with 

this requirement either at the same time 

as the clearing requirement or thirty 

days after the swap is made available for 

trading, whichever is later. In providing 

these market participants an additional 

90 days to come into compliance, the 

Commission took into consideration the 

fact that Category 2 Entities may not be 

required to be registered with the 

Commission and may be less 

experienced and less frequent users of 

the swap markets than those in 

Category 1. 

Additionally, Category 2 Entities may 

not have the same level of expertise and 

resources to bring their swaps into 

compliance with a clearing requirement 

as quickly as Category 1 Entities. As 

defined for purposes of these 

compliance schedules, Category 2 

Entities do not include those financial 

entities that are third-party subaccounts, 

as described further below. 

Phase 3—Third-Party Subaccounts and 

all Other Swap Transactions 

Finally, the Commission proposes to 

phase in compliance for all other swap 

transactions not excepted from the 

mandatory clearing requirement within 

270 days after the Commission issues a 

clearing requirement. The Commission 

proposes to phase in compliance with 

the trade execution requirement either 

at the same time as the clearing 

requirement or thirty days after the 

swap is made available for trading, 

whichever is later. 

The Commission proposes to include 

all entities that are third-party 

subaccounts in this 270-day period. 

This approach would give these entities 

the most time to bring their swaps into 

compliance because they are likely to 

require the most time for 

documentation, coordination, and 

management. A third-party subaccount 

is afforded 270 days to bring its swaps 

into compliance because its portfolio is 

managed by an asset manager that may 

have to bring numerous accounts into 

compliance. The Commission also 

proposes to include any other swap 

transaction that would be subject to a 

clearing requirement into compliance 

within this proposed 270-day period. 

Under the Commission’s proposed 

definition, a third-party subaccount 

would be a managed account that 

requires specific approval by the 

beneficial owner of the account to 

execute documentation necessary for 

executing, confirming, margining, or 

clearing swaps. By way of non-exclusive 

example, if investment management 

firm X manages the assets of pension 

fund Y, and does so in a separate 

account that requires the approval of 

pension fund Y to execute necessary 

documentation, then that account 

would be afforded 270 days to come 

into compliance. On the other hand, if 

pension fund Y manages its own assets, 

it would fall within Category 2 and be 

afforded 180 days to come into 

compliance. Likewise, if investment 

management firm X does not manage 

the assets of third parties, then it would 

fall within Category 2. 

The Commission is proposing to 

afford third-party subaccounts an 

additional 90 days beyond the 180 days 

proposed for Category 2 because such 

entities may have documentation 

obligations for hundreds or even 

thousands of third-party subaccounts, 

and each such account must meet the 

mandatory clearing and trading 

requirements. For example, according to 

a statement made during the Joint SEC– 

CFTC Roundtable by Mr. William 

DeLeon of the firm Pacific Investment 

Management Company, LLC (PIMCO), 

PIMCO manages hundreds of third-party 

subaccounts, as defined above.44 The 

proposed compliance schedules would 

not prohibit any type of market 

participant from voluntarily complying 

sooner than the compliance deadline. 

Indeed, the Commission would 

encourage market participants that can 

come into compliance more quickly to 

move their swaps into clearing and 

begin trading on trading platforms as 

soon as possible in order to facilitate 

development of infrastructure that takes 

into account the views of many types of 

market participants. As one commenter 

noted, ‘‘Smaller entities, for example, 

may have unique issues that need to be 

accounted for before systems are 

hardwired. Many swap market 

participants are small entities; it is 

important to ensure that these entities 

and their liquidity are not squeezed out 

of the swaps market.’’ 45

E. Prospective Application of 

Compliance Schedules 

The Commission anticipates that it 

will exercise its authority to trigger the 

proposed compliance schedules each 

time it issues a mandatory clearing 

determination for a new group, category, 

type, or class of swaps. Under this 

approach, when a DCO begins offering 

a new swap for clearing and it is in the 

same group, category, type, or class of 

swaps and it meets the requirements 

imposed under a previously issued 

mandatory clearing determination, then 

the proposed compliance schedules 

would not be triggered. However, if the 

Commission issues a mandatory 

clearing determination in any entirely 

new group, category, type, or class of 

mstockstill on DSK4VPTVN1PROD with PROPOSALS

58192 Federal Register / Vol. 76, No. 182 / Tuesday, September 20, 2011 / Proposed Rules 

46Letter from Adam C. Cooper, Citadel, dated 

June 3, 2011, Appendix B. 

47 5 U.S.C. 601 et seq. 

swaps then the compliance schedules 

could once again be triggered by the 

Commission. For example, if the 

Commission issues a mandatory 

clearing determination for 5 year credit 

default swap products and a new 5 year 

credit default swap product is offered 

for clearing based on a new 5 year 

index, then the proposed compliance 

schedules may not be triggered. If on the 

other hand, the Commission has not 

issued a mandatory clearing 

determination for 10 year credit default 

swap products and a new 10 year credit 

default swap product is offered for 

clearing, then the compliance schedules 

could be triggered by the Commission. 

When issuing a mandatory clearing 

determination, the Commission would 

set an effective date by which all market 

participants would have to comply. In 

other words, the proposed compliance 

schedules would be used only when the 

Commission believes that phasing is 

necessary based on the considerations 

outlined in this release. The 

Commission will provide the public 

with notice of its intent to rely upon the 

compliance schedule pursuant to the 

process outlined in § 39.5(b)(5). 

The Commission solicits comment on 

the ongoing usefulness of the proposed 

compliance schedules once market 

participants have established 

documentation and connectivity to 

DCOs, DCMs, and SEFs. 

F. Comment Requested 

The Commission requests comment 

on all aspects of the proposed 

compliance schedules, §§ 37.12, 38.11 

and 39.5(e). The Commission may 

consider alternatives to the proposed 

compliance schedules and is requesting 

comment on the following questions: 

• What, if any, other rules should 

have been taken into consideration 

when proposing an implementation 

schedule regarding the clearing and 

trade execution requirements? If 

applicable, how should the 

implementation requirements of those 

other rules be taken into consideration? 

• Should there be a presumption that 

the Commission will rely on the 

compliance schedule for each 

mandatory clearing determination that it 

issues, unless the Commission finds that 

the compliance schedule is not 

necessary to achieve the benefits set 

forth herein (e.g., facilitating the 

transition to the new regulatory 

requirement established by the DoddFrank Act in an orderly manner that 

does not unduly disrupt markets and 

transactions)? 

• What factors, if any, would prevent 

an entity in any of the proposed 

categories from adhering to the 

compliance schedules proposed by the 

Commission? How much additional 

time would be needed to address these 

factors? 

• Are there other considerations that 

the Commission should have taken into 

account when designing this tiered 

implementation schedule? Are the 

timeframes outlined in this 

implementation schedule adequate? If 

not, what alternative schedule should 

the Commission consider, and why? 

• Assuming a situation where a swap 

first becomes subject to the clearing 

requirement and then is made available 

for trading by a DCM or SEF, is an 

additional thirty days after the swap 

becomes made available for trading 

enough time for DCMs, SEFs, and 

market participants to come into 

compliance with the trade execution 

requirement? For example, would thirty 

days be sufficient for the needed 

technological linkages to be established 

between (i) the DCOs, DCMs, and SEFs 

and (ii) the DCMs, SEFs, and market 

participants. 

• What other entities, if any, should 

be included in Category 1 or 2, and 

why? Should any entities be moved 

from Category 1 or 2 to a later category? 

For example, where should the 

Commission place those entities 

described in section 2(h)(7)(C)(ii) of the 

CEA (e.g., small banks, savings 

associations, farm credit system 

institutions, and credit unions)? 

• What adjustments to the 

compliance schedule and/or other steps 

could the Commission take to ensure 

there is adequate representation from all 

market participants at the outset of 

clearing and trade execution 

requirements? 

• In suggesting phasing in 

transactions between Category 1 or 2 

Entities and ‘‘any other entity that 

desires to clear the transaction,’’ the 

Commission intended to facilitate 

clearing by counterparties that desire to 

comply with a clearing mandate earlier 

than they would otherwise be required 

to under the compliance schedule. Is 

there a better way to achieve this 

objective? 

• Is an entity’s average monthly swap 

transaction activity a useful proxy for 

that entity’s ability to comply with the 

clearing and trade execution 

requirements? Or whether an entity is 

required to be registered with the 

Commission (rather than whether an 

entity is already registered with the 

Commission)? 

• Is the Commission’s definition of 

‘‘active fund’’ overly inclusive or underinclusive? Should the numerical 

threshold for number of monthly swap 

transactions be higher or lower than 20? 

If so, why? Should the number of 

monthly swap transactions be linked to 

swap activity in a particular asset class? 

• Should the Commission exclude 

from the definition of ‘‘active fund’’ any 

investment advisor of private funds 

acting solely as an advisor to private 

funds with assets under management in 

the United States of less than 

$150,000,000, as provided for in the 

reporting exemption for private funds 

under section 408 of the Dodd-Frank 

Act? 

• Would it be more appropriate for 

the Commission to measure a market 

participant’s level of swap activity by 

measuring notional turnover and/or 

open exposure, as suggested by some 

commenters? 46

• Are there any anticompetitive 

implications to the proposed 

compliance schedules? If so, how could 

the proposed rules be implemented to 

achieve the purposes of the CEA in a 

less anticompetitive manner? If so, 

please quantify those costs, if possible, 

and provide underlying data sources, 

assumptions and calculations. 

• Are there additional costs or 

benefits associated with the current 

proposal that the Commission has not 

already taken into account? Please 

discuss any such costs in detail and 

quantify in dollar terms, if possible. 

• Are there any assumptions, 

including quantitative assumptions, 

underlying the Commission’s cost 

benefit analysis that the Commission 

should consider? 

• Should the Commission consider an 

alternative implementation schedule? 

Would such an alternative schedule 

reduce the costs market participants 

bear? Please describe any such 

alternative implementation schedule in 

detail, including how it will reduce 

costs and the benefits it will likely 

deliver. If possible, please quantify the 

cost and benefits associated with any 

alternative. If providing dollar values, 

please describe any data sources, 

assumptions, and calculations used to 

generate them. 

III. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires that agencies consider whether 

the rules they propose will have a 

significant economic impact on a 

substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact.47 The rules proposed by the 

CFTC provide compliance schedules for 

mstockstill on DSK4VPTVN1PROD with PROPOSALS

Federal Register / Vol. 76, No. 182 / Tuesday, September 20, 2011 / Proposed Rules 58193 

48 44 U.S.C. 3507(d). 

49 7 U.S.C. 19(a). 

50E.g., Letter from Richard H. Baker, Managed 

Funds Association, dated Mar. 24, 2011 at 

Appendix 1, page 1. 

51 In a letter from the Financial Services Forum, 

Futures Industry Association, International Swaps 

and Derivatives Association, and Securities 

Industry and Financial Markets Association, dated 

May 4, 2011, commenters noted that ‘‘market 

participants vary dramatically in their resources, 

market sophistication and rationale for using 

Swaps. Swap Entities, in general, have greater 

resources, access to technology and clearing 

infrastructure than their end user counterparties.’’ 

certain new statutory requirements of 

the Dodd Frank Act and do not by 

themselves impose significant new 

regulatory requirements. Accordingly, 

the Chairman, on behalf of the CFTC, 

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. 

The CFTC invites public comment on 

this determination. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act 

(PRA) 48 imposes certain requirements 

on federal agencies (including the 

Commission) in connection with 

conducting or sponsoring any collection 

of information as defined by the PRA. 

This notice of proposed rulemaking, if 

approved, would not require a new 

collection of information from any 

persons or entities. 

C. Consideration of Costs and Benefits 

Section 15(a) of the CEA 49 requires 

the Commission to consider the costs 

and benefits of its action before 

promulgating a regulation under the 

CEA. Section 15(a) of the CEA specifies 

that the costs and benefits shall be 

evaluated in light of five broad areas of 

market and public concern: (1) 

Protection of market participants and 

the public; (2) efficiency, 

competitiveness and financial integrity 

of futures markets; (3) price discovery; 

(4) sound risk management practices; 

and (5) other public interest 

considerations. The Commission may in 

its discretion give greater weight to any 

one of the five enumerated areas and 

could in its discretion determine that, 

notwithstanding its costs, a particular 

regulation is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or 

accomplish any of the purposes of the 

Act. 

The purpose of the proposed 

compliance schedules is to afford 

market participants adequate time to 

comply with the clearing requirement 

under section 2(h)(1)(A) of the CEA and 

the trade execution requirements under 

section 2(h)(8). Without the proposed 

compliance schedules, market 

participants could be required to 

comply with the clearing requirement 

immediately upon issuance of a 

mandatory clearing determination by 

the Commission, and market 

participants could be required to 

comply with the trade execution 

requirement when (1) The Commission 

has issued a determination that the 

swap is required to be cleared and (2) 

any DCM or SEF has made the swap 

available to trade. 

The Commission recognizes that 

requiring such immediate compliance 

with the clearing and trade execution 

requirements may impose costs on 

market participants, particularly for 

market participants that may not be 

registered with the Commission and 

those market participants that have 

hundreds or thousands of third-party 

subaccounts to bring into compliance 

with the new requirements under 

section 2(h) of the CEA.50 Accordingly, 

the Commission’s proposal provides 

substantial benefits in that it affords 

market participants additional time to 

document new clearing arrangements, 

connect to market infrastructures, and 

prepare themselves and their customers 

for the new regulatory requirements. 

The Commission believes that such an 

approach will help protect the public 

interest by facilitating an orderly 

transition to a new regulatory 

environment. 

1. Protection of Market Participants and 

the Public 

In devising the proposed compliance 

schedules, the Commission sought to 

balance the goal of protecting the public 

by bringing market participants into 

compliance with the clearing and trade 

execution requirements for swaps as 

quickly as possible while affording 

market participants adequate time to 

come into compliance. 

Market participants in Category 1 

(e.g., SDs, MSPs, and active funds) are 

likely to be among the most experienced 

and active participants with the 

resources needed to come into 

compliance with the clearing and 

trading requirements more quickly.51

The swaps entered into by these market 

participants are likely to represent a 

significant portion of the total swap 

market volume. As a result, moving 

these transactions into central clearing 

and onto trading platforms before those 

of Category 2 and 3 Entities would 

provide additional protection for the 

public by ensuring that the most active 

participants in the swap market come 

into compliance as soon as possible, 

thus mitigating risk and promoting 

transparency in significant portions of 

the swap market. 

By requiring Category 2 Entities to 

comply within 180 days, the 

Commission is seeking to balance the 

needs of those market participants that 

are not registered with the Commission 

and may not be as active in the swap 

market with the public interest of 

bringing all market participants into 

compliance as soon as possible. 

The market participants in Category 2 

are likely to be less experienced and less 

active participants than those in 

Category 1. To the extent these market 

participants are less active in the swap 

markets the balance between moving 

their transactions into central clearing 

and onto trading platforms and giving 

them additional time to comply with the 

new requirements, tips in favor of the 

latter approach. Additionally, these 

entities may not have the same level of 

resources as Category 1 Entities. 

Therefore, they will benefit from the 

opportunity to document new clearing 

arrangements, connect to market 

infrastructures, and prepare themselves 

and their customers for the new 

regulatory requirements by considering 

examples of how Category 1 Entities 

have met these requirements. 

It should be noted that Category 2 

Entities and other market participants 

wanting to come into compliance before 

their respective compliance schedule 

deadlines in order to take advantage of 

the risk-mitigating benefits of central 

clearing and executing swaps on trading 

platforms are allowed, and encouraged, 

to do so. 

Entities that are third-party 

subaccounts have the additional 

challenge of transitioning hundreds, and 

in some cases, thousands of subaccounts 

into compliance with the clearing and 

trade execution requirements. This 

process may require that these entities 

negotiate and formalize new agreements 

with each of their customers. In order to 

accomplish this they also will need to 

educate their customers about how 

clearing and trade execution 

requirements will affect the costs and 

processes associated with their 

accounts. Each of these tasks requires 

time. By giving third-party subaccounts 

270 days to come into compliance, the 

Commission seeks to balance the need 

of these entities and their customers for 

additional time with the benefits of 

reducing risks in the swap market and 

protecting the public as quickly as 

possible. 

It may be that the Category 1 Entities 

that constitute the first phase under the 

proposed compliance schedules will 

bear a larger proportion of the ‘‘start-up’’ 

mstockstill on DSK4VPTVN1PROD with PROPOSALS

58194 Federal Register / Vol. 76, No. 182 / Tuesday, September 20, 2011 / Proposed Rules 

52See TABB Group, ‘‘Technology and Financial 

Reform: Data, Derivatives and Decision Making’’, 

Aug. 2011 at 12. 

costs associated with implementing the 

clearing and trade execution 

requirements. They are the entities 

likely to expend the most resources 

documenting new clearing 

arrangements, connecting to market 

infrastructures, and preparing 

themselves and their customers for the 

new regulatory requirements. The 

Commission is aware of these costs and 

believes that it is appropriate for the 

entities that are likely to be among the 

most active participants in these 

markets to shoulder a larger percentage 

of these start-up costs. 

2. Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

By necessity, the first group of market 

participants that are required to comply 

with the clearing and trade execution 

requirements, along with DCOs, DCMs, 

and SEFs, are likely to work together to 

establish methods for compliance that 

other market participants may later 

consider. The experience with swaps 

that the first group of market 

participants brings to this process 

should help to ensure the integrity and 

effectiveness of their solutions. These 

solutions will likely be helpful to other 

market participants that comply later. 

For example, entities that are more 

experienced in the swap market, such as 

those in Category 1, are likely to have 

greater technological expertise and will 

best be able to develop the necessary 

technological infrastructure. 

It is critical that a cross-section of 

market participants is involved in 

developing the solutions that become 

industry conventions in order to ensure 

that those approaches promote the 

efficiency, competitiveness, and 

integrity of participants on the buy-side 

and the sell-side. The Commission’s 

proposed compliance schedules address 

this need. For example, Category 1 

includes active funds and MSPs that are 

likely to have the experience and 

expertise to represent ‘‘buy-side’’ 

interests, whereas SDs generally will 

represent ‘‘sell-side’’ interests. 

In providing Category 1 Entities with 

90 days to comply with the clearing and 

trade execution requirements, the 

Commission would afford these market 

participants additional time to identify 

issues and work to develop solutions. 

This is likely to result in more efficient 

problem-solving processes, which may 

reduce the system-wide start-up costs of 

implementing new regulations. 

Moreover, it is also likely to foster a 

greater degree of compatibility and 

interoperability among the varied 

methods of compliance which, in turn, 

is likely to reduce the cost and 

complexity of interconnectedness.52

Lastly, in the absence of the proposed 

compliance schedules, some entities 

have expressed concern that they would 

be unable to comply with the clearing 

and trading requirements and would 

choose to leave the swap market or 

avoid the market for some period of 

time. If this occurred, it could reduce 

liquidity and increase spreads in the 

market. By providing additional time for 

compliance, this rule reduces the 

chance that these adverse effects will 

occur in the swap market during the 

transition period. 

3. Price Discovery 

The trade execution requirement is 

expected to facilitate price discovery in 

the swap market. However, a disorderly 

implementation may inhibit price 

discovery by creating confusion about 

which counterparties are prepared to 

trade specific swaps and which 

contracts are fungible. An orderly 

process, however, promotes good 

communication between counterparties, 

which is essential to price discovery 

during the transition period. 

As for costs, to the extent that market 

participants could comply sooner than 

the proposed compliance schedule in an 

effective and efficient manner, this 

proposed schedule would delay the 

benefits that would come from 

increased price transparency that are 

expected to accompany a trade 

execution requirement under section 

2(h)(8) of the CEA. The Commission’s 

proposed compliance schedule reflects 

that the Commission anticipates that 

market participants will need additional 

time, however, for an orderly 

implementation process. 

4. Sound Risk Management Practices 

To the extent that the proposed 

compliance schedule for the clearing 

requirement would delay 

implementation of mandatory clearing, 

the swap market could suffer costs in 

terms of risk management. For example, 

there are risk management costs 

associated with not having counterparty 

credit risk monitored and managed 

effectively by a DCO. More prompt 

implementation of mandatory clearing 

would have the benefit of preventing 

losses from accumulating over time 

through the settlement of variation 

margin between a DCO’s clearing 

members each day. The settlement of 

variation margin each day reduces both 

the chance of default and the size of any 

default should one occur. Delay in 

implementing mandatory clearing 

would also postpone the use of initial 

margin as a performance bond against 

potential future losses such that if a 

party fails to meet its obligation to pay 

variation margin, resulting in a default, 

the DCO may use the defaulting party’s 

initial margin to cover most or all of any 

loss based on the need to replace the 

open position. 

On the other hand, the proposed 

compliance schedule for the clearing 

requirement would provide an orderly 

process for implementing mandatory 

clearing of swaps, and to the extent that 

it does so successfully, it will lead to 

overall sounder risk management 

practices for the swap market and the 

broader financial system, particularly 

during the implementation period. As 

noted above, in the absence of this rule, 

some entities may choose not to engage 

in swap transactions while they work to 

come into compliance with the new 

requirements. This result could expose 

those entities to risks they would 

otherwise have used swaps to mitigate. 

Therefore, by providing a timetable for 

orderly transition, this rule encourages 

continued participation in the swap 

markets and makes possible the 

continued use of swaps during the 

transition period for risk mitigation 

purposes. 

Moreover, if market participants were 

concerned that they might not be able to 

meet the proposed compliance schedule 

timelines, it is likely that they would 

incur additional costs associated with 

the potential lack of regulatory 

compliance. Providing additional time 

for compliance may reduce the costs 

that participants may incur mitigating 

legal risks during the transition period, 

and focuses those resources on 

achieving compliance. 

5. Other Public Interest Considerations 

There are public interest benefits to 

phasing in compliance using the 

implementation structure proposed in 

this release. The proposed 

implementation structure generally 

allows market participants to comply 

with the requirements of Dodd-Frank as 

quickly and efficiently as possible and 

thereby provides a sound basis for 

achieving the overarching Dodd-Frank 

goals of risk reduction and increased 

market transparency. 

In sum, the Commission has 

considered the costs and benefits as 

required by section 15(a) and is 

proposing the compliance schedules 

discussed herein. The Commission 

invites public comment on its costbenefit considerations. Commenters are 

also invited to submit any data or other 

mstockstill on DSK4VPTVN1PROD with PROPOSALS

Federal Register / Vol. 76, No. 182 / Tuesday, September 20, 2011 / Proposed Rules 58195 

information that they may have 

quantifying or qualifying the costs and 

benefits of the proposal with their 

comment letters. 

List of Subjects 

17 CFR Part 37 

Commodity futures, Swaps, Swap 

execution facilities, Registration 

application, Registered entities, 

Reporting and recordkeeping 

requirements. 

17 CFR Part 38 

Block transaction, Commodity 

futures, Designated contract markets, 

Reporting and Recordkeeping 

requirements, Transactions off the 

centralized market. 

17 CFR Part 39 

Business and industry, Commodity 

futures, Reporting and recordkeeping 

requirements. 

For the reasons stated in the 

preamble, the Commission proposes to 

amend 17 CFR parts 37, 38 and 39 as 

follows: 

PART 37—SWAP EXECUTION 

FACILITIES 

1. The authority citation for part 37 

continues to read as follows: 

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

2, 7b–3 and 12a, as amended by Titles VII 

and VIII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, Pub. L. 

111–203, 124 Stat. 1376 (2010). 

2. Add § 37.12 to read as follows: 

§ 37.12 Trade execution compliance 

schedule. 

(a) A swap transaction shall be subject 

to the requirements of section 2(h)(8)(A) 

of the Act upon the later of (1) the 

applicable deadline established under 

the compliance schedule provided 

under § 39.5(e)(2); or (2) 30 days after 

the swap is first made available for 

trading on either a swap execution 

facility registered under section 5h of 

the Act or a board of trade designated 

as a contract market under section 5 of 

the Act. 

(b) Nothing in this rule shall prohibit 

any counterparty from complying 

voluntarily with the requirements of 

section 2(h)(8)(A) of the Act sooner than 

as provided in paragraph (a) of this 

section. 

PART 38—DESIGNATED CONTRACT 

MARKETS 

3. The authority citation for part 38 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 

6f, 6g, 6i, 6j, 6k, 6l, 6m, 6n, 7, 7a–2, 7b, 7b– 

1, 7b–3, 8, 9, 15, and 21, as amended by the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376 (2010). 

4. Add § 38.11 to read as follows: 

§ 38.11 Trade execution compliance 

schedule. 

(a) A swap transaction shall be subject 

to the requirements of section 2(h)(8)(A) 

of the Act upon the later of (1) the 

applicable deadline established under 

the compliance schedule provided 

under § 39.5(e)(2); or (2) 30 days after 

the swap is first made available for 

trading on a swap execution facility 

registered under section 5h of the Act or 

a board of trade designated as a contract 

market under section 5 of the Act. 

(b) Nothing in this rule shall prohibit 

any counterparty from complying 

voluntarily with the requirements of 

section 2(h)(8)(A) of the Act sooner than 

as provided in paragraph (a) of this 

section. 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

5. The authority citation for part 39 

continues to read as follows: 

Authority: 7 U.S.C. 7a–1 as amended by 

Pub. L. 111–203, 124 Stat. 1376. 

6. Amend § 39.5 to add paragraph (e) 

to read as follows: 

§ 39.5 Review of swaps for Commission 

determination on clearing requirement. 

* * * * * 

(e) Mandatory clearing compliance 

schedule. (1) Definitions. For the 

purposes of this paragraph: 

Category 1 Entity means (1) a swap 

dealer, (2) a security-based swap dealer; 

(3) a major swap participant; (4) a major 

security-based swap participant; or (5) 

an active fund. 

Category 2 Entity means (1) a 

commodity pool; (2) a private fund as 

defined in section 202(a) of the 

Investment Advisors Act of 1940 other 

than an active fund; (3) an employee 

benefit plan as defined in paragraphs (3) 

and (32) of section 3 of the Employee 

Retirement Income and Security Act of 

1974; or (4) a person predominantly 

engaged in activities that are in the 

business of banking, or in activities that 

are financial in nature as defined in 

section 4(k) of the Bank Holding 

Company Act of 1956, provided that, in 

each case, the entity is not a third-party 

subaccount. 

Active Fund means any private fund 

as defined in section 202(a) of the 

Investment Advisors Act of 1940, that is 

not a third-party subaccount and that 

executes 20 or more swaps per month 

based on a monthly average over the 12 

months preceding the Commission 

issuing a mandatory clearing 

determination under section 2(h)(2) of 

the Act. 

Third-party Subaccount means a 

managed account that requires specific 

approval by the beneficial owner of the 

account to execute documentation 

necessary for executing, confirming, 

margining, or clearing swaps. 

(2) Upon issuing a mandatory clearing 

determination under section 2(h)(2) of 

the Act, the Commission may 

determine, based on the group, category, 

type or class of swaps subject to such 

determination, that the following 

schedule for compliance with the 

requirements of section 2(h)(1)(A) of the 

Act shall apply: 

(i) A swap transaction between a 

Category 1 Entity and another Category 

1 Entity, or any other entity that desires 

to clear the transaction, must comply 

with the requirements of section 

2(h)(1)(A) of the Act no later than ninety 

(90) days after the effective date set by 

the Commission for such mandatory 

clearing determination. 

(ii) A swap transaction between a 

Category 2 Entity and a Category 1 

Entity, another Category 2 Entity, or any 

other entity that desires to clear the 

transaction, must comply with the 

requirements of section 2(h)(1)(A) of the 

Act no later than one hundred and 

eighty (180) days after the effective date 

set by the Commission for such 

mandatory clearing determination. 

(iii) All other swap transactions not 

eligible to claim the exception from 

mandatory clearing set forth in section 

2(h)(7) of the Act and § 39.6, must 

comply with the requirements of section 

2(h)(1)(A) of the Act no later than two 

hundred and seventy (270) days after 

the effective date set by the Commission 

for such mandatory clearing 

determination. 

(3) Nothing in this rule shall be 

construed to prohibit any person from 

voluntarily complying with the 

requirements of section 2(h)(1)(A) of the 

Act sooner than the implementation 

schedule provided under paragraph (2). 

Issued in Washington, DC, on September 8, 

2011, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

mstockstill on DSK4VPTVN1PROD with PROPOSALS

58196 Federal Register / Vol. 76, No. 182 / Tuesday, September 20, 2011 / Proposed Rules 

53Public Consultation: Review of the Markets in 

Financial Instruments Directive (MiFID) (December 

8, 2010), available at http://ec.europa.eu/internal_

market/consultations/docs/2010/mifid/

consultation_paper_en.pdf. 

Appendices to Swap Transaction 

Compliance and Implementation 

Schedule: Clearing and Trade 

Execution Requirements under Section 

2(h) of the CEA—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, and Chilton 

voted in the affirmative; Commissioner 

O’Malia voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed rule to establish 

schedules to phase in compliance with the 

clearing and trade execution requirement 

provisions in the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. The 

proposal would provide greater clarity to 

market participants regarding the timeframe 

for bringing their swap transactions into 

compliance with the clearing and trade 

execution requirements. The rule also would 

make the market more open and transparent, 

while giving market participants an adequate 

amount of time to comply. The proposed rule 

would help facilitate an orderly transition to 

a new regulatory environment for swaps. 

Appendix 3—Statement of 

Commissioner Jill Sommers 

I support this proposal to establish a 

schedule to phase in compliance with certain 

statutory provisions under Title VII of the 

Dodd-Frank Act because this will give market 

participants some degree of certainty about 

implementation deadlines. However, I 

believe the Commission should have 

provided a broader implementation plan 

encompassing all of the rulemakings under 

Dodd Frank, rather than the much narrower 

portion covered by today’s proposed 

rulemaking. In addition, the proposed rule 

fails to address a critical component of the 

trade execution requirement in Section 

2(h)(8) of the Commodity Exchange Act. That 

is, what does it mean to ‘‘make a swap 

available to trade?’’ 

I believe the Commission should clarify 

who makes the determination that a swap is 

‘‘made available for trading’’ and how the 

decision is to be made, just as the 

Commission has done with respect to the 

clearing requirement. This would provide the 

public with an opportunity to comment on a 

proposed mechanism for such a 

determination. In a consultation paper 

published by the European Commission’s 

Directorate General on Internal Markets and 

Services on December 8, 2010, the European 

Commission put forth the idea that the 

European Securities and Markets Authority, 

or ESMA, ‘‘could assess and decide when a 

derivative which is eligible for clearing is 

sufficiently liquid to be traded exclusively’’ 

on a trading platform.53 The European 

Commission noted that ESMA could base its 

decision on ‘‘the frequency of trades in a 

given derivative and the average size of 

transactions,’’ and solicited comments from 

the public on which criteria could determine 

whether a derivative is sufficiently liquid to 

be required to be traded on a platform. 

Both the Dodd-Frank Act and proposed 

regulations in the European Union require 

consideration of trading liquidity, in addition 

to other factors, before a determination is 

made that a swap is required to be cleared. 

The Commission should address whether any 

additional factors will be considered as part 

of a determination on the trade execution 

requirement. 

Though I support today’s proposal, I 

believe the Commission should clarify who 

makes the determination that a swap is 

‘‘made available for trading’’ and how that 

decision will be made. 

Appendix 4— Statement of 

Commissioner Scott O’Malia 

I respectfully dissent from the 

Commission’s decision today to approve for 

Federal Register publication two rule 

proposals related to implementation entitled 

‘‘Swap Transaction Compliance and 

Implementation Schedule: Clearing and 

Trade Execution Requirements under Section 

2(h) of the CEA’’ and ‘‘Swap Transaction 

Compliance and Implementation Schedule: 

Trading Documentation and Margining 

Requirements under Section 4s of the CEA.’’ 

For quite some time, I have been asking that 

the Commission publish for notice and 

comment a comprehensive implementation 

schedule that addresses the entire mosaic of 

rule proposals under the Dodd-Frank Act. I 

believe the Commission should have 

proposed a comprehensive schedule that 

detailed, at a minimum: 

• for each registered entity (e.g., swap 

dealer and major swap participants), 

compliance dates for each of its entityspecific obligations (e.g., all obligations 

under Section 4s of the Commodity Exchange 

Act) under Dodd-Frank; and 

• for each market-wide obligation (e.g., the 

clearing and trading mandates), the entities 

affected (whether registered or unregistered) 

along with appropriate compliance dates. 

Such a schedule would have 

complemented and informed existing 

proposals and provided structure to future 

determinations. Additionally, a proposal 

regarding such a schedule should have 

adequately analyzed the costs and benefits of 

alternatives, including appropriate 

quantification. Unfortunately, the two rule 

proposals that the Commission approved 

today fail to either propose a comprehensive 

schedule or provide an adequate cost benefit 

analysis. 

The Commission’s proposals also fail to 

request comment on a number of issues that 

I believe are important considerations in 

developing an implementation plan. As a 

result, I am encouraging commenters to 

submit responses to the questions below as 

part of their comments on the two rule 

proposals. 

Swap Transaction Compliance and 

Implementation Schedule: Clearing and 

Trade Execution Requirements under Section 

2(h) of the CEA 

• Should the Commission provide 

guidance on how it will make and 

communicate a mandatory clearing 

determination prior to considering the first 

such determination? If so, what information 

should be included in guidance? 

• As section II(E) of the proposal states: 

‘‘When issuing a mandatory clearing 

determination, the Commission would set an 

effective date by which all market 

participants would have to comply. In other 

words, the proposed compliance schedules 

would be used only when the Commission 

believes that phasing is necessary based on 

the considerations outlined in this release. 

The Commission will provide the public 

with notice of its intent to rely upon the 

compliance schedule pursuant to the process 

outlined in § 39.5(b)(5).’’ To afford more 

certainty to market participants, should the 

Commission instead create a presumption 

that it will rely on the compliance schedule 

for each mandatory clearing determination 

that it issues, unless it finds that the 

compliance schedule is not necessary to 

achieve the benefits set forth in the proposal 

(e.g., facilitating the transition to the new 

regulatory regime established by the DoddFrank Act in an orderly manner that does not 

unduly disrupt markets and transactions)? 

• What, if any, other issues not addressed 

in current proposed or final rulemakings 

should the Commission have taken into 

consideration when proposing the 

compliance schedule? For example, should 

the Commission have considered the extent 

to which its clearing and trade execution 

requirements apply to entities and 

transactions located outside the United 

States? Also, should the Commission have 

considered the extent to which such 

requirements apply to transactions between 

affiliates (whether domestic or cross-border)? 

If applicable, how should the Commission 

adjust the proposed compliance schedule to 

account for such issues? 

• What, if any, adjustments should the 

Commission make to the proposed 

compliance schedule for trade execution 

requirements if the Commission makes a 

determination that a group, category, type, or 

class of swaps, rather than a specific swap, 

is subject to mandatory clearing? Would such 

adjustments vary depending on the manner 

in which the Commission defines group, 

category, type, or class? 

Swap Transaction Compliance and 

Implementation Schedule: Trading 

Documentation and Margining Requirements 

under Section 4s of the CEA 

• What, if any, other issues not addressed 

in current proposed or final rulemakings 

should the Commission have taken into 

consideration when proposing the 

mstockstill on DSK4VPTVN1PROD with PROPOSALS

Federal Register / Vol. 76, No. 182 / Tuesday, September 20, 2011 / Proposed Rules 58197 

compliance schedule? For example, should 

the Commission have considered the extent 

to which its documentation and margin 

requirements apply to entities and 

transactions located outside the United 

States? Also, should the Commission have 

considered the extent to which such 

requirements apply to transactions between 

affiliates (whether domestic or cross-border)? 

If applicable, how should the Commission 

adjust the proposed compliance schedule to 

account for such issues? 

Finally, I want to be clear that I support 

completing the final Dodd-Frank rulemakings 

in a reasonable time frame. I believe that the 

timely implementation of such rulemakings 

is important. Knowing when and how the 

markets are required to do what is vital to the 

success of implementing the new market 

structure required under the Dodd-Frank Act. 

When billions of dollars are at stake, you 

simply do not rely on guesses and estimates 

based on vague conditions. 

[FR Doc. 2011–24124 Filed 9–19–11; 8:45 am] 

BILLING CODE 6351–01–P 

DEPARTMENT OF JUSTICE 

Bureau of Prisons 

28 CFR Part 570 

[BOP Docket No. 1151] 

RIN 1120–AB61 

Pre-Release Community Confinement 

AGENCY: Bureau of Prisons, Justice. 

ACTION: Proposed rule. 

SUMMARY: In this document, the Bureau 

of Prisons (Bureau) responds to recent 

litigation surrounding the pre-release 

community confinement regulation 

which it published on October 21, 2008 

by publishing a proposed rule on this 

subject. 

DATES: Comments are due by November 

21, 2011. 

ADDRESSES: Submit comments to the 

Rules Unit, Office of General Counsel, 

Bureau of Prisons, 320 First Street, NW., 

Washington, DC 20534. You may view 

an electronic version of this rule at 

http://www.regulations.gov. You may 

also comment via the Internet to the 

Bureau at BOPRULES@BOP.GOV or by 

using the http://www.regulations.gov 

comment form for this regulation. When 

submitting comments electronically, 

you must include the BOP Docket No. 

in the subject box. 

FOR FURTHER INFORMATION CONTACT: 

Sarah Qureshi, Office of General 

Counsel, Bureau of Prisons, phone (202) 

307–2105. 

SUPPLEMENTARY INFORMATION: 

Posting of Public Comments 

Please note that all comments 

received are considered part of the 

public record and are available for 

public inspection online at http:// 

www.regulations.gov. Such information 

includes personal identifying 

information (such as your name, 

address, etc.) voluntarily submitted by 

the commenter. 

If you want to submit personal 

identifying information (such as your 

name, address, etc.) as part of your 

comment, but do not want it to be 

posted online, you must include the 

phrase ‘‘PERSONAL IDENTIFYING 

INFORMATION’’ in the first paragraph 

of your comment. You must also locate 

all the personal identifying information 

you do not want posted online in the 

first paragraph of your comment and 

identify what information you want 

redacted. 

If you want to submit confidential 

business information as part of your 

comment but do not want it to be posted 

online, you must include the phrase 

‘‘CONFIDENTIAL BUSINESS 

INFORMATION’’ in the first paragraph 

of your comment. You must also 

prominently identify confidential 

business information to be redacted 

within the comment. If a comment 

contains so much confidential business 

information that it cannot be effectively 

redacted, all or part of that comment 

may not be posted on http:// 

www.regulations.gov. 

Personal identifying information 

identified and located as set forth above 

will be placed in the agency’s public 

docket file, but not posted online. 

Confidential business information 

identified and located as set forth above 

will not be placed in the public docket 

file. If you wish to inspect the agency’s 

public docket file in person by 

appointment, please see the FOR

FURTHER INFORMATION CONTACT

paragraph. 

The Proposed Rule 

In this document, the Bureau of 

Prisons (Bureau) responds to recent 

litigation surrounding the pre-release 

community confinement regulation 

which it published on October 21, 2008 

(73 FR 62443) (2008 regulations) by 

publishing a proposed rule on this 

subject. 

The interim rule published in 2008 

revised the Bureau’s regulations on prerelease community confinement in 28 

CFR part 570, subpart B, to conform 

with the requirements of the Second 

Chance Act of 2007, approved April 9th, 

2008 (Pub. L. 110–199; 122 Stat. 657) 

(‘‘Second Chance Act’’). 

In an opinion filed on June 16, 2010, 

the District Court for the District of 

Oregon upheld Bureau policies issued 

following the Second Chance Act, 

finding that they are ‘‘internal agency 

guidelines which do not trigger the 

procedural requirements of 5 U.S.C. 

§ 553,’’ but invalidated the 2008 interim 

rule on the grounds that the Bureau did 

not ‘‘establish good cause to forego 

advance notice and comment’’ under 

the Administrative Procedure Act (5 

U.S.C. 552, et seq.). Sacora v. Thomas, 

No. CV 08–578–MA (D. Or. June 16, 

2010). The court enjoined the BOP 

‘‘from considering inmates for prerelease RRC [Residential Re-entry 

Centers] placement pursuant to 28 CFR 

570.20–22 until such time as regulations 

are promulgated in accordance with 5 

U.S.C. 553(b).’’ We now issue this 

proposed rule in order to comply with 

the court’s determination. The proposed 

rule is identical to the 2008 interim rule, 

and we therefore reprint the rationale 

for the interim rule below as the 

rationale for this proposed rule. 

Prior to October 21, 2008, the 

community confinement regulations 

implemented the Bureau’s categorical 

exercise of discretion for designating 

inmates to community confinement. 

The regulations stated that the Bureau 

would designate inmates to community 

confinement only as a condition of prerelease custody and programming, 

during the last ten percent of the prison 

sentence being served, for a period not 

exceeding six months, unless specific 

Bureau programs allow greater periods 

of community confinement. 

To conform these regulations to the 

language of the Second Chance Act, we 

made the following revisions: 

Section 570.20 Purpose 

In this regulation, we describe the 

Bureau’s procedures for designating 

inmates to pre-release community 

confinement or home detention. We also 

provide a new definition of the term 

‘‘community confinement.’’ Section 

231(f) of the Second Chance Act 

amended 18 U.S.C. 3621 by adding a 

new subsection (g). New 18 U.S.C. 

3621(g)(2) defines the term ‘‘community 

confinement’’ for purposes of that 

subsection by adopting the meaning 

‘‘given that term in the application notes 

under section 5F1.1 of the Federal 

Sentencing Guidelines Manual’’ in 

effect on the date of enactment of the 

Act. On April 9, 2008, the application 

notes to United States Sentencing 

Guideline (USSG) § 5F1.1 read in 

pertinent part as follows: 

‘‘Community confinement’’ means 

residence in a community treatment center, 

halfway house, restitution center, mental 

mstockstill on DSK4VPTVN1PROD with PROPOSALS