41940 Federal Register / Vol. 77, No. 137 / Tuesday, July 17, 2012 / Proposed Rules 

the FAA’s Web page at http:// 

www.faa.gov/airports_airtraffic/ 

air_traffic/publications/ 

airspace_amendments/. 

You may review the public docket 

containing the proposal, any comments 

received, and any final disposition in 

person in the Dockets Office (see the 

ADDRESSES section for the address and 

phone number) between 9:00 a.m. and 

5:00 p.m., Monday through Friday, 

except Federal holidays. An informal 

docket may also be examined during 

normal business hours at the Northwest 

Mountain Regional Office of the Federal 

Aviation Administration, Air Traffic 

Organization, Western Service Center, 

Operations Support Group, 1601 Lind 

Avenue SW., Renton, WA 98057. 

Persons interested in being placed on 

a mailing list for future NPRMs should 

contact the FAA’s Office of Rulemaking, 

(202) 267–9677, for a copy of Advisory 

Circular No. 11–2A, Notice of Proposed 

Rulemaking Distribution System, which 

describes the application procedure. 

The Proposal 

The FAA is proposing an amendment 

to Title 14 Code of Federal Regulations 

(14 CFR) Part 71 by establishing Class E 

airspace at Deer Lodge-City-County 

Airport, Deer Lodge, MT, to 

accommodate aircraft using the new 

RNAV (GPS) standard instrument 

approach procedures at the airport. This 

action would enhance the safety and 

management of instrument flight rules 

operations at Deer Lodge-City-County 

Airport, Deer Lodge, MT. 

Class E airspace designations are 

published in paragraph 6005, of FAA 

Order 7400.9V, dated August 9, 2011, 

and effective September 15, 2011, which 

is incorporated by reference in 14 CFR 

71.1. The Class E airspace designation 

listed in this document will be 

published subsequently in this Order. 

The FAA has determined this 

proposed regulation only involves an 

established body of technical 

regulations for which frequent and 

routine amendments are necessary to 

keep them operationally current. 

Therefore, this proposed regulation; 

(1) is not a ‘‘significant regulatory 

action’’ under Executive Order 12866; 

(2) is not a ‘‘significant rule’’ under DOT 

Regulatory Policies and Procedures (44 

FR 11034; February 26, 1979); and (3) 

does not warrant preparation of a 

regulatory evaluation as the anticipated 

impact is so minimal. Since this is a 

routine matter that will only affect air 

traffic procedures and air navigation, it 

is certified this proposed rule, when 

promulgated, would not have a 

significant economic impact on a 

substantial number of small entities 

under the criteria of the Regulatory 

Flexibility Act. 

The FAA’s authority to issue rules 

regarding aviation safety is found in 

Title 49 of the U.S. Code. Subtitle 1, 

Section 106, describes the authority for 

the FAA Administrator. Subtitle VII, 

Aviation Programs, describes in more 

detail the scope of the agency’s 

authority. This rulemaking is 

promulgated under the authority 

described in Subtitle VII, Part A, 

Subpart I, Section 40103. Under that 

section, the FAA is charged with 

prescribing regulations to assign the use 

of the airspace necessary to ensure the 

safety of aircraft and the efficient use of 

airspace. This regulation is within the 

scope of that authority as it would 

modify controlled airspace at Deer 

Lodge-City-County Airport, Deer Lodge, 

MT. 

This proposal will be subject to an 

environmental analysis in accordance 

with FAA Order 1050.1E, 

‘‘Environmental Impacts: Policies and 

Procedures’’ prior to any FAA final 

regulatory action. 

List of Subjects in 14 CFR Part 71 

Airspace, Incorporation by reference, 

Navigation (air). 

The Proposed Amendment 

Accordingly, pursuant to the 

authority delegated to me, the Federal 

Aviation Administration proposes to 

amend 14 CFR part 71 as follows: 

PART 71—DESIGNATION OF CLASS A, 

B, C, D AND E AIRSPACE AREAS; AIR 

TRAFFIC SERVICE ROUTES; AND 

REPORTING POINTS 

1. The authority citation for 14 CFR 

part 71 continues to read as follows: 

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

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

1963 Comp., p. 389. 

§ 71.1 [Amended] 

2. The incorporation by reference in 

14 CFR 71.1 of the Federal Aviation 

Administration Order 7400.9V, Airspace 

Designations and Reporting Points, 

dated August 9, 2011, and effective 

September 15, 2011 is amended as 

follows: 

Paragraph 6005 Class E Airspace Areas 

Extending Upward From 700 Feet or More 

Above the Surface of the Earth. 

* * * * * 

ANM MT E5 Deer Lodge, MT [New] 

Deer Lodge-City-County Airport, MT 

(Lat. 46°23′16′′ N., long. 112°45′54′′ W.) 

That airspace extending upward from 700 

feet above the surface within a 7.6-mile 

radius of the Deer Lodge-City-County 

Airport; that airspace extending upward from 

1,200 feet above the surface bounded by a 

line beginning at lat. 46°41′00′′ N., long. 

114°08′00′′ W.; to lat. 47°03′00′′ N., long. 

113°33′00′′ W.; to lat. 46°28′00′′ N., long. 

112°15′00′′ W.; to lat. 45°41′00′′ N., long. 

112°13′00′′ W.; to lat. 45°44′00′′ N., long. 

113°03′00′′ W.; thence to the point of origin. 

Issued in Seattle, Washington, on July 10, 

2012. 

John Warner, 

Manager, Operations Support Group, Western 

Service Center. 

[FR Doc. 2012–17282 Filed 7–16–12; 8:45 am] 

BILLING CODE 4910–13–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 39 

RIN 3038–AD47 

Clearing Exemption for Certain Swaps 

Entered Into by Cooperatives 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘CFTC’’ or 

‘‘Commission’’) is proposing a rule 

pursuant to its authority under Section 

4(c) of the Commodity Exchange Act 

(CEA) allowing cooperatives meeting 

certain conditions to elect not to submit 

for clearing certain swaps that such 

cooperatives would otherwise be 

required to clear in accordance with 

Section 2(h)(1) of the CEA. 

DATES: Comments must be received on 

or before August 16, 2012. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AD47, 

by any of the following methods: 

Commission Web Site: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

Hand Delivery/Courier: Same as mail 

above. 

Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one method. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. ‘‘Exempt 

Cooperatives’’ must be clearly indicated 

on all comment submissions. Comments 

will be posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

mstockstill on DSK4VPTVN1PROD with PROPOSALS

Federal Register / Vol. 77, No. 137 / Tuesday, July 17, 2012 / Proposed Rules 41941 

1 17 CFR 145.9. Commission regulations may be 

accessed through the Commission’s Web site, 

http://www.cftc.gov. 

2See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 124 

Stat. 1376 (2010), available at http://www.cftc.gov/ 

LawRegulation/OTCDERIVATIVES/index.htm. 

3See Section 2(h)(1)(A) of the CEA, 7 U.S.C. 

2(h)(1)(A). 

4See Section 2(h)(7)(A) of the CEA, 7 U.S.C. 

2(h)(7)(A). 

5See 75 FR 80747 (Dec. 23, 2010). 

6See, e.g., Agricultural Leaders of Michigan 

(ALM), The Farm Credit Council (FCC), Allegheny 

Electric Cooperative, Inc. (AEC), Garkane Energy 

Cooperative, Inc. (GEC), National Council of Farmer 

Cooperatives, Dairy Farmers of America, and 

National Rural Utilities Cooperative Finance 

Corporation (CFC). All comments referred to in this 

NPRM were comments received on the § 39.6 

NPRM and can be found on the Commission’s Web 

site at http://comments.cftc.gov/PublicComments/ 

CommentList.aspx?id=937. 

7Other reasons given for providing an exemption 

from clearing for cooperatives, including risk 

considerations, are discussed below. 

8See, e.g., FCC, CFC, AEC, ALM, and GEC. 

available publicly. If you wish the 

Commission to consider information 

that is exempt from disclosure under the 

Freedom of Information Act, a petition 

for confidential treatment of the exempt 

information may be submitted according 

to the established procedures in CFTC 

Regulation 145.9.1

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse, or 

remove any or all of a submission from 

www.cftc.gov that it may deem to be 

inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: Erik 

F. Remmler, Associate Director, 202– 

418–7630, Division of Clearing and 

Risk, Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

I. Background 

The CEA, as amended by Title VII of 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (the ‘‘DoddFrank Act’’),2 establishes a 

comprehensive new regulatory 

framework for swaps. The CEA requires 

a swap: (1) To be submitted for clearing 

through a derivatives clearing 

organization (DCO) if the Commission 

has determined that the swap is 

required to be cleared, unless an 

exception to the clearing requirement 

applies; (2) to be reported to a swap data 

repository (SDR) or the Commission; 

and (3) if such swap is subject to a 

clearing requirement, to be executed on 

a designated contract market (DCM) or 

swap execution facility (SEF), unless no 

DCM or SEF has made the swap 

available to trade. 

Section 2(h)(1)(A) of the CEA 

establishes a clearing requirement for 

swaps, providing that ‘‘it shall be 

unlawful for any person to engage in a 

swap unless that person submits such 

swap for clearing to a [DCO] that is 

registered under [the CEA] or a [DCO] 

that is exempt from registration under 

[the CEA] if the swap is required to be 

cleared.’’ 3 However, Section 2(h)(7)(A) 

of the CEA provides that the clearing 

requirement of Section 2(h)(1)(A) shall 

not apply to a swap if one of the 

counterparties to the swap: ‘‘(i) is not a 

financial entity; (ii) is using swaps to 

hedge or mitigate commercial risk; and 

(iii) notifies the Commission, in a 

manner set forth by the Commission, 

how it generally meets its financial 

obligations associated with entering into 

non-cleared swaps’’ (referred to 

hereinafter as the ‘‘end-user 

exception’’).4 The Commission has 

promulgated § 39.6 to implement certain 

provisions of Section 2(h)(7). 

Accordingly, any swap that is required 

to be cleared by the Commission 

pursuant to Section 2(h)(2) of the CEA 

must be submitted to a DCO for clearing 

by the counterparties unless the 

conditions of § 39.6 are satisfied. 

Congress adopted the end-user 

exception in Section 2(h)(7) of the CEA 

to permit certain non-financial 

companies to continue using noncleared swaps to hedge risks associated 

with their underlying businesses, such 

as manufacturing, energy exploration, 

farming, transportation, or other 

commercial activities. Additionally, in 

Section 2(h)(7)(C)(ii) of the CEA, the 

Commission was directed to ‘‘consider 

whether to exempt from the definition 

of ‘financial entity’ small banks, savings 

associations, farm credit system 

institutions and credit unions including: 

(I) Depository institutions with total 

assets of $10,000,000,000 or less; 

(II) Farm credit system institutions 

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

less; or 

(III) Credit unions with total assets of 

$10,000,000,000 or less.’’ 

In § 39.6(d), the Commission 

identifies which financial entities are 

small financial institutions and 

establishes an exemption for these small 

financial institutions pursuant to 

Section 2(h)(7)(C)(ii) (the ‘‘small 

financial institution exemption’’). The 

small financial institution exemption 

largely adopts the language of Section 

2(h)(7)(C)(ii) providing for an exemption 

for the types of Section 2(h)(7)(C)(ii) 

institutions having total assets of $10 

billion or less. 

On December 23, 2010, the 

Commission published for public 

comment a notice of proposed 

rulemaking (NPRM) for § 39.6.5 Several 

parties that commented on the § 39.6 

NPRM recommended that the 

Commission provide relief from clearing 

for cooperatives.6 These commenters 

primarily reasoned 7 that the member 

ownership nature of cooperatives and 

the fact that cooperatives act on behalf 

of members that are non-financial 

entities or small financial institutions 

justified an extension of the end-user 

exception to the cooperatives. In effect, 

they proposed that because a 

cooperative acts in place of its members 

when facing the larger financial markets 

on behalf of the members, the end-user 

exception that would be available to a 

cooperative’s members should pass 

through to the cooperative. Accordingly, 

if the members themselves could elect 

the end-user exception, then the 

Commission should permit the 

cooperatives to do so as well. 

However, Section 2(h)(7) of the CEA 

does not differentiate cooperatives from 

other types of entities and therefore, 

cooperatives that are ‘‘financial 

entities,’’ as defined in Section 2(h)(7)(i) 

of the CEA, would be prohibited from 

electing the end-user exception unless 

they qualify for the small financial 

institution exemption. Some 

commenters recommended including 

cooperatives that are ‘‘financial entities’’ 

with total assets in excess of $10 billion 

in the small financial institution 

exemption.8 However, as explained in 

greater detail in the final release for 

§ 39.6, Section 2(h)(7)(C)(ii) of the CEA 

focused on asset size and not on the 

structure of the financial entity. 

Accordingly, only cooperatives that are 

financial entities with total assets of $10 

billion or less can qualify as small 

financial institutions. 

Notwithstanding the foregoing, the 

Commission recognizes that the member 

ownership structure of cooperatives and 

the merits of effectively passing through 

the end-user exception available to 

members to the cooperative warrant 

consideration. Accordingly, the 

Commission is using the authority 

provided in Section 4(c) of the CEA to 

propose § 39.6(f), which would permit 

cooperatives that meet certain 

qualifications to elect not to clear 

certain swaps that are otherwise 

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41942 Federal Register / Vol. 77, No. 137 / Tuesday, July 17, 2012 / Proposed Rules 

9See, e.g., FCC, CFC, AEC, ALM, and GEC. 

10See, e.g., FCC, CFC, AEC, ALM, and GEC. 

11See, e.g., FCC, CFC, AEC, ALM, and GEC. 

12See 12 U.S.C. 2124(c) (providing that ‘‘[v]oting 

stock may be issued or transferred and held only 

by * * * cooperative associations eligible to borrow 

from the banks’’). 

13 Id. § 2128(a). 

14See id. § 2075. 

15For example, the cooperative exemption would 

not be available to the Federal Home Loan Banks, 

whose membership includes financial entities that 

are not small financial institutions. 16The meaning of ‘‘in connection with originating 

a loan’’ is similarly used in the definition of swap 

dealer in § 1.3(ggg) of the CEA. See 77 FR 30596, 

30744 (May 23, 2012). For purposes of consistency, 

that meaning is incorporated in the cooperative 

exception rule. 

required to be cleared pursuant to 

Section 2(h)(1)(A) of the CEA 

(hereinafter referred to as the 

‘‘cooperative exemption’’). 

II. Cooperatives 

Cooperatives that are ‘‘financial 

entities’’ as defined in Section 

2(h)(7)(C)(i) of the CEA generally serve 

as the collective asset liability manager 

for their members. In this role, the 

cooperatives face the financial markets 

on behalf of their members. For 

example, they borrow money on a 

wholesale basis and then lend those 

funds to their members to meet their 

funding needs at a lower cost than 

would otherwise be available to the 

members individually. The commenters 

on the § 39.6 NPRM noted that financial 

cooperatives also enter into swaps with 

members primarily in connection with 

originating loans to the members for the 

purpose of hedging interest rate risk 

associated with the loans.9 The 

cooperatives also enter into swaps with 

other financial entities, typically Swap 

Dealers (‘‘SDs’’) or Major Swap 

Participants (‘‘MSPs’’), to hedge the 

risks associated with the swaps they 

execute with their members or to hedge 

risks associated with their wholesale 

borrowing activities. The cooperatives 

use their size and resources on behalf of 

their members to provide more efficient 

financing and hedging than the 

members might achieve on their own. 

Several commenters also noted that 

financial cooperative swap activities in 

connection with loans to members pose 

less risk to the financial system.10 The 

cooperatives often enter into swaps with 

other financial institutions, typically on 

a matched book basis, to hedge the 

underlying risk of those member swaps. 

According to commenters, such 

matched book swaps pose less risk to 

the cooperatives because the market risk 

is largely passed through. Similar 

comments were made with respect to 

small financial institutions and the 

Commission acknowledged this as one 

reason for adopting the small financial 

institution exemption. 

Some cooperatives have more than 

$10 billion in total assets, but act on 

behalf of members that are non-financial 

entities, small financial institutions, or 

other cooperatives whose members 

consist of such entities.11 For example, 

there are four Farm Credit System (FCS) 

banks chartered under Federal law, each 

of which has assets in excess of $10 

billion. The FCS banks are cooperatives 

primarily owned by their cooperative 

associations.12 The Farm Credit Act 

authorizes the banks ‘‘to make loans and 

commitments to eligible cooperative 

associations.’’ 13 The FCS association 

members are, in turn, authorized to 

make loans to farmers and ranchers, 

rural residents, and persons furnishing 

farm-related services.14 In effect, FCS 

bank cooperatives lend to FCS 

associations, which lend to farmers, and 

farmers own the FCS associations, 

which own the FCS banks. In addition 

to the example of the FCS banks as 

provided in Federal law, other 

cooperatives formed under Federal and 

state laws also have a similar entity 

structure in that they are owned by their 

members and they exist primarily to 

serve those members. 

III. The Proposed Cooperative 

Exemption Rule 

A. Introduction 

In proposing an exemption for certain 

swaps entered into by cooperatives that 

are financial entities, the Commission is 

very much aware that central clearing of 

swaps is a primary focus of Title VII of 

the Dodd-Frank Act. Central clearing 

mitigates financial system risks that 

result from swaps and any exemption 

therefrom should be narrowly drawn to 

minimize the impact on the risk 

mitigation benefits of clearing and 

should also be in line with the end-user 

exception requirements of Section 

2(h)(7) of the CEA. Accordingly, the 

Commission has sought to narrow the 

cooperative exemption appropriately. 

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

Exempt Cooperative 

The proposed rule would apply only 

to cooperatives that are financial entities 

as defined in Section 2(h)(7)(C)(i) of the 

CEA. The end-user exception is 

generally available to commercial (i.e. 

non-financial) cooperatives, or financial 

cooperatives that meet the requirements 

of the small financial institution 

exemption, that are seeking an 

exception for swaps that hedge or 

mitigate commercial risk. 

Proposed paragraph (f)(1) would 

provide that each member of the 

cooperative seeking to elect the 

cooperative exemption must be a nonfinancial entity, a financial institution to 

which the small financial institution 

exemption applies, or itself a 

cooperative each of whose members fall 

into those categories. This provision 

would limit the cooperative exemption 

to cooperatives whose members are 

entities that could elect the end-user 

exception themselves. With this 

provision, the Commission is assuring 

that the cooperative exemption does not 

become overly broad and available to 

cooperatives with members that are 

non-exempt financial entities as defined 

in Section 2(h)(7)(C) of the CEA.15

C. Regulation 39.6(f)(2). Swaps to Which 

the Cooperative Exemption Applies 

Proposed paragraph (f)(2)(i) limits 

application of the cooperative 

exemption to swaps entered into with 

members of the exempt cooperative in 

connection with originating loans 16 for 

members or swaps entered into by 

exempt cooperatives that hedge or 

mitigate risks associated with member 

loans or member loan-related swaps. 

This provision assures that the 

cooperative exemption is only used as a 

pass through for swaps with members 

who would themselves be able to elect 

the end-user exception and for swaps 

that hedge or mitigate risk in connection 

with member loans and swaps as would 

be required by Section 2(h)(7)(A)(ii) of 

the CEA for those member swaps. The 

primary rationale for the cooperative 

exemption is based on the unique 

relationship between cooperatives and 

their member owners. Expanding this 

exemption to include swaps with nonmember entities with which a 

cooperative may do business (other than 

swaps used to hedge risks related to 

member loans or swaps) would go 

beyond the purpose of the exemption, 

which is to pass the member’s end-user 

exception through to the cooperative 

because of the unique member-owner 

structure of cooperatives. Furthermore, 

allowing cooperatives to enter into noncleared swaps with non-members or 

swaps that serve purposes other than 

hedging member loans or swaps would 

give the cooperatives, which are large 

financial entities, a market advantage 

over their competitors that is not 

justified by their cooperative structure 

or the provisions of the Dodd-Frank Act. 

Additionally, for the cooperative 

exemption to benefit all members of 

cooperatives who would otherwise be 

able to elect the end-user exception 

themselves, the proposed exemption 

would be available to all qualifying 

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Federal Register / Vol. 77, No. 137 / Tuesday, July 17, 2012 / Proposed Rules 41943 

17Some financial cooperatives such as CoBank, 

and AgriBank FCB, have total assets in excess of 

$50 billion. 

18See Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1). 19 7 U.S.C. 6(c). 

20For example, the CFC was formed as a 

nonprofit corporation under the District of 

Columbia Cooperative Association Act of 1940 to 

arrange financing for its members and their patrons 

and for the ‘‘primary and mutual benefit of the 

patrons of the Association and their patrons, as 

ultimate consumers.’’ CFC Articles of Incorporation, 

Art. 1. 

cooperatives, including those with total 

assets greater than $10 billion.17 The 

Commission remains mindful that larger 

financial institutions pose greater risk to 

the financial system than small financial 

institutions, such as those identified in 

Section 2(h)(7)(C)(ii) of the CEA, 

because larger financial institutions are 

more likely to be interconnected with a 

greater number of market participants 

and therefore more likely to transfer risk 

widely. In keeping with this concern 

and in recognition of the larger asset 

size of cooperatives that will be able to 

use the cooperative exemption, the 

Commission, in its proposal, is limiting 

the cooperative exemption to swaps in 

connection with member loans. Several 

commenters who requested an 

exemption for cooperatives justified the 

request in part on the basis that 

cooperatives principally use swaps in 

connection with originating loans to 

members. These commenters noted that 

such swaps are relatively low risk. To 

minimize the risk a cooperative 

exemption might pose to the financial 

system, the proposed rule would limit 

the exemption to swaps in connection 

with originating loans to members and 

swaps used by the cooperatives to hedge 

or mitigate risks related to member 

loans or risks arising from swaps 

entered into with members related to 

such loans. 

D. Regulation 39.6(f)(3). Reporting 

Under Section 4(c) of the CEA, the 

Commission can subject such exemptive 

relief to appropriate terms and 

conditions.18 To this end, the 

Commission believes it is appropriate to 

impose certain reporting requirements 

on any entities that may be exempted 

from the clearing requirement by this 

rule. These reporting requirements are 

effectively identical to the reporting 

requirements for the end-user exception. 

For the end-user exception, Section 

2(h)(7)(A)(iii) of the CEA requires that 

one of the counterparties to the swap 

must notify ‘‘the Commission in a 

manner set forth by the Commission 

how it generally meets its financial 

obligations associated with entering into 

non-cleared swaps.’’ Regulation 39.6(b) 

implements Section 2(h)(7)(A)(iii) by 

requiring one of the counterparties (the 

‘‘reporting counterparty’’) to provide, or 

cause to be provided, to a registered 

SDR, or if no registered SDR is available, 

to the Commission, information about 

how the counterparty electing the 

exception generally expects to meet its 

financial obligations associated with 

non-cleared swaps. In addition, § 39.6(b) 

requires the reporting counterparty to 

provide certain information that the 

Commission will use to monitor 

compliance with, and prevent abuse of, 

the end-user exception. The reporting 

counterparty would be required to 

provide the information at the time the 

electing counterparty elects the end-user 

exception. 

Proposed § 39.6(f)(3) would require 

the same reporting required for the enduser exception whenever the 

cooperative exemption is elected for the 

same reasons. For purposes of 

regulatory consistency, § 39.6(f)(3) 

incorporates the provisions of § 39.6(b) 

with only those changes needed to 

apply the provisions to the cooperative 

exemption. 

IV. Section 4(c) of the Commodity 

Exchange Act 

Section 4(c)(1) of the CEA provides 

that, in order to promote responsible 

economic or financial innovation and 

fair competition, the Commission, by 

rule, regulation or order, after notice 

and opportunity for hearing, may 

exempt any agreement, contract, or 

transaction, or class thereof, including 

any person or class of persons offering, 

entering into, rendering advice or 

rendering other services with respect to 

the agreement, contract, or transaction, 

from the contract market designation 

requirement of Section 4(a) of the CEA, 

or any other provision of the CEA other 

than certain enumerated provisions.19

Through this exemptive regulation, the 

Commission proposes that cooperatives 

meeting certain conditions are the class 

of persons that should be exempted 

from the clearing requirement for 

certain types of swaps. As discussed in 

more detail above, such cooperatives act 

on behalf of their members in certain 

financial matters and to that extent, the 

proposed rule effectively provides for 

passing through the end-user exception 

available to such cooperatives’ members 

to the cooperatives. 

The end-user exception provided in 

Section 2(h)(7) of the CEA is not 

available to an entity that is a ‘‘financial 

entity’’ as defined in Section 

2(h)(7)(C)(i) unless such entity is 

exempt from the definition because it is 

a small financial institution as provided 

in Section 2(h)(7)(C)(ii) of the CEA and 

§ 39.6(d). As explained in greater detail 

in the final release for § 39.6, Section 

2(h)(7)(C)(ii) of the CEA focused 

exclusively on asset size for determining 

what financial entities could qualify for 

the small financial institution 

exemption. Furthermore, the $10 billion 

limit identified in that section guides 

the Commission’s consideration of the 

small financial institution exemption 

absent convincing evidence that a 

different asset level is warranted. 

Section 2(h)(7)(C)(ii) does not provide 

special consideration for cooperatives 

that meet the definition of ‘‘financial 

entity’’ and therefore the asset size limit 

applies to them. 

Cooperatives have a member 

ownership structure in which the 

cooperatives exist to serve their member 

owners and do not act for their own 

profit.20 Furthermore, the member 

owners of the cooperative collectively 

have full control and governance of the 

cooperative. In a real sense, the 

cooperative is not separable from its 

member owners. As described above, 

some cooperatives provide financial 

services to their members including 

lending and providing swaps to 

members and hedging those activities 

with other financial entities such as 

SDs. The memberships of some of these 

cooperatives consist of entities that each 

could elect the end-user exception if 

acting alone. However, some of those 

cooperatives meet the definition of 

‘‘financial entity’’ and have assets in 

excess of $10 billion, and therefore the 

end-user exception is unavailable to 

them. Accordingly, the cooperative 

members would not benefit from the 

end-user exception if they use their 

cooperative as the preferred vehicle for 

hedging commercial risks in the greater 

financial marketplace. In light of this, 

the Commission is exercising its 

authority under Section 4(c) of the CEA 

to propose § 39.6(f) and establish the 

cooperative exemption. 

The Commission believes that there 

are benefits to having cooperatives 

execute risk hedging or mitigation 

strategies with, and on behalf of, their 

members. The FCC has commented that 

‘‘[t]o provide tailored financing 

products for farmers and farm-related 

businesses, Farm Credit System 

institutions rely on the safe use of 

derivatives to manage interest rate, 

liquidity, and balance sheet risk, 

primarily in the form of interest rate 

swaps.’’ The FCS institutions include 

the four FCS cooperative banks, each of 

which has total assets in excess of $10 

billion. Using the substantial, financefocused resources of the cooperative to 

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41944 Federal Register / Vol. 77, No. 137 / Tuesday, July 17, 2012 / Proposed Rules 

21See Section 2(h)(2) of the CEA, 7 U.S.C. 2(h)(2). 

22When a bilateral swap is moved into clearing, 

the DCO becomes the counterparty to each of the 

original participants in the swap. This standardizes 

counterparty risk for the original swap participants 

in that they each bear the same risk attributable to 

facing the DCO as counterparty. In addition, DCOs 

exist for the primary purpose of managing credit 

exposure from the swaps being cleared and 

therefore DCOs are effective at mitigating 

counterparty risk through the use of risk 

management frameworks. These frameworks model 

risk and collect defined levels of initial and 

variation margin from the counterparties that are 

adjusted for changing market conditions and use 

guarantee funds and other risk management tools 

for the purpose of assuring that, in the event of a 

member default, all other counterparties remain 

whole. DCOs have demonstrated resilience in the 

face of past market stress. Most recently, they 

remained financially sound and effectively settled 

positions in the midst of turbulent events in 2007– 

2008 that threatened the financial health and 

stability of many other types of entities. 

23See CEA 2(h)(7)(C)(ii). 24See 75 FR 80747. 25Other reasons given for providing an 

exemption from clearing for cooperatives, including 

risk considerations, are discussed above in this 

NPRM. 

undertake hedging activities for the 

numerous members of the cooperative 

promotes greater economic efficiency 

and lower costs for the members. The 

Commission believes that the use of 

swaps in this manner by cooperatives 

on behalf of their members constitutes 

financial innovation that is beneficial 

for the public. 

In light of the foregoing, the 

Commission believes that the adoption 

of proposed § 39.6(f) and its attendant 

terms and conditions would promote 

responsible economic and financial 

innovation and fair competition. 

The Commission requests public 

comment on whether the proposed 

regulation satisfies the requirements for 

exemption under Section 4(c) of the 

CEA and on all aspects of the proposed 

regulation. The Commission welcomes 

any quantifiable data and analysis that 

would assist the Commission in this 

rulemaking. In particular, the 

Commission is requesting comment on 

the following questions: 

• Has the Commission correctly 

limited the exemption to cooperatives in 

which each member is: A non-financial 

entity, a financial entity to which the 

small financial institution exemption 

applies, or a cooperative each of whose 

members fall into those categories? 

• Are there cooperatives in which not 

all members are a non-financial entity, 

a financial entity to which the small 

financial institution exemption applies, 

or a cooperative each of whose members 

fall into those categories? If so, should 

the proposed definition of ‘‘exempt 

cooperative’’ be modified to include 

them? Would such inclusion undermine 

the narrow pass through focus of the 

rule? Is it possible that financial entities 

that do not currently operate as 

cooperatives and for which the clearing 

requirement is intended could 

reorganize or create cooperatives to take 

advantage of the proposed cooperative 

exemption? If so, how could the 

proposed rule be modified to prevent 

that from happening? Should affiliates 

of financial entities identified in 

Sections 2(h)(7)(C)(i)(I) through (VII) of 

the CEA be expressly excluded from the 

definition of exempt cooperative? 

• The Commission invites comment 

on whether the types of swaps for which 

the cooperative exemption may be 

elected should be expanded or further 

limited and why. If so, please describe 

such expansion or limitation 

specifically. Is the provision allowing 

for swaps that hedge or mitigate risk 

‘‘related to loans to members’’ too 

limited or not limited enough? What 

clarifying language could be added to 

more effectively identify such swaps 

that would be consistent with the 

rationale used for the proposed rule 

regarding the cooperative standing in 

place of its members when entering into 

hedging swaps with other financial 

entities? Are there practical or other 

considerations in identifying which 

swaps serve to hedge or mitigate the risk 

of member loans or member loan related 

swaps? 

• Are there additional or alternative 

considerations that should be reviewed 

by the Commission regarding the 

proposed cooperative exemption? 

V. Consideration of Costs and Benefits 

A. Background 

In the wake of the financial crisis of 

2008, Congress adopted the Dodd-Frank 

Act, which, among other things, 

requires the Commission to determine 

whether a particular swap, or group, 

category, type or class of swaps, shall be 

required to be cleared.21 Specifically, 

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

amended Section 2(h)(1)(A) of the CEA 

to make it ‘‘unlawful for any person to 

engage in a swap unless that person 

submits such swap for clearing to a 

[DCO] that is registered under the CEA 

or a [DCO] that is exempt from 

registration under [the CEA] if the swap 

is required to be cleared.’’ This clearing 

requirement is designed to reduce 

counterparty risk associated with swaps 

and, in turn, mitigate the potential 

systemic impact of such risk and reduce 

the likelihood for swaps to cause or 

exacerbate instability in the financial 

system.22 It reflects a fundamental 

premise of the Dodd-Frank Act: the use 

of properly regulated and functioning 

central clearing can reduce systemic 

risk. 

Notwithstanding the benefits of 

clearing, Section 2(h)(7) of the CEA 

provides the end-user exception if one 

of the swap counterparties: ‘‘(i) is not a 

financial entity; (ii) is using swaps to 

hedge or mitigate commercial risk; and 

(iii) notifies the Commission, in a 

manner set forth by the Commission, 

how it generally meets its financial 

obligations associated with entering into 

non-cleared swaps.’’ Section 

2(h)(7)(C)(ii) of the CEA directs the 

Commission to consider making the 

end-user exception available to small 

banks, savings associations, credit 

unions, and farm credit institutions, 

including those institutions with total 

assets of $10 billion or less, through an 

exemption from the definition of 

‘‘financial entity.’’ 23 In § 39.6(d), the 

Commission establishes the small 

financial institution exemption for these 

institutions. The small financial 

institution exemption largely adopts the 

language of Section 2(h)(7)(C)(ii) 

providing for an exemption for the 

institutions identified in Section 

2(h)(7)(C)(ii) that have total assets of $10 

billion or less. 

Through proposed § 39.6(f), the 

Commission would use the authority 

provided in Section 4(c) of the CEA to 

permit ‘‘exempt cooperatives,’’ as 

defined in § 39.6(f)(1), to elect not to 

clear certain swaps that are otherwise 

required to be cleared pursuant to 

Section 2(h)(1)(A) of the CEA, 

notwithstanding that these cooperatives 

are financial entities that do not qualify 

for the small financial institution 

exemption because their assets exceed 

$10 billion. Specifically, an ‘‘exempt 

cooperative’’ is a cooperative under 

Federal or state law that is a financial 

entity each member of which is eligible 

for the end-user exception, or is another 

cooperative composed of members, each 

of whom is eligible for the end-user 

exception. An exempt cooperative 

would not be required to clear swaps 

with members in connection with 

member loans, or swaps used by the 

exempt cooperative to hedge or mitigate 

risk arising in connection with such 

swaps with members or loans to 

members. 

On December 23, 2010, the 

Commission published for public 

comment an NPRM for § 39.6 proposing 

the end-user exception.24 Several 

parties that commented on the § 39.6 

NPRM recommended that the 

Commission provide relief from clearing 

for cooperatives. These commenters 

reasoned 25 that the member ownership 

nature of cooperatives and the fact that 

they act on behalf of members that are 

non-financial entities or small financial 

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Federal Register / Vol. 77, No. 137 / Tuesday, July 17, 2012 / Proposed Rules 41945 

26Transacting swaps bilaterally is not without 

cost, of course, and the Commission notes that 

uncleared swaps have associated costs as well. For 

example, when a market participant faces a swap 

dealer or other counterparty in an uncleared swap, 

the uncleared swap contains an implicit line of 

credit upon which the market participant 

effectively draws when its swap position is out of 

the money. Counterparties charge for this implicit 

line of credit in the spread they offer on 

uncollateralized, uncleared swaps. 

27See CME pricing charts at: http:// 

www.cmegroup.com/trading/cds/files/CDSFees.pdf; http://www.cmegroup.com/trading/ 

interest-rates/files/CME-IRS-Customer-Fee.pdf; and 

http://www.cmegroup.com/trading/interest-rates/ 

files/CME-IRS-Self-Clearing-Fee.pdf. 

28See LCH pricing for clearing services related to 

OTC interest rate swaps at: http://www.lchclearnet.

com/swaps/swapclear_for_clearing_members/

fees.asp. 

institutions justified an extension of the 

end-user exception to the cooperatives. 

In effect, the commenters posit that 

because a cooperative takes the place of 

its members to face the larger financial 

markets on behalf of the members, the 

end-user exception that would be 

available to a cooperative’s members 

should pass through to the cooperative. 

Accordingly, if the members themselves 

could elect the end-user exception, then 

the Commission should permit the 

cooperatives to do so as well. 

The Commission is proposing such an 

exemption herein for certain 

cooperatives, and it is the costs and 

benefits of this exemption that the 

Commission considers in the discussion 

that follows. 

B. Statutory Requirement To Consider 

the Costs and Benefits of the 

Commission’s Action: CEA Section 15(a) 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of the 

following five broad areas of market and 

public concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. 

Accordingly, the Commission considers 

the costs and benefits resulting from its 

own discretionary determinations with 

respect to the Section 15(a) factors. 

The costs and benefits of the 

Commission’s action in this rulemaking 

are measured against the level of costs 

and benefits that would exist absent this 

rulemaking. Absent this rulemaking, all 

cooperatives that are financial entities 

as defined in Section 2(h)(7)(C)(i) of the 

CEA and which are not otherwise 

exempt from that definition would be 

unable to elect the end-user exception 

pursuant to Section 2(h)(7)(A)(i) of the 

CEA, which specifies that to elect the 

end-user exception a counterparty must 

not be a financial entity. Thus, the 

foundation against which this 

rulemaking’s costs and benefits are 

measured is the statutory requirement 

that cooperatives within the definition 

of financial entities and with assets 

exceeding $10 billion, remain subject to 

the clearing requirement of Section 

2(h)(1)(A) of the CEA. Additionally, the 

Commission considers the rulemaking’s 

costs and benefits relative to alternatives 

besides that of abstaining from action. 

As discussed in more detail below, 

the Commission is able to estimate 

certain reporting costs. The dollar 

estimates are offered as ranges with 

upper and lower bounds, which is 

necessary to accommodate the 

uncertainty that surrounds them. The 

Commission notes that the most likely 

outcome with respect to each estimate is 

a cost above the lower bound and below 

the upper bound. 

The discussion below considers the 

rule’s costs and benefits as well as 

alternatives to the rule. The discussion 

concludes with a consideration of the 

rule’s costs and benefits in light of the 

five factors specified in Section 15(a) of 

the CEA. 

C. Costs and Benefits of the Proposed 

Rule 

1. Costs and Benefits to Electing Entities 

Without this proposed 4(c) rule, 

cooperatives meeting the criteria of the 

proposed exemption would have to 

engage in cleared swaps pursuant to 

Section 2(h)(1)(A) of the CEA when they 

are either: (1) Transacting with a 

member who does not elect the end-user 

exception, or (2) transacting with 

another financial entity to hedge or 

mitigate risk related to loans with 

members or swaps with members 

related to such loans. Extending the 

end-user exception to such entities in 

these circumstances benefits them in 

that they will not have to bear the costs 

of clearing that each may incur. These 

costs include certain capital costs and 

fees associated with clearing.26

Regarding fees, DCOs typically charge 

FCMs an initial transaction fee for each 

of the FCM customers’ swaps that are 

cleared, as well as an annual 

maintenance fee for each of their 

customers’ open positions. For example, 

not including customer-specific and 

volume discounts, the transaction fees 

for interest rate swaps at CME range 

from $1 to $24 per million notional 

amount and the maintenance fees are $2 

per year per million notional amount for 

open positions.27 LCH transaction fees 

for interest rate swaps range from $1 to 

$20 per million notional amount, and 

the maintenance fee ranges from $5 to 

$20 per swap per month, depending on 

the number of outstanding swap 

positions that an entity has with the 

DCO.28

It is within the FCM’s discretion to 

determine whether or how to pass these 

fees on to their customers, but the 

Commission believes that FCMs 

generally pass these fees straight 

through to their customers. To the 

extent that this is true, allowing exempt 

cooperatives to elect not to clear swaps 

that meet the requirements of the 

proposed rule will result in the exempt 

cooperatives not having to pay such 

clearing related fees with respect to 

those swaps. The Commission requests 

comment on whether and how FCMs 

pass DCO fees on to their customers, 

and to what extent this creates clearingrelated costs for exempt cooperatives 

entering into swaps meeting the 

conditions proposed in this rule. If 

possible, please provide quantitative 

information related to this issue. 

The proposed rule may also impact 

the capital that cooperatives that are 

financial entities are required to hold 

with respect to their swap positions 

pursuant to prudential regulatory 

capital requirements. As stated above, 

when compared to a situation in which 

the proposed exemption is not available, 

the proposed exemption will reduce the 

number of swaps that eligible 

cooperatives are required to clear. The 

Commission anticipates that reducing 

the number of swaps that such 

cooperatives clear will impact their 

capital ratios in such a way as to reduce 

the amount of capital that eligible 

cooperatives are required to hold. This 

creates both benefits and costs. 

Regarding benefits, this increases the 

cooperative’s lending capacity, enabling 

them to lend more to their members 

without retaining or raising additional 

capital. As for costs, this allows eligible 

cooperatives to become more highly 

leveraged, which increases the 

counterparty risk that they pose to their 

members and other market participants 

with whom they transact. The 

Commission invites comment on the 

effects of required clearing on the 

capital requirements for financial 

cooperatives. To the extent possible, 

please quantify the anticipated effect of 

the proposed exemption on relevant 

capital ratios as well as the costs and 

benefits resulting from changes in the 

cooperatives’ leverage and lending 

capacity. 

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41946 Federal Register / Vol. 77, No. 137 / Tuesday, July 17, 2012 / Proposed Rules 

29This assessment assumes similar levels of 

netting and compression in both uncleared and 

cleared portfolios. These assumptions are not 

necessarily valid in all cases. Moving swaps into 

clearing can—depending on the number of 

counterparties a market participant originally faced 

with uncleared swaps, the margin agreements in 

place with those counterparties, and the number of 

DCOs that eventually clear those positions—reduce 

the amount of margin that an entity has to post. 

30Mello, Antonio S., and John E. Parsons, 

‘‘Margins, Liquidity, and the Cost of Hedging.’’ MIT 

Center for Energy and Environmental Policy 

Research, May 2012. 

31Wage estimates are taken from the SIFMA 

‘‘Report on Management and Professional Earnings 

in the Securities Industry 2011.’’ Hourly wages are 

calculated assuming 1,800 hours per year and a 

multiplier of 5.35 to account for overhead and 

bonuses. In light of the challenges of developing 

precise estimates, the results of calculations have 

been rounded. 

Clearing swaps creates an obligation 

for counterparties to the cleared swap to 

post both initial and variation margin 

related to that position. A clearing 

exemption may reduce the amount of 

capital that an entity has to post in order 

to cover its positions, particularly if that 

entity does not post margin directly to 

its counterparties with respect to some 

or all of its uncleared positions.29

However, in the case of unmargined 

swaps, dealers typically account for the 

counterparty risk that they face in the 

absence of margin by adjusting the 

terms of the swap. The additional cost 

embedded in an unmargined swap to 

account for additional counterparty risk 

is likely to be roughly equivalent to the 

cost associated with a line of credit that 

would be used to post margin for that 

position if it were cleared.30 The 

Commission, therefore, believes that 

this is an implicit cost in unmargined 

swaps that is made explicit by clearing 

swaps, rather than a new cost created by 

clearing. Therefore the exemption is not 

expected to significantly alter exempt 

cooperatives’ costs in this area. The 

Commission invites comment regarding 

the expected effect of this proposed 

exemption on the amount and cost of 

collateral posted by entities eligible for 

the exemption. Wherever possible, 

please quantify costs and benefits. 

Regarding reporting, cooperatives 

electing the cooperative exemption will 

have some reporting costs. The 

proposed rule requires that exempt 

cooperatives adhere to the reporting 

requirements of § 39.6(b). For each swap 

where the exemption is elected, either 

the cooperative or its counterparty (if 

the counterparty is an SD or MSP) must 

report: (1) That the election of the 

exemption is being made; (2) which 

party is the electing counterparty; and 

(3) certain information specific to the 

electing counterparty unless that 

information has already been provided 

by the electing counterparty through an 

annual filing. The third set of 

information comprises data that is likely 

to remain relatively constant for many, 

but not all, electing counterparties and 

therefore, does not require swap-byswap reporting and can be reported less 

frequently. In addition, for entities that 

are registered with the SEC, the 

reporting party will also be required to 

report: (1) The SEC filer’s central index 

key number; and (2) that an appropriate 

committee of the board of directors has 

approved the decision for that entity to 

enter into swaps that are exempt from 

the requirements of Sections 2(h)(1) and 

2(h)(8) of the Act. 

When entering into swaps with 

members and electing the exemption, 

exempt cooperatives will be responsible 

to report this information. When 

cooperatives enter into swaps with SDs 

or MSPs, the SDs or MSPs will be 

responsible to report this information. 

Entities would bear costs related to the 

personnel hours committed to reporting 

the required information. As described 

below in the subsection entitled 

‘‘Number of Exempt Cooperatives and 

Swaps’’ in the section entitled 

‘‘Paperwork Reduction Act,’’ the 

Commission estimates that 

approximately ten cooperatives will be 

eligible for the cooperative exemption. 

For purposes of estimating costs, the 

Commission assumes that each potential 

exempt cooperative is likely to function 

as the reporting counterparty for at least 

some of their exempted swaps in any 

given year because they would be 

responsible for reporting when 

transacting exempted swaps with 

members. 

A review of information provided for 

five cooperatives that likely would be 

exempt cooperatives showed a range of 

swap usage from none to as many as 

approximately 200 swaps a year with 

most entering into less than 50 swaps a 

year. Using the high end of reported 

swaps for the five cooperatives for 

which information was available, an 

estimate of 50 swaps per year was 

calculated. The Commission believes 

this estimate is high because some of the 

reported swaps may not meet the 

requirements of the proposed rule and 

several cooperatives for which 

information was not available to the 

Commission likely undertake little if 

any, swap activity. However, for 

purposes of the cost calculations, the 

Commission assumes that each of the 

ten potential exempt cooperatives will 

enter into 50 swaps each year. 

Accordingly, we estimate that exempt 

cooperatives may elect the cooperative 

exemption for 500 swaps each year. The 

Commission invites comment regarding 

the estimated number of swaps 

conducted by each cooperative that 

would be eligible under this proposed 

rule. In addition, the Commission 

invites comment regarding the per 

cooperative average and total notional 

value of swaps that would be eligible 

under the cooperative exemption. 

For each exempted swap, to comply 

with the swap-by-swap reporting 

requirements in §§ 39.6(b)(1)(i) and (ii), 

the reporting counterparty will be 

required to check one box indicating the 

exemption is being elected and 

complete one field identifying the 

electing counterparty. The Commission 

expects that this information will be 

entered into the appropriate reporting 

system concurrently with additional 

information that is required under the 

CEA and other Commission regulations 

promulgated thereunder. Therefore, 

each reporting counterparty is likely to 

spend 15 seconds to two minutes per 

transaction in incremental time entering 

the swap-by-swap information into the 

reporting system, or in the aggregate, 1.5 

hours to 17 hours per year for all 500 

estimated swaps. A financial analyst’s 

average salary is $208/hour, which 

corresponds to approximately $1–$7 per 

transaction or in aggregate, $300–$3,500 

per year for all 500 estimated swaps.31

Regulation 39.6(b)(1)(iii) allows for 

certain counterparty specific 

information identified therein to be 

reported either swap-by-swap by the 

reporting counterparty or annually by 

the electing counterparty. For the enduser exception for which that section 

also applies, the alternative options may 

be useful in instances where electing 

counterparties enter into very few swaps 

each year and the reporting 

counterparties will report this 

information for them on a swap-by-swap 

basis. However, for the cooperative 

exemption, the exempt cooperative is 

the electing counterparty and will also 

likely be the reporting counterparty for 

swaps entered into with members. 

Furthermore, the Commission expects 

that, assuming the cooperative is the 

reporting counterparty, the time burden 

for the first swap entered into by an 

exempt cooperative in collecting and 

reporting the information required by 

§ 39.6(b)(1)(iii) will be approximately 

the same as the time burden for 

collecting and reporting the information 

for the annual filing. Given the cost 

equivalence for annual reporting to 

reporting a single swap if the exempt 

cooperative is both the electing and 

reporting counterparty, the Commission 

assumes that all ten exempt 

cooperatives will make an annual filing 

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32The 2012 ISDA Margin Survey indicates that 

71% of all OTC derivatives transactions were 

subject to collateral agreements during 2011, but 

notes that the degree of collateralization may vary 

significantly depending on the type of derivative 

and counterparties entering into a transaction. 

of the information required for 

§ 39.6(1)(iii). The Commission estimates 

that it will take an average of 30 minutes 

to 90 minutes to complete and submit 

the annual filing. The average hourly 

wage for a compliance attorney is $390, 

which means that the annual per 

cooperative cost for the filing is likely 

to be between $200 and $590. If all ten 

eligible cooperatives were to undertake 

an annual filing, the aggregate cost 

would be $2,000 to $5,900. 

Furthermore, when an exempt 

cooperative is not functioning as the 

reporting counterparty (i.e. when 

transacting with a SD or MSP), it may, 

at certain times, need to communicate 

information to its reporting 

counterparties in order to facilitate 

reporting. That information may 

include, among other things, whether 

the electing counterparty has filed an 

annual report pursuant to § 39.6(b) and 

information to facilitate any due 

diligence that the reporting counterparty 

may conduct. These costs will likely 

vary substantially depending on the 

number of different reporting 

counterparties with whom an electing 

counterparty conducts transactions, 

how frequently the electing 

counterparty enters into swaps, whether 

the electing counterparty undertakes an 

annual filing, and the due diligence that 

the reporting counterparty chooses to 

conduct. Therefore, the Commission 

believes that it is difficult to estimate 

these costs reliably at this time. 

Nevertheless, the Commission estimates 

that non-reporting electing 

counterparties will incur between five 

minutes and ten hours of annual burden 

hours, or in the aggregate, between 

approximately one hour and 100 hours. 

The hourly wage for a compliance 

attorney is $390, which means that the 

annual aggregate cost for 

communicating information to the 

reporting counterparty is likely to be 

between $400 and $39,000. Given the 

unknowns associated with this cost 

estimate noted above, the Commission 

does not believe this wide range can be 

narrowed without further information. 

2. Costs and Benefits for Counterparties 

to Electing Cooperatives 

Reduced clearing of swaps by exempt 

cooperatives likely will increase 

counterparty risk for both exempt 

cooperatives and their counterparties. 

Cooperatives will be more exposed to 

financial instability in their 

counterparties, and conversely, the 

cooperatives’ counterparties may be 

exposed to any instability that might 

develop within the exempt 

cooperatives. This could be problematic 

for an exempt cooperative if one of the 

dealers with which the cooperative has 

large uncleared positions experiences 

financial instability, or if groups of 

members whose financial strength may 

be highly correlated and whose 

aggregate uncleared positions with the 

cooperative are large, encounter 

financial challenges. Conversely, if an 

exempt cooperative becomes insolvent 

and its positions with a SD or MSP are 

substantial, it is possible that its 

uncleared positions could be large 

enough to create or exacerbate 

instability at the SD or MSP, and could 

also create significant exposure for the 

members the cooperative serves. In this 

way, financial instability at one of the 

cooperative’s counterparties could 

adversely impact the other 

counterparties of that cooperative. 

However, these risks may be mitigated 

through negotiated collateral agreements 

between exempt cooperatives and their 

counterparties. The Commission 

understands that many swaps in the 

uncleared market are subject to such 

agreements.32 The Commission invites 

comment on the size of exposures 

between potential exempt cooperatives 

and other financial entities, the size and 

number of positions between exempt 

cooperatives and their members, and the 

extent to which uncleared swaps 

between exempt cooperatives and 

financial entities, and transactions 

between exempt cooperatives and their 

members, are currently collateralized. 

Please quantify estimates, where 

possible. 

In a similar vein, some members of 

exempt cooperatives are commercial 

entities that, in the absence of this 

exemption, could elect not to clear 

swaps by using the end-user exception. 

The proposed cooperative exemption 

does not affect the ability of those 

members to elect the end-user 

exemption, but it does constrain their 

ability to forego the end-user exception 

when entering into transactions with 

exempt cooperatives that are eligible for 

the proposed exemption. In other 

words, either the exempt cooperative or 

the member may elect not to clear the 

swap, and neither party may compel the 

other to clear the swap. To the extent 

that members are unconstrained in their 

choice of counterparties, this is not 

problematic. Members could still go to 

a SD or other financial entity, which has 

no clearing exemption election ability, 

to access the terms and counterparty 

protection that a cleared position 

provides. However, if members are 

constrained in their choice of 

counterparties (i.e. if they do not have 

sufficient size or experience to transact 

with a SD, or if they need the collateral 

that is already pledged with the loan to 

secure a corresponding swap) they will 

not be able to elect a cleared transaction 

when using swaps that are required to 

be cleared unless the cooperative agrees 

to clearing. The Commission invites 

comment regarding the extent to which 

this consideration represents a cost to 

members of cooperatives that would be 

eligible for the exemption under the 

criteria proposed in this rule. If 

possible, please quantify any such costs. 

3. Costs and Benefits to the Public 

The public generally has an interest in 

required clearing because of its potential 

to reduce counterparty risk among large, 

interconnected institutions, and to 

facilitate rapid resolution of outstanding 

positions held by such institutions in 

the event of their default. By narrowly 

crafting the proposed cooperative 

exemption to incorporate qualifying 

criteria limiting both the types of 

institutions and the types of swaps that 

are eligible, the Commission expects the 

proposed exemption to appropriately 

conserve this public interest. Moreover, 

for this narrow category of swaps 

proposed for exemption, the potential 

remains for exempt cooperatives and 

their counterparties to mitigate residual 

counterparty risk through negotiated 

collateral agreements. The Commission 

invites comment regarding the extent to 

which this proposed exemption would 

impose costs or provide benefits on the 

public, including the expected impact of 

negotiated collateral agreements. Please 

provide quantification where possible. 

D. Costs and Benefits Compared to 

Alternatives 

The proposed cooperative exemption 

includes two important limiting criteria. 

First, each member of a cooperative 

must independently be able to elect the 

end-user exception or be a cooperative 

whose members can elect the end-user 

exception. Second, the swaps for which 

exempt cooperatives may make use of 

the proposed rule only includes those 

entered into by the cooperative with its 

members in connection with originating 

loans or swaps that hedge or mitigate 

risks associated with such swaps or 

associated with member loans. 

The Commission considered 

including cooperatives consisting of 

members that could not elect the enduser exception. Such an exemption 

would assist in ensuring that a greater 

number of cooperatives and their 

members are able to elect not to clear 

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33See Chen, K., et al. ‘‘An Analysis of CDS 

Transactions: Implications for Public Reporting,’’ 

September 2011, Federal Reserve Bank of New York 

Staff Reports, at 14. 

swaps. However, the Commission 

believes that such an exemption would 

significantly undermine Congress’ 

intent to promote clearing and be 

inconsistent with the end-user 

exception provided for in Section 

2(h)(7) of the CEA. This alternative 

could allow any large financial entities 

such as SDs or MSPs, which Congress 

clearly intended the clearing 

requirement to apply to without 

exception, to form cooperatives with 

other entities that would be exempt 

from the clearing requirement. By 

contrast, with the proposed provision, 

the Commission is assuring that the 

cooperative exemption does not become 

overly broad and available to 

cooperatives with members that are 

financial entities as defined in Section 

2(h)(7)(C) of the CEA. 

The Commission also considered 

exempting any swap transacted by an 

exempt cooperative. However, the 

Commission was concerned that 

financial entities such as SDs, MSPs, or 

non-member borrowers that are 

financial entities would be able to avoid 

clearing by entering into swaps through 

an exempt cooperative. For example, 

from a SD’s perspective, taking a long 

position on a swap with another SD 

would require clearing. However, the 

two parties could have essentially the 

same economic arrangement if the first 

SD goes long on the swap with an 

exempt cooperative, and the second SD 

takes a short position on the same swap 

with the same exempt cooperative. The 

exempt cooperative would be even, and 

the two SDs would have created a 

synthetic swap that avoided the clearing 

requirement. The proposed provision 

avoids such a scenario by ensuring that 

the cooperative exemption is only used 

as a pass through for swaps with 

members who would themselves be able 

to elect the end-user exception and for 

swaps that hedge or mitigate risk in 

connection member loans or swaps as 

would be required by Section 

2(h)(7)(A)(ii) of the CEA. 

The Commission invites comment 

regarding the extent to which the 

requirements in the definition of exempt 

cooperative may be too restrictive for 

cooperatives that the commenter 

believes should have the benefit of the 

proposed cooperative exemption or are 

not restrictive enough to protect the 

public interest in requiring clearing of 

certain swaps. Similarly, the 

Commission invites comment on 

whether the limitation on the types of 

swaps for which the cooperative 

exemption may be elected should be 

expanded or further limited and why. 

Please describe such specific expansion 

or further limitation contemplated and 

the costs and benefits that could result 

therefrom. 

E. Section 15(a) Factors 

1. Protection of Market Participants and 

the Public 

As described above, allowing exempt 

cooperatives to exempt certain swaps 

from required clearing will reduce the 

DCO and FCM clearing fees that such 

entities may otherwise bear. This, in 

turn, provides benefits to the members 

of exempt cooperatives, who would 

otherwise absorb such costs as they are 

passed through by the cooperatives to 

their members in the form of fees or less 

desirable spreads on swaps or loans 

conducted with the cooperative. In 

addition, the exemption may reduce the 

amount of capital that exempt 

cooperatives must allocate to margin 

accounts with their FCM. 

The proposed rule is narrowly 

tailored to exempt only swaps that are 

associated with positions established in 

connection with loans made to 

customers, or that hedge or mitigate risk 

arising in connection with such member 

loans or swaps. Further, it is otherwise 

generally consistent with the 

requirements for the end-user exception 

as provided in Section 2(h)(7) of the 

CEA and § 39.6. Given the proposed 

cooperative exemption’s limited scope 

and the remaining potential for exempt 

cooperatives and their counterparties to 

mitigate residual counterparty risk 

through negotiated collateral 

agreements, the Commission does not 

anticipate that the proposed rule would 

materially compromise protection of 

market participants and the public. The 

Commission requests comment on the 

extent to which the limitations on the 

entities and transactions eligible for the 

proposed exemption will limit risk to 

market participants and the public. If 

possible, please quantify relevant 

estimates. 

2. Efficiency, Competitiveness, and 

Financial Integrity of Swap Markets 

While the proposed rule would take 

swaps out of clearing, it limits any 

compromise of the financial integrity of 

the swap markets insomuch as it is 

narrowly tailored to include only 

cooperatives that are made up entirely 

of entities that could elect the end-user 

exception, and only swaps related to 

originating loans between the 

cooperative and such members. The 

Commission invites comment on the 

effects of the proposed rule on 

efficiency, competitiveness, and 

financial integrity of swap markets. 

3. Price Discovery 

Clearing, in general, encourages better 

price discovery because it eliminates the 

importance of counterparty 

creditworthiness in pricing swaps 

cleared through a given DCO. That is, by 

making the counterparty 

creditworthiness of all swaps of a 

certain type essentially the same, prices 

should reflect factors related to the 

terms of the swap, rather than the 

idiosyncratic risk posed by the entities 

trading it.33 To the extent that the 

cooperative exemption reduces the 

number of swaps subject to required 

clearing, it will lessen the beneficial 

effects of required clearing for price 

discovery. However, the Commission 

assumes that the number of swaps 

eligible for this exemption, estimated 

above at 500 a year, will be a de 

minimis fraction of all those that are 

otherwise required to be cleared. The 

Commission invites comment on the 

effects of the proposed rule on price 

discovery. 

4. Sound Risk Management Practices 

To the extent that a swap is removed 

from clearing, all other things being 

constant, it is a detriment to a sound 

risk management regime. To the extent 

that exempt cooperatives enter into 

uncleared swaps on the basis of this 

proposed rule, it likely increases the 

amount of counterparty risk that exempt 

cooperatives and their counterparties 

face. For the public, it increases the risk 

that financial distress at one or more 

cooperatives could spread to other 

financial institutions with which those 

cooperatives have concentrated 

positions. However, as discussed above, 

this additional risk may be reduced by 

the presence of bilateral margin 

agreements, which the Commission 

believes are often used in the absence of 

clearing. Furthermore, the Commission 

believes that, given the small number of 

swaps that will be exempted from 

clearing as a result of the proposed rule, 

estimated above to be 500 each year, 

these risks to the public will be 

minimized. The Commission invites 

comment regarding the effect of the 

proposed rule on the risk exposure of 

the cooperatives meeting the criteria 

proposed in this rule, their 

counterparties, and the public. Where 

possible, please quantify any costs or 

benefits that are relevant. 

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Federal Register / Vol. 77, No. 137 / Tuesday, July 17, 2012 / Proposed Rules 41949 

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

35 It is possible that a cooperative or members 

thereof may not be ECPs. However, pursuant to 

Section 2(e) of the CEA, if a counterparty to a swap 

is not an ECP, then such swap must be entered into 

on, or subject to the rules of, a board of trade 

designated as a contract market under Section 5 of 

the CEA. All such swaps are required to be cleared 

by the board of trade. In effect all swaps entered 

into by a cooperative or a member that is not an 

ECP will need to be executed on a board of trade 

and therefore will be cleared. 

36See 77 FR 30596, 30701 (May 23, 2012). 

37See 66 FR 20740, 20743 (Apr. 25, 2001). 

38See joint letter from EEI, NRECA, and ESPA, 

dated Nov. 4, 2011, (Electric Associations Letter), 

commenting on Swap Transaction Compliance and 

Implementation Schedule: Clearing and Trade 

Execution Requirements under Section 2(h) of the 

CEA, 76 FR 58186 (Sept. 20, 2011). 

39Small Business Administration, Table of Small 

Business Size Standards, Nov. 5, 2010. 

40See Electric Associations Letter, at 2. 41 44 U.S.C. 3501 et seq. 

5. Other Public Interest Considerations 

The Commission has not identified 

any public interest considerations 

relevant to this proposed rule beyond 

those already noted above. 

F. Public Comment on the Cost-Benefit 

Considerations 

The Commission invites public 

comment on all aspects of the costbenefit considerations. More 

specifically, the Commission also 

requests comment on the following. 

Would a cooperative exemption have 

any adverse impact on competition? 

Would a cooperative exemption have 

an impact on fees or other charges for 

any products and/or services? 

Would a cooperative exemption result 

in efficiencies or other benefits not 

described in this NPRM? 

Commenters are also invited to 

submit any data or other information 

that they may have quantifying or 

qualifying the costs and benefits of the 

proposal with their comment letters. 

VI. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 34

(‘‘RFA’’) requires that agencies consider 

whether proposed rules will have a 

significant economic impact on a 

substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis on the impact. 

The proposed rule will not have a 

significant economic impact on a 

substantial number of small entities. 

The proposed rule would affect 

cooperatives, their members, and 

potentially the counterparties with 

whom they trade. These entities could 

be SDs, MSPs, and eligible contract 

participants (ECPs).35 The Commission 

has previously established certain 

definitions of ‘‘small entities’’ to be used 

by the Commission in evaluating the 

impact of its rules on small entities in 

accordance with the RFA. In that regard, 

the Commission has certified previously 

that SDs and MSPs are not small entities 

for purposes of the RFA.36 The 

Commission is making a similar 

determination for purposes of this 

proposal. The proposed rules would 

also affect SDRs, which the Commission 

has similarly determined not to be small 

entities for purposes of the RFA. The 

Commission is making the same 

determination with respect to the 

proposed rules. 

The Commission has previously 

determined that ECPs are not small 

entities for purposes of the RFA.37

However, in its proposal of rule § 39.6, 

the Commission received a joint 

comment (‘‘Electric Associations 

Letter’’) from the National Rural Electric 

Cooperative Association, the American 

Public Power Association and the Large 

Public Power Council (the 

‘‘Associations’’) asserting that certain 

members of the Associations may both 

be ECPs under the CEA and small 

businesses under the RFA.38 These 

members of the Associations, as the 

Commission understands, have been 

determined to be small entities by the 

Small Business Administration (‘‘SBA’’) 

because they are ‘‘primarily engaged in 

the generation, transmission, and/or 

distribution of electric energy for sale 

and [their] total electric output for the 

preceding fiscal year did not exceed 4 

million megawatt hours.’’ 39 The Electric 

Associations Letter states that the 

Associations’ members are ‘‘not 

financial entities’’ and ‘‘engage in swaps 

only to mitigate or hedge commercial 

risks.’’ 40 Because the Associations’ 

members that have been determined by 

the SBA to be small entities would be 

using swaps to hedge commercial risk, 

the Commission expects that they 

would be able to use the end-user 

exception from the clearing requirement 

and therefore would not be affected to 

any significant extent by this proposed 

exemption. 

Accordingly, because nearly all of the 

entities that may be affected by the 

proposed cooperative exemption are not 

small entities, and because the few ECPs 

that have been determined by the SBA 

to be small entities are unlikely to be 

affected to any significant extent by the 

proposed exemption, the Chairman, on 

behalf of the Commission, hereby 

certifies, pursuant to 5 U.S.C. 605(b), 

that the proposed regulation would not 

have a significant economic impact on 

a substantial number of small entities. 

The Commission invites public 

comment on this determination. 

B. Paperwork Reduction Act 

1. Overview 

The Paperwork Reduction Act 

(PRA) 41 imposes certain requirements 

on Federal agencies in connection with 

their conducting or sponsoring any 

collection of information as defined by 

the PRA. An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a currently valid 

control number issued by the Office of 

Management and Budget (OMB). Certain 

provisions of this proposed rule would 

result in new collection of information 

requirements, within the meaning of the 

PRA, for exempt cooperatives. These 

new reporting requirements for exempt 

cooperatives are not currently covered 

by any existing OMB control number 

and OMB has not yet assigned a control 

number for this new collection. The 

Commission therefore is submitting this 

proposal to the OMB for review in 

accordance with 44 U.S.C. 3507(d) and 

5 CFR 1320.11. 

The title for this collection of 

information is ‘‘Rule 39.6(f) Cooperative 

Clearing Exemption Notification.’’ If 

adopted, this new collection of 

information would be mandatory for 

those parties availing themselves of the 

cooperative exemption. The 

Commission will protect proprietary 

information according to the Freedom of 

Information Act and 17 CFR Part 145, 

‘‘Commission Records and 

Information.’’ In addition, Section 

8(a)(1) of the CEA strictly prohibits the 

Commission, unless specifically 

authorized by the CEA, from making 

public ‘‘data and information that 

would separately disclose the business 

transactions or market positions of any 

person and trade secrets or names of 

customers.’’ The Commission is also 

required to protect certain information 

contained in a government system of 

records according to the Privacy Act of 

1974, 5 U.S.C. 552a. 

2. Information Provided by Reporting 

Entities 

This proposed cooperative exemption 

rule would trigger certain reporting 

conditions under proposed § 39.6(f)(3) 

that must be satisfied for exempt 

cooperatives. These conditions are 

designed to notify the Commission 

when the exemption from the clearing 

requirements in Section 2(h)(1)(A) of the 

CEA is being elected, address 

Commission concerns regarding exempt 

cooperative swap risk, and provide the 

Commission with information necessary 

to regulate swap markets. In particular, 

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41950 Federal Register / Vol. 77, No. 137 / Tuesday, July 17, 2012 / Proposed Rules 

42See 5 CFR 1320.3(b) for the definition of the 

term ‘‘burden.’’ 

43Wage estimates are taken from the SIFMA 

‘‘Report on Management and Professional Earnings 

in the Securities Industry 2011.’’ Hourly wages are 

calculated assuming 1,800 hours per year and a 

multiplier of 5.35 to account for overhead and 

bonuses. In light of the challenges of developing 

precise estimates, the results of all calculations 

have been rounded. 

the reporting conditions in proposed 

§ 39.6(f)(3), which requires compliance 

with reporting requirements under 

§ 39.6(b) for swaps for which the 

cooperative exemption is elected, would 

establish new collection of information 

requirements within the meaning of the 

PRA. Additionally, exempt cooperatives 

may be required to supplement their 

reporting systems for purposes of 

complying with the proposed reporting 

requirements. 

For each swap where the exemption 

is elected, either the cooperative or its 

counterparty (if the counterparty is an 

SD or MSP) must report: (1) That the 

election of the exemption is being made; 

(2) which party is the electing 

counterparty; and (3) certain 

information specific to the electing 

counterparty unless that information 

has already been provided by the 

electing counterparty through an annual 

filing. The third set of information 

comprises data that is likely to remain 

relatively constant for many, but not all, 

electing counterparties and therefore, 

does not require swap-by-swap 

reporting and can be reported less 

frequently. In addition, for entities that 

are registered with the SEC, the 

reporting party will also be required to 

report: (1) The SEC filer’s central index 

key number; and (2) that an appropriate 

committee of the board of directors has 

approved the decision for that entity to 

enter into swaps that are exempt from 

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

the CEA. 

When entering into swaps with 

members and electing the exemption, 

exempt cooperatives will likely be 

responsible to report this information. 

When cooperatives enter into swaps 

with SDs or MSPs, the SDs or MSPs will 

be responsible to report this 

information. However, the cooperatives 

would bear costs related to the 

personnel hours committed to reporting 

the required information. 

The Commission provides estimates 

of the time burden required for exempt 

cooperatives to comply with the 

proposed requirements below.42 The 

estimates include quantifiable costs, 

including one-time and annual burden 

hours and costs per cooperative, and 

costs that are incurred on a swap-byswap basis. The dollar estimates are 

offered as ranges with upper and lower 

bounds, which is necessary to 

accommodate uncertainty regarding the 

estimates. 

3. Number of Exempt Cooperatives and 

Swaps 

The total reporting related costs of the 

cooperative exemption would depend 

on the number of cooperatives electing 

the cooperative exemption, as well as 

the number of swaps for which 

cooperatives would elect to use the 

exemption. In addition, as described in 

more detail below, the cost will also 

depend on whether the cooperatives 

choose the annual reporting option 

permitted by the proposed rule. 

To identify the number of 

cooperatives that could elect the 

cooperative exemption, the Commission 

first considered what types of 

cooperatives may be financial entities 

with total assets in excess of $10 billion 

since non-financial cooperatives or 

cooperatives that are financial entities 

with assets of $10 billion or less can use 

the end-user exception in the alternative 

and the costs of reporting thereunder 

have already been addressed in the enduser exception rulemaking. Given the 

comments received for the end-user 

exception NPRM regarding cooperatives 

and consideration of other financial 

cooperatives the Commission is aware 

of, the Commission believes that 

cooperatives that may meet the 

definition of exempt cooperative could 

be farm credit system cooperatives, 

credit unions, and financial 

cooperatives that provide financing in 

the rural electric space. Based on a 

review of data available from the 

regulators for these entities and 

information provided by commenters, 

the Commission believes there are 

approximately ten cooperatives that will 

meet the definition of ‘‘financial entity’’ 

in Section 2(h)(7)(C)(i)(VIII) of the CEA 

and which will not be exempt from that 

definition as small financial institutions 

because they have total assets in excess 

of $10 billion. Each of these is likely to 

function as the reporting counterparty 

for at least some of their exempted 

swaps in any given year since they 

would likely be responsible for 

reporting when transacting exempted 

swaps with members. 

A review of information provided for 

five cooperatives that likely would be 

exempt cooperatives showed a range of 

swap usage from none to as many as 

approximately 200 swaps a year with 

most entering into less than 50 swaps a 

year. Using the high end of reported 

swaps for the five cooperatives for 

which information was available, an 

estimate of 50 swaps per year was 

calculated. The Commission believes 

this estimate is high because some of the 

reported swaps may not meet the 

requirements of the proposed rule and 

several cooperatives for which 

information was not available to the 

Commission likely undertake little, if 

any, swap activity. However, for 

purposes of the cost calculations, we 

will assume that each of the ten 

potential exempt cooperatives will enter 

into 50 swaps per year. Accordingly, we 

estimate that exempt cooperatives may 

elect the cooperative exemption for 500 

swaps each year. 

4. Proposed § 39.6(f)(3) Reporting 

Requirements Cost Estimate 

a. Ongoing Reporting Burden Hours and 

Costs 

Proposed § 39.6(f)(3) would require 

exempt cooperatives that are reporting 

counterparties to comply with the 

reporting requirements in paragraph (b) 

of § 39.6, which require delivering 

specified information to a registered 

SDR or, if no registered SDR is available, 

the Commission. Counterparties must 

also undertake reporting pursuant to 

§ 39.6(b) if the end-user exception is 

elected. 

Assuming that the exempt cooperative 

is the reporting counterparty, it would 

have to report the information required 

in § 39.6(b)(1)(i) and (ii) for each swap 

for which it elects the cooperative 

exemption. To comply with 

§ 39.6(b)(1)(i) and (ii), each reporting 

counterparty would be required to 

check one box in the SDR or 

Commission reporting data fields 

indicating that the exempt cooperative 

is electing not to clear the swap. The 

Commission expects that each reporting 

counterparty would likely spend 15 

seconds to two minutes per transaction 

entering this information into the 

reporting system, or in the aggregate, 1.5 

hours to 17 hours per year for all 500 

estimated swaps. Using a financial 

analyst’s average salary of $208/hour, 

these burden hour costs would equal 

between less than $1 and $7 for each 

transaction, or approximately $300 to 

$3,500 per year for all 500 

transactions.43

Regulation 39.6(b)(1)(iii) allows for 

certain counterparty specific 

information identified therein to be 

reported either swap-by-swap by the 

reporting counterparty or annually by 

the electing counterparty. For the enduser exception, the alternative options 

may be useful in instances where 

electing counterparties enter into very 

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44Hours estimates reflect total burden hours for 

the ten exempt cooperatives, rounded to nearest 

half-hour. 45The total burden costs are aggregate costs for 

the ten exempt cooperatives, rounded to nearest 

hundred dollars. 

few swaps each year and the reporting 

counterparties will report this 

information for them on a swap-by-swap 

basis. However, for the cooperative 

exemption, the exempt cooperative is 

the electing counterparty and will also 

likely be the reporting counterparty for 

swaps entered into with members. 

Furthermore, the Commission expects 

that, assuming the cooperative is the 

reporting counterparty, the time burden 

for the first swap entered into by an 

exempt cooperative in collecting and 

reporting the information required by 

§ 39.6(b)(1)(iii) will be approximately 

the same as the time burden for 

collecting and reporting the information 

for the annual filing. Given the cost 

equivalence for annual reporting to 

reporting a single swap if the exempt 

cooperative is the electing counterparty 

and the reporting counterparty, the 

Commission assumes that all ten 

exempt cooperatives will make an 

annual filing of the information required 

for § 39.6(1)(iii). The Commission 

estimates that it will take an average of 

30 minutes to 90 minutes to complete 

and submit the annual filing. The 

average hourly wage for a compliance 

attorney is $390, which means that the 

annual per cooperative cost for the filing 

is likely to be between $200 and $590. 

If all ten eligible cooperatives were to 

undertake an annual filing, the aggregate 

cost would be $2,000 to $5,900. 

b. Other Costs 

i. Updating Reporting Procedures 

The Commission believes that 

cooperatives electing the cooperative 

exemption would have established 

reporting systems to comply with other 

Commission rules regarding swap 

reporting generally. Reporting 

counterparties may need to modify their 

reporting systems in order to 

accommodate the additional data fields 

required by this rule. The Commission 

estimates that those modifications 

would create a one-time expense of 

approximately one to ten burden hours 

per reporting counterparty. The 

Commission estimates that the hourly 

wage for a senior programmer is $341, 

which means that the one-time, per 

entity cost for modifying reporting 

systems to comply with proposed 

§ 39.6(f)(3) would likely be between 

$340 and $3,400, and the aggregate onetime cost for all ten potential exempt 

cooperatives is estimated to be $3,400 to 

$34,100. 

ii. Burden on Non-Reporting 

Cooperatives 

When an exempt cooperative is not 

functioning as the reporting 

counterparty (i.e. when transacting with 

a SD or MSP), it may, at certain times, 

need to communicate information to its 

reporting counterparties in order to 

facilitate reporting. That information 

may include, among other things, 

whether the exempt cooperative has 

filed an annual report pursuant to 

§ 39.6(b) and information to facilitate 

any due diligence that the reporting 

counterparty may conduct. These costs 

will likely vary substantially depending 

on the number of different reporting 

counterparties with whom an exempt 

cooperative conducts transactions, how 

frequently the exempt cooperative 

enters into swaps, whether the exempt 

cooperative undertakes an annual filing, 

and the due diligence that the reporting 

counterparty chooses to conduct. 

Therefore, the Commission believes that 

it is difficult to estimate these costs 

reliably at this time. Nevertheless, the 

Commission estimates that a nonreporting exempt cooperative will incur 

between five minutes and ten hours of 

annual burden hours. The hourly wage 

for a compliance attorney is $390, 

which means that the annual aggregate 

cost for communicating information to 

the reporting counterparty is likely to be 

between $400 and $39,000. Given the 

unknowns associated with this cost 

estimate noted above, the Commission 

does not believe this wide range can be 

narrowed without further information. 

c. Reporting Cost Summary 

The reporting costs described above 

are summarized in the following table. 

SUMMARY OF REPORTING-RELATED COSTS

Reporting Aggregate hours per 

annum 44 Cost range 45 Notes 

(1) Swap-by-Swap Reporting to SDR or Commission (§§ 39.6(b)(1)(i) and (ii)).1.5–17 ....................... $300 to $3,500 ..........

($208/hour) 

This assumes that all exempt cooperatives will 

be reporting counterparties. 

(2) Electing Counterparty Annual Reporting 

(§ 39.6(b)(1)(iii)).

5–15 .......................... $2,000–$5,900 ..........

($390/hour) 

This assumes that all exempt cooperatives will 

be reporting counterparties and will elect 

annual reporting for § 39.6(b)(1)(iii) information. 

(3) Updating Reporting Procedures 

(§ 39.6(f)(3)).

10–100 ...................... $3,400–$34,100 ........

($341/hour) 

This assumes that all exempt cooperatives will 

have to update reporting procedures. This is 

a one-time cost in the first year. 

(4) Non-Reporting Counterparties (§ 39.6(f)(3)) 1.0–100 ..................... $400–$39,000 ...........

($390/hour) 

This estimate assumes all exempt cooperatives are non-reporting counterparties for 

some swaps and each spends between five 

minutes to ten hours each year on this task. 

Estimated Reporting Total ......................... 18–232 ......................

(125 midpoint) 

$6,100–$82,500 ........

($44,300 midpoint) 

Sum of rows (1) through (4). 

3. Information Collection Comments 

The Commission invites public 

comment on any aspect of the reporting 

burdens discussed above. Pursuant to 44 

U.S.C. 3506(c)(2)(B), the Commission 

solicits comments in order to: (i) 

Evaluate whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have 

practical utility; (ii) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed collection 

of information; (iii) determine whether 

there are ways to enhance the quality, 

utility, and clarity of the information to 

be collected; and (iv) minimize the 

burden of the collection of information 

on those who are to respond, including 

through the use of automated collection 

techniques or other forms of information 

technology. 

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41952 Federal Register / Vol. 77, No. 137 / Tuesday, July 17, 2012 / Proposed Rules 

Comments may be submitted directly 

to the Office of Information and 

Regulatory Affairs (‘‘OIRA’’) in OMB, by 

fax at (202) 395–6566, or by email at 

OIRAsubmissions@omb.eop.gov. Please 

provide the Commission with a copy of 

submitted comments so that they can be 

considered in connection with a final 

rule. Refer to the Addresses section of 

this release for comment submission 

instructions to the Commission. A copy 

of the supporting statements for the 

collections of information discussed 

above may be obtained by visiting 

www.RegInfo.gov. OMB is required to 

make a decision concerning the 

collection of information between 30 

and 60 days after publication of this 

release in the Federal Register. 

Consequently, a comment to OMB is 

most assured of being fully effective if 

received by OMB (and the Commission) 

within 30 days after publication. 

List of Subjects in 17 CFR Part 39 

Business and industry, Clearing, 

Commodity futures, Cooperatives, 

Reporting requirements, Swaps. 

For the reasons stated in the 

preamble, the Commission proposes to 

amend 17 CFR part 39 as follows: 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

1. The authority citation for part 39 

continues to read as follows: 

Authority: 7 U.S.C. 2 and 7a–1 as 

amended by Pub. L. 111–203, 124 Stat. 1376. 

2. Amend § 39.6, to add paragraph (f) 

to read as follows: 

§ 39.6 Exceptions to the clearing 

requirement. 

* * * * * 

(f) Exemption for cooperatives. 

Exempt cooperatives may elect not to 

clear certain swaps identified in 

paragraph (f)(2) of this section that are 

otherwise subject to the clearing 

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

Act if the following requirements are 

satisfied. 

(1) For the purposes of this paragraph, 

an exempt cooperative means a 

cooperative: 

(i) Formed and existing pursuant to 

Federal or state law as a cooperative; 

(ii) That is a ‘‘financial entity,’’ as 

defined in section 2(h)(7)(C)(i) of the 

Act, solely because of section 

2(h)(7)(C)(i)(VIII) of the Act; and 

(iii) Each member of which is not a 

‘‘financial entity,’’ as defined in section 

2(h)(7)(C)(i) of the Act, or if any member 

is a financial entity solely because of 

section 2(h)(7)(C)(i)(VIII) of the Act, 

such member is: 

(A) Exempt from the definition of 

‘‘financial entity’’ pursuant to paragraph 

(d) of this section; or 

(B) A cooperative formed under 

Federal or state law as a cooperative and 

each member thereof is either not a 

‘‘financial entity,’’ as defined in section 

2(h)(7)(C)(i) of the Act, or is exempt 

from the definition of ‘‘financial entity’’ 

pursuant to paragraph (d) of this 

section. 

(2) An exempt cooperative may elect 

not to clear a swap that is subject to the 

clearing requirement of section 

2(h)(1)(A) of the Act if the swap: 

(i) Is entered into with a member of 

the exempt cooperative in connection 

with originating a loan or loans for the 

member, which means the requirements 

of § 1.3(ggg)(5)(i), (ii), and (iii) are 

satisfied; provided that, for this 

purpose, the term ‘‘insured depository 

institution’’ as used in those sections is 

replaced with the term ‘‘exempt 

cooperative’’ and the word ‘‘customer’’ 

is replaced with the word ‘‘member;’’ or 

(ii) Hedges or mitigates commercial 

risk, in accordance with paragraph (c) of 

this section, related to loans to members 

or arising from a swap or swaps that 

meet the requirements of paragraph 

(f)(2)(i) of this section. 

(3) An exempt cooperative that elects 

the exemption provided in paragraph (f) 

of this section shall comply with the 

requirements of paragraph (b) of this 

section. For this purpose, the exempt 

cooperative shall be the ‘‘electing 

counterparty,’’ as such term is used in 

paragraph (b), and for purposes of 

paragraph (b)(1)(iii)(A), the reporting 

counterparty shall report that an 

exemption is being elected in 

accordance with paragraph (f) of this 

section. 

Issued in Washington, DC, on July 10, 

2012, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Appendices to Clearing Exemption for 

Certain Swaps Entered Into by 

Cooperatives—Commission Voting 

Summary and Statements of 

Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting Summary 

On this matter, Chairman Gensler and 

Commissioners Sommers, Chilton, O’Malia 

and Wetjen voted in the affirmative; no 

Commissioner voted in the negative. 

Appendix 2—Statement of Chairman Gary 

Gensler 

I support the proposed rule that would 

permit certain cooperatives to choose not to 

clear member-related swaps. 

One of the primary goals of the Dodd-Frank 

Wall Street Reform and Consumer Protection 

Act (Dodd-Frank Act) was to lower risk to the 

financial system by requiring standardized 

swaps between financial entities to be 

cleared. 

Congress provided that non-financial 

entities, such as farmers, ranchers, 

manufacturers and other end users, should be 

able to choose whether or not to clear those 

swaps that hedge or mitigate commercial 

risks. 

Cooperatives act on behalf of and are an 

extension of their members. Thus, I believe 

it is appropriate that those cooperatives made 

up entirely of members that could 

individually qualify for the end-user 

exception should qualify as well themselves 

as end users in certain circumstances. 

The proposed cooperative exemption is 

narrowly tailored, and extends only to: 

• Swaps entered into with members of the 

cooperative in connection with originating 

loans for members; and 

• Swaps entered into by a cooperative to 

hedge or mitigate risks associated with 

member loans or member loan related swaps. 

[FR Doc. 2012–17357 Filed 7–16–12; 8:45 am] 

BILLING CODE 6351–01–P 

DEPARTMENT OF COMMERCE 

International Trade Administration 

19 CFR Part 351 

Correction to Modification of 

Regulations Regarding the Definition 

of Factual Information and Time Limits 

for Submission of Factual Information 

AGENCY: Import Administration, 

International Trade Administration, 

Department of Commerce. 

FOR FURTHER INFORMATION CONTACT: 

Joanna Theiss at (202) 482–5052. 

Correction 

On July 10, 2012, the Department of 

Commerce published in the Federal 

Register the following notice: 

Modification of Regulations Regarding 

the Definition of Factual Information 

and Time Limits for Submission of 

Factual Information, 77 FR 40534 (July 

10, 2012) (‘‘Modification of Factual 

Information Regulations’’). After 

publication of Modification of Factual 

Information Regulations, we identified 

an inadvertent error in this notice. 

Specifically, the notice does not include 

a Docket Number for the submission of 

comments through the Federal 

eRulemaking Portal. The Docket 

Number is Docket No. ITA–2012–0004. 

To be assured of consideration, 

comments must be received by August 

24, 2012. 

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