```

[Federal Register Volume 76, Number 147 (Monday, August 1, 2011)]
[Proposed Rules]
[Pages 45724-45730]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19362]

=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 23

RIN 3038-AD51

Clearing Member Risk Management

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing rules to implement new statutory provisions enacted by 
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act. These proposed rules address risk management for cleared trades by 
futures commission merchants, swap dealers, and major swap participants 
that are clearing members.

DATES: Submit comments on or before September 30, 2011.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD51, 
by any of the following methods:
     Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
     Courier: Same as mail above.
    Please submit your comments using only one method. RIN number, 
3038-AD51, must be in the subject field of responses submitted via e-
mail, and clearly indicated on written submissions. All comments must 
be submitted in English, or if not, accompanied by an English 
translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the CFTC to consider information that 
you believe 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 procedures established in Sec.  145.9 
of the CFTC's regulations.\1\
---------------------------------------------------------------------------

    \1\ 17 CFR 145.9.
---------------------------------------------------------------------------

    The CFTC reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of this action 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: John C. Lawton, Deputy Director and 
Chief Counsel, 202-418-5480, jlawton@cftc.gov, or Christopher A. Hower, 
Attorney-Advisor, 202-418-6703, chower@cftc.gov, Division of Clearing 
and Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act).\2\ Title VII of 
the Dodd-Frank Act amended the Commodity Exchange Act (CEA or Act) \3\ 
to establish a comprehensive new regulatory framework for swaps. The 
legislation was enacted to reduce risk, increase transparency, and 
promote market integrity within the financial system by, among other 
things: (1) Providing for the registration and comprehensive regulation 
of swap dealers and major swap participants; (2) imposing clearing and 
trade execution requirements on standardized derivative products; (3) 
creating rigorous recordkeeping and real-time reporting regimes; and 
(4) enhancing the Commission's rulemaking and enforcement authorities 
with respect to, among others, all registered entities and 
intermediaries subject to the Commission's oversight. Title VII also 
includes amendments to the federal securities laws to establish a 
similar

[[Page 45725]]

regulatory framework for security-based swaps under the authority of 
the Securities and Exchange Commission (SEC).
---------------------------------------------------------------------------

    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
    \3\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------

II. Proposed Regulations

A. Introduction

    A fundamental premise of the Dodd-Frank Act is that the use of 
properly regulated central clearing can reduce systemic risk. The 
Commission has proposed extensive regulations addressing open access 
and risk management at the derivatives clearing organization (DCO) 
level.\4\ The Commission also has proposed regulations addressing risk 
management for swap dealers (SDs) and major swap participants 
(MSPs).\5\
---------------------------------------------------------------------------

    \4\ See, e.g., 76 FR 3698 (Jan. 20, 2011) (Risk Management 
Requirements for Derivatives Clearing Organizations). These proposed 
regulations include a requirement that a DCO adopt rules addressing 
each clearing member's risk management policies and procedures. See 
proposed Sec.  39.13(h)(5).
    \5\ See, e.g., 75 FR 91397 (Nov. 23, 2010) (Regulations 
Establishing Duties of Swap Dealers and Major Swap Participants).
---------------------------------------------------------------------------

    Clearing members provide the portals through which market 
participants gain access to DCOs as well as the first line of risk 
management. Accordingly, the Commission is proposing regulations to 
facilitate customer access to clearing and to bolster risk management 
at the clearing member level. The proposal addresses risk management 
for cleared trades by FCMs and SDs and MSPs that are clearing members.

B. Clearing Member Risk Management

    Section 3(b) provides that one of the purposes of the Act is to 
ensure the financial integrity of all transactions subject to the Act 
and to avoid systemic risk. Section 8a(5) authorizes the Commission to 
promulgate such regulations that it believes are reasonably necessary 
to effectuate any of the provisions or to accomplish any of the 
purposes of the Act. Risk management systems are critical to the 
avoidance of systemic risks.
    Section 4s(j)(2) requires each SD and MSP to have risk management 
systems adequate for managing its business. Section 4s(j)(4) requires 
each SD and MSP to have internal systems and procedures to perform any 
of the functions set forth in Section 4s.
    Section 4d requires FCMs to register with the Commission. It 
further requires FCMs to segregate customer funds. Section 4f requires 
FCMs to maintain certain levels of capital. Section 4g establishes 
reporting and recordkeeping requirements for FCMs.
    These provisions of law and Commission regulations promulgated 
pursuant to these provisions create a web of obligations designed to 
secure the financial integrity of the markets and the clearing system, 
to avoid systemic risk, and to protect customer funds. Effective risk 
management by FCMs is essential to achieving these goals. For example, 
a poorly managed position in the customer account can cause an FCM to 
become undersegregated. A poorly managed position in the proprietary 
account can cause an FCM to fall out of compliance with capital 
requirements.
    Even more significantly, a failure of risk management can cause an 
FCM to become insolvent and default to a DCO. This can disrupt the 
markets and the clearing system and harm customers. Such failures have 
been predominately attributable to failures in risk management.\6\
---------------------------------------------------------------------------

    \6\ See, e.g., the failure of Volume Investors Corporation in 
1986, the failure of Griffin Trading Company in 1998, and the 
failure of Klein & Company Futures, Inc. in 2000.
---------------------------------------------------------------------------

    As noted previously, the Dodd-Frank Act requires the increased use 
of central clearing. In particular, Section 2(h) establishes procedures 
for the mandatory clearing of certain swaps. As stated in the Senate 
Committee report: ``Increasing the use of central clearinghouses * * * 
will provide safeguards for American taxpayers and the financial system 
as a whole.\7\
---------------------------------------------------------------------------

    \7\ S. Rep. No. 111-176, at 32 (2010) (report of the Senate 
Committee on Banking, Housing, and Urban Affairs).
---------------------------------------------------------------------------

    The Commission has proposed extensive risk management standards at 
the DCO level. Given the increased importance of clearing and the 
expected entrance of new products and new participants into the 
clearing system, the Commission believes that enhancing the safeguards 
at the clearing member level is necessary as well.
    Bringing swaps into clearing will increase the magnitude of the 
risks faced by clearing members. In many cases, it will change the 
nature of those risks as well. Many types of swaps have their own 
unique set of risk characteristics. The Commission believes that the 
increased concentration of risk in the clearing system combined with 
the changing configuration of the risk warrant additional vigilance not 
only by DCOs but by clearing members as well.
    FCMs generally have extensive experience managing the risk of 
futures. They generally have less experience managing the risks of 
swaps. The Commission believes that it is a reasonable precaution to 
require that certain safeguards be in place. It would ensure that FCMs, 
who clear on behalf of customers, are subject to standards at least as 
stringent as those applicable to SDs and MSPs, who clear only for 
themselves. Failure to require SDs, MSPs, and FCMs that are clearing 
members to maintain such safeguards would frustrate the regulatory 
regime established in the CEA, as amended by the Dodd-Frank Act. 
Accordingly, the Commission believes that applying the risk-management 
requirements in the proposed rules to SDs, MSPs, and FCMs that are 
clearing members are reasonably necessary to effectuate the provisions 
and to accomplish the purposes of the CEA.
    Proposed Sec.  1.73 would apply to clearing members that are FCMs; 
proposed Sec.  23.609 would apply to clearing members that are SDs or 
MSPs. These provisions would require these clearing members to have 
procedures to limit the financial risks they incur as a result of 
clearing trades and liquid resources to meet the obligations that 
arise. The proposal would require clearing members to:
    (1) Establish credit and market risk-based limits based on position 
size, order size, margin requirements, or similar factors;
    (2) Use automated means to screen orders for compliance with the 
risk-based limits;
    (3) Monitor for adherence to the risk-based limits intra-day and 
overnight;
    (4) Conduct stress tests of all positions in the proprietary 
account and all positions in any customer account that could pose 
material risk to the futures commission merchant at least once per 
week;
    (5) Evaluate its ability to meet initial margin requirements at 
least once per week;
    (6) Evaluate its ability to meet variation margin requirements in 
cash at least once per week;
    (7) Evaluate its ability to liquidate the positions it clears in an 
orderly manner, and estimate the cost of the liquidation at least once 
per month; and
    (8) Test all lines of credit at least once per quarter.
    Each of these items has been observed by Commission staff as an 
element of an existing sound risk management program at a DCO or an 
FCM.
    The Commission does not intend to prescribe the particular means of 
fulfilling these obligations. As is the case with DCOs, clearing 
members will have flexibility in developing procedures that meet their 
needs. For example, items (1) and (2) could be addressed through simple 
numerical limits on order or position size or through more complex 
margin-based limits. Further examples could include

[[Page 45726]]

price limits to reject orders that are too far away from the market, or 
limits on the number of orders that could be placed in a short time.
    The following are examples of tools that could be used to monitor 
for risk and to mitigate it:

--The ability to see all working and filled orders for intraday risk 
management;
--A ``kill button'' that cancels all open orders for an account and 
disconnects electronic access.
    The Commission believes that these proposals are consistent with 
international standards. In August 2010, the International Organization 
of Securities Commissions issued a report entitled ``Direct Electronic 
Access to Markets.'' \8\ The report set out a number of principles to 
guide markets, regulators, and intermediaries. Principle 6 states that:
---------------------------------------------------------------------------

    \8\ The report can be found at http://www.iosco.org.

    A market should not permit DEA [direct electronic access] unless 
there are in place effective systems and controls reasonably 
designed to enable the management of risk with regard to fair and 
orderly trading including, in particular, automated pre-trade 
controls that enable intermediaries to implement appropriate trading 
---------------------------------------------------------------------------
limits.

    Principle 7 states that:

    Intermediaries (including, as appropriate, clearing firms) 
should use controls, including automated pre-trade controls, which 
can limit or prevent a DEA Customer from placing an order that 
exceeds a relevant intermediary's existing position or credit 
limits.

    Stress tests are an essential risk management tool. The purpose in 
conducting stress tests is to determine the potential for significant 
losses in the event of extreme market events and the ability of traders 
and clearing members to absorb the losses. As was the case with the DCO 
risk management proposal, the Commission does not intend to prescribe 
the manner in which clearing members conduct stress tests. Rather, the 
Commission would monitor to determine whether clearing members were 
routinely conducting stress tests reasonably designed for the types of 
risk the clearing members and their customers face.
    The proposal also would require clearing members to evaluate their 
ability to meet calls for initial and variation margin. This includes 
testing for liquidity of financial resources available to cover 
exposures due to market events. Routine testing of this sort diminishes 
the chance of a default based on liquidity problems.
    Each clearing member also would be required to evaluate 
periodically its ability to liquidate, in an orderly manner, the 
positions in the proprietary and customer accounts and estimate the 
cost of the liquidation. In recent years, Commission staff has observed 
instances where a trader was unable to meet its financial obligations 
and the FCM had to assume responsibility for the trader's portfolio. 
Under these conditions, an FCM would normally liquidate the portfolio 
promptly. In some instances, however, where the portfolio contained 
large and complex options positions, the FCM found that it was not easy 
to liquidate. The Commission believes that clearing members should 
periodically review portfolios to ensure that they have the ability to 
liquidate them and to estimate the cost of such liquidation. The 
exercise should also address the ability of the FCM to put on 
appropriate hedges to mitigate risk pending liquidation. Such an 
exercise would take into account the size of the positions, the 
concentration of the positions in particular markets, and the liquidity 
of the markets.
    Finally, the proposal would require each clearing member to 
establish written procedures to comply with this regulation and to keep 
records documenting its compliance. The Commission believes that these 
are important elements of a good risk management program.
    The Commission requests comments on all aspects of the risk 
management proposal. In particular the Commission requests comment on:
     The extent to which each DCO already (i) Requires clearing 
member FCMs, SDs, and MSPs to have each component, and (ii) audits 
compliance with such requirement;
     The extent to which each component has otherwise been 
incorporated into exsisting risk management systems of clearing member 
FCMs, SDs, and MSPs; and
     The potential costs and benefits of each component.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities.\9\ The 
Commission previously has established certain definitions of ``small 
entities'' to be used in evaluating the impact of its regulations on 
small entities in accordance with the RFA.\10\ The proposed regulations 
would affect FCMs, DCOs, SDs, and MSPs.
---------------------------------------------------------------------------

    \9\ 5 U.S.C. 601 et seq.
    \10\ 47 FR 18618, Apr. 30, 1982.
---------------------------------------------------------------------------

    The Commission previously has determined, however, that FCMs should 
not be considered to be small entities for purposes of the RFA.\11\ The 
Commission's determination was based, in part, upon the obligation of 
FCMs to meet the minimum financial requirements established by the 
Commission to enhance the protection of customers' segregated funds and 
protect the financial condition of FCMs generally.\12\ The Commission 
also has previously determined that DCOs are not small entities for the 
purpose of the RFA.\13\
---------------------------------------------------------------------------

    \11\ Id. at 18619.
    \12\ Id.
    \13\ See 66 FR 45605, 45609, Aug. 29, 2001.
---------------------------------------------------------------------------

    SDs and MSPs are new categories of registrants. Accordingly, the 
Commission has not previously addressed the question of whether such 
persons are, in fact, small entities for purposes of the RFA. Like 
FCMs, SDs will be subject to minimum capital and margin requirements 
and are expected to comprise the largest global financial firms. The 
Commission is required to exempt from SD registration any entities that 
engage in a de minimis level of swap dealing in connection with 
transactions with or on behalf of customers. The Commission anticipates 
that this exemption would tend to exclude small entities from 
registration. Accordingly, for purposes of the RFA for this rulemaking, 
the Commission is hereby proposing that SDs not be considered ``small 
entities'' for essentially the same reasons that FCMs have previously 
been determined not to be small entities and in light of the exemption 
from the definition of SD for those engaging in a de minimis level of 
swap dealing.
    The Commission also has previously determined that large traders 
are not ``small entities'' for RFA purposes.\14\ In that determination, 
the Commission considered that a large trading position was indicative 
of the size of the business. MSPs, by statutory definition, maintain 
substantial positions in swaps or maintain outstanding swap positions 
that create substantial counterparty exposure that could have serious 
adverse effects on the financial stability of the United States banking 
system or financial markets. Accordingly, for purposes of the RFA for 
this rulemaking, the Commission is hereby proposing that MSPs not be 
considered ``small entities'' for essentially the same reasons that 
large traders have

[[Page 45727]]

previously been determined not to be small entities.
---------------------------------------------------------------------------

    \14\ Id. at 18620.
---------------------------------------------------------------------------

    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations 
will not have a significant economic impact on a substantial number of 
small entities. The Commission invites the public to comment on whether 
SDs and MSPs should be considered small entities for purposes of the 
RFA.

B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \15\ imposes certain requirements 
on Federal agencies (including the Commission) in connection with their 
conducting or sponsoring any collection of information as defined by 
the PRA. This proposed rulemaking would result in new collection of 
information requirements within the meaning of the PRA. The Commission 
therefore is submitting this proposal to the Office of Management and 
Budget (OMB) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. The title for this collection of information is ``Clearing 
Member Position Risk Management.'' An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number. The 
OMB has not yet assigned this collection a control number.
---------------------------------------------------------------------------

    \15\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The collection of information under these proposed regulations is 
necessary to implement certain provisions of the CEA, as amended by the 
Dodd-Frank Act. Specifically, it is essential both for effective risk 
management and for the efficient operation of trading venues among swap 
dealers, major swap participants, and futures commission merchants. The 
position risk management requirement established by the proposed rules 
diminishes the chance for a default, thus ensuring the financial 
integrity of markets as well as customer protection.
    If the proposed regulations are adopted, responses to this 
collection of information would be mandatory. The Commission will 
protect proprietary information according to the Freedom of Information 
Act and 17 CFR part 145, ``Commission Records and Information.'' In 
addition, section 8(a)(1) of the CEA strictly prohibits the Commission, 
unless specifically authorized by the CEA, from making public ``data 
and information that would separately disclose the business 
transactions or market positions of any person and trade secrets or 
names of customers.'' The Commission 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.
1. Information Provided by Reporting Entities/Persons
    Swap dealers, major swap participants, and futures commission 
merchants would be required to develop and monitor procedures for 
position risk management in accordance with proposed rules 1.73 and 
23.609.
    The annual burden associated with these proposed regulations is 
estimated to be 524 hours, at an annual cost of $52,400 for each 
futures commission merchant, swap dealer, and major swap participant. 
Burden means the total time, effort, or financial resources expended by 
persons to generate, maintain, retain, disclose, or provide information 
to or for a federal agency. The Commission has characterized the annual 
costs as initial costs because the Commission anticipates that the cost 
burdens will be reduced dramatically over time as the documentation and 
procedures required by the proposed regulations become increasingly 
standardized within the industry.
    This hourly burden primarily results from the position risk 
management obligations that would be imposed by proposed regulations 
1.73 and 23.609. Proposed 1.73 and 23.609 would require each futures 
commission merchant, swap dealer, and major swap participant to 
establish and enforce procedures to establish risk-based limits, 
conduct stress testing, evaluate the ability to meet initial and 
variation margin, test lines of credit, and evaluate the ability to 
liquidate, in an orderly manner, the positions in the proprietary and 
customer accounts and estimate the cost of the liquidation. The 
Commission believes that each of these items is currently an element of 
existing risk management programs at a DCO or an FCM. Accordingly, any 
additional expenditure related to Sec. Sec.  1.73 and 23.609 likely 
would be limited to the time initially required to review and, as 
needed, amend, existing risk management procedures to ensure that they 
encompass all of the required elements and to develop a system for 
performing these functions as often as required.
    In addition, proposed Sec. Sec.  1.73 and 23.609 would require each 
futures commission merchant, swap dealer, and major swap participant to 
establish written procedures to comply, and maintain records 
documenting compliance. Maintenance of compliance procedures and 
records of compliance is prudent business practice and the Commission 
anticipates that swap dealers and major swap participants already 
maintain some form of this documentation.
    With respect to the required position risk management, the 
Commission estimates that futures commission merchants, swap dealers, 
and major swap participants will spend an average of 2 hours per 
trading day, or 504 hours per year, performing the required tests. The 
Commission notes that the specific information required for these tests 
is of the type that would be performed in a prudent market 
participant's ordinary course of business.
    In addition to the above, the Commission anticipates that futures 
commission merchants, swap dealers, and major swap participants will 
spend an average of 16 hours per year drafting and, as needed, updating 
the written policies and procedures to ensure compliance required by 
proposed Sec. Sec.  1.73 and 23.609, and 4 hours per year maintaining 
records of the compliance.
    The hour burden calculations below are based upon a number of 
variables such as the number of futures commission merchants, swap 
dealers, and major swap participants in the marketplace and the average 
hourly wage of the employees of these registrants that would be 
responsible for satisfying the obligations established by the proposed 
regulation.
    There are currently 134 futures commission merchants based on 
industry data. Swap dealers and major swap participants are new 
categories of registrants. Accordingly, it is not currently known how 
many swap dealers and major swap participants will become subject to 
these rules, and this will not be known to the Commission until the 
registration requirements for these entities become effective after 
July 16, 2011, the date on which the Dodd-Frank Act becomes effective. 
While the Commission believes there will be approximately 200 swap 
dealers and 50 major swap participants, it has taken a conservative 
approach, for PRA purposes, in estimating that there will be a combined 
number of 300 swap dealers and major swap participants who will be 
required to comply with the recordkeeping requirements of the proposed 
rules. The Commission estimated the number of affected entities based 
on industry data.
    According to recent Bureau of Labor Statistics, the mean hourly 
wage of an employee under occupation code 11-3031, ``Financial 
Managers,'' (which includes operations managers) that is employed by 
the ``Securities and Commodity Contracts Intermediation

[[Page 45728]]

and Brokerage'' industry is $74.41.\16\ Because swap dealers, major 
swap participants, and futures commission merchants include large 
financial institutions whose operations management employees' salaries 
may exceed the mean wage, the Commission has estimated the cost burden 
of these proposed regulations based upon an average salary of $100 per 
hour.
---------------------------------------------------------------------------

    \16\ http://www.bls.gov/oes/current/oes113031.htm.
---------------------------------------------------------------------------

    Accordingly, the estimated hour burden was calculated as follows: 
Developing and Conducting Position Risk Management Procedures for Swap 
Dealers and Major Swap Participants. This hourly burden arises from the 
proposed requirement that swap dealers and major swap participants 
establish and perform testing of clearing member risk management 
procedures.
    Number of registrants: 300.
    Frequency of collection: Daily.
    Estimated number of responses per registrant: 252 [252 trading 
days].
    Estimated aggregate number of responses: 75,600 [300 registrants x 
252 trading days].
    Estimated annual burden per registrant: 504 hours [252 trading days 
x 2 hours per record].
    Estimated aggregate annual hour burden: 151,200 hours [300 
registrants x 252 trading days x 2 hours per record].
    Developing Written Procedures for Compliance, and Maintaining 
Records Documenting Compliance for Swap Dealers and Major Swap 
Participants. This hourly burden arises from the proposed requirement 
that swap dealers and major swap participants make and maintain records 
documenting compliance related to clearing member risk management.
    Number of registrants: 300.
    Frequency of collection: As needed.
    Estimated number of annual responses per registrant: 1.
    Estimated aggregate number of annual responses: 300.
    Estimated annual hour burden per registrant: 20 hours.
    Estimated aggregate annual hour burden: 6,000 burden hours [300 
registrants x 20 hours per registrant].
    Developing and Conducting Position Risk Management Procedures for 
Futures Commission Merchants: This hourly burden arises from the 
proposed requirement that futures commission merchants establish and 
perform testing of clearing member risk management procedures.
    Number of registrants: 134.
    Frequency of collection: Daily.
    Estimated number of responses per registrant: 252 [252 trading 
days].
    Estimated aggregate number of responses: 33,768 [134 registrants x 
252 trading days].
    Estimated annual burden per registrant: 504 hours [252 trading days 
x 2 hours per record].
    Estimated aggregate annual hour burden: 67,536 hours [134 
registrants x 252 trading days x 2 hours per record].
    Developing Written Procedures for Compliance, and Maintaining 
Records Documenting Compliance for Futures Commission Merchants. This 
hourly burden arises from the proposed requirement that futures 
commission merchants make and maintain records documenting compliance 
related to clearing member risk management.
    Number of registrants: 134.
    Frequency of collection: As needed.
    Estimated number of annual responses per registrant: 1.
    Estimated aggregate number of annual responses: 134.
    Estimated annual hour burden per registrant: 20 hours.
    Estimated aggregate annual hour burden: 2,680 burden hours [134 
registrants x 20 hours per registrant].
    Based upon the above, the aggregate hour burden cost for all 
registrants is 227,416 burden hours and $22,741,600 [227,416 x $100 per 
hour].
    In addition to the per hour burden discussed above, the Commission 
anticipates that swap dealers, major swap participants, and futures 
commission merchants may incur certain start-up costs in connection 
with the proposed recordkeeping obligations. Such costs would include 
the expenditures related to re-programming or updating existing 
recordkeeping technology and systems to enable the swap dealer, major 
swap participant, or futures commission merchant to collect, capture, 
process, maintain, and re-produce any newly required records. The 
Commission believes that swap dealers, major swap participants, and 
futures commission merchants generally could adapt their current 
infrastructure to accommodate the new or amended technology and thus no 
significant infrastructure expenditures would be needed. The Commission 
estimates the programming burden hours associated with technology 
improvements to be 60 hours.
    According to recent Bureau of Labor Statistics, the mean hourly 
wages of computer programmers under occupation code 15-1021 and 
computer software engineers under program codes 15-1031 and 1032 are 
between $34.10 and $44.94.\17\ Because swap dealers, major swap 
participants, and futures commission merchants generally will be large 
entities that may engage employees with wages above the mean, the 
Commission has conservatively chosen to use a mean hourly programming 
wage of $60 per hour. Accordingly, the start-up burden associated with 
the required technological improvements would be $3,600 [$60 x 60 
hours] per affected registrant or $1,562,400 [$3,600 x 434 registrants] 
in the aggregate.
---------------------------------------------------------------------------

    \17\ http://www.bls.gov/oes/current/oes113031.htm.
---------------------------------------------------------------------------

2. Information Collection Comments
    The Commission invites the public and other federal agencies to 
comment on any aspect of the recordkeeping burdens discussed above. 
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments 
in order to: (i) Evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information will have practical 
utility; (ii) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information; (iii) determine 
whether there are ways to enhance the quality, utility, and clarity of 
the information to be collected; and (iv) minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at 
OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy 
of submitted comments so that all comments can be summarized and 
addressed in the final rule preamble. Refer to the Addresses section of 
this notice of proposed rulemaking for comment submission instructions 
to the Commission. A copy of the supporting statements for the 
collection of information discussed above may be obtained by visiting 
http://www.RegInfo.gov. OMB is required to make a decision concerning 
the collection of information between 30 and 60 days after publication 
of this document in the Federal Register. Therefore, a comment is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.

C. Consideration of Costs and Benefits Under Section 15(a) of the CEA

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its action before promulgating a regulation under 
the CEA. Section 15(a) of the CEA specifies

[[Page 45729]]

that costs and benefits shall be evaluated in light of five broad areas 
of market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
may in its discretion give greater weight to any one of the five 
enumerated areas and could in its discretion determine that, 
notwithstanding its costs, a particular order is necessary or 
appropriate to protect the public interest or to effectuate any of the 
provisions or to accomplish any of the purposes of the CEA.
    The proposed rules involve risk management for cleared trades by 
futures commission merchants, swap dealers, and major swap participants 
that Are clearing members. The discussion below will consider the 
proposed rule in light of each section 15(a) concerns.

Position Risk Management for Cleared Trades by Futures Commission 
Merchants, Swap Dealers, and Major Swap Participants That Are Clearing 
Members

    The Commission is proposing regulations that would require FCMs, 
SDs, and MSPs to put into place certain risk management procedures.

1. Protection of Market Participants

    Good risk management practices among FCMs, SDs, and MSPs help 
insulate DCOs from financial distress. Moreover, while the rule calls 
for standard risk mitigation measures, it allows FCMs, SDs, and MSPs to 
use diverse techniques to implement those measures. This makes it less 
likely that multiple FCMs, SDs, and MSPs would be exposed to identical 
blind spots during unexpected market developments.
    As far as costs are concerned, regular testing of various systems 
and financial positions requires significant personnel hours and 
potentially the services of external vendors. The requirement that 
records be created and maintained may impose costs on FCMs, SDs, and 
MSPs. The Commission believes that some costs might only be incremental 
because it believes that well-managed firms would generally already 
create and maintain records of this type.

2. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets

    The integrity of the markets is enhanced with the certainty that 
the customer's counterparties (i.e., FCMs, SDs, and MSPs, as well as 
DCOs) are more likely to remain solvent during strenuous financial 
conditions.
    As for the costs related to this rule, rigorous stress tests may 
encourage conservative margin requirements that reduce customers' 
ability to leverage their positions. Also, higher costs associated with 
maintaining more stringent risk management practices will ultimately be 
passed along to customers, likely in the form of larger spreads, which 
may reduce the liquidity and efficiency of the market. However, more 
conservative margin requirements and stringent risk management 
practices will also help reduce systemic risk thereby protecting the 
integrity of the financial system as a whole.

3. Sound Risk Management Practices

    The rule extends the range of parties responsible for rigorous risk 
management practices which promotes further stability of the entire 
financial system. However, as mentioned previously, risk management 
systems can be costly to implement. The Commission does not know at 
this time, and requests comment on, how many parties will need to 
upgrade their systems, if any. Additionally, the Commission requests 
comment from the public as to what the costs might be to upgrade 
existing systems or install new systems to comply with the proposed 
regulation.

4. Other Public Interest Considerations

    Requiring a significant investment in risk mitigation structures 
and procedures by all FCMs, SDs, and MSPs increases the number of 
entities committing time and resources to development of new techniques 
that have the potential to advance the practice across the entire 
industry. Such measures contribute to the overall stability of our 
global financial system.

List of Subjects

17 CFR Part 1

    Conflicts of interest, Futures commission merchants, Major swap 
participants, Swap dealers.

17 CFR Part 23

    Conflicts of interests, Futures commission merchants, Major swap 
participants, Swap dealers.

    In light of the foregoing, the Commission hereby proposes to amend 
Part 1, and Part 23, as proposed to be added at 75 FR 71390, November 
23, 2010, and further amended at 75 FR 81530, December 28, 2010, of 
Title 17 of the Code of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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

    Authority:  7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 
6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 
8, 9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as 
amended by Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

    2. Add Sec.  1.73 to part 1 to read as follows:

Sec.  1.73  Clearing futures commission merchant risk management.

    (a) Each futures commission merchant that is a clearing member of a 
derivatives clearing organization shall:
    (1) Establish risk-based limits in the proprietary account and in 
each customer account based on position size, order size, margin 
requirements, or similar factors;
    (2) Use automated means to screen orders for compliance with the 
risk-based limits;
    (3) Monitor for adherence to the risk-based limits intra-day and 
overnight;
    (4) Conduct stress tests of all positions in the proprietary 
account and in each customer account that could pose material risk to 
the futures commission merchant at least once per week;
    (5) Evaluate its ability to meet initial margin requirements at 
least once per week;
    (6) Evaluate its ability to meet variation margin requirements in 
cash at least once per week;
    (7) Evaluate its ability to liquidate, in an orderly manner, the 
positions in the proprietary and customer accounts and estimate the 
cost of the liquidation at least once per month; and
    (8) Test all lines of credit at least once per quarter.
    (b) Each futures commission merchant that is a clearing member of a 
derivatives clearing organization shall:
    (1) Establish written procedures to comply with this regulation; 
and
    (2) Keep full, complete, and systematic records documenting its 
compliance with this regulation.

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

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

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

    4. Add Sec.  23.609 to part 23, subpart J, to read as follows:

[[Page 45730]]

Sec.  23.609  Clearing member risk management.

    (a) With respect to clearing activities in futures, security 
futures products, swaps, agreements, contracts, or transactions 
described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act, 
commodity options authorized under section 4c of the Act, or leveraged 
transactions authorized under section 19 of the Act, each swap dealer 
or major swap participant that is a clearing member of a derivatives 
clearing organization shall:
    (1) Establish risk-based limits based on position size, order size, 
margin requirements, or similar factors;
    (2) Use automated means to screen orders for compliance with the 
risk-based limits;
    (3) Monitor for adherence to the risk-based limits intra-day and 
overnight;
    (4) Conduct stress tests of all positions at least once per week;
    (5) Evaluate its ability to meet initial margin requirements at 
least once per week;
    (6) Evaluate its ability to meet variation margin requirements in 
cash at least once per week;
    (7) Test all lines of credit at least once per quarter; and
    (8) Evaluate its ability to liquidate the positions it clears in an 
orderly manner, and estimate the cost of the liquidation.
    (b) Each swap dealer or major swap participant that is a clearing 
member of a derivatives clearing organization shall:
    (1) Establish written procedures to comply with this regulation; 
and
    (2) Keep full, complete, and systematic records documenting its 
compliance with this regulation.

    Issued in Washington, DC, on July 19, 2011, by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Clearing Member Risk Management--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 Dunn and 
Chilton voted in the affirmative; Commissioners O'Malia and Sommers 
voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rulemaking for enhanced risk management 
for clearing members. One of the primary goals of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act was to reduce the 
risk that swaps pose to the economy. The proposed rule would require 
clearing members, including swap dealers, major swap participants 
and futures commission merchants to establish risk-based limits on 
their house and customer accounts. The proposed rule also would 
require clearing members to establish procedures to, amongst other 
provisions, evaluate their ability to meet margin requirements, as 
well as liquidate positions as needed. These risk filters and 
procedures would help secure the financial integrity of the markets 
and the clearing system and protect customer funds.

[FR Doc. 2011-19362 Filed 7-29-11; 8:45 am]
BILLING CODE 6351-01-P
```