21278 Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 

1See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). 

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

3 Derivatives Clearing Organization General 

Provisions and Core Principles, 76 FR 69334 (Nov. 

8, 2011). 

4Customer Clearing Documentation and Timing 

of Acceptance for Clearing, 76 FR 45730 (Aug. 1, 

2011). 

5Requirements for Processing, Clearing, and 

Transfer of Customer Positions, 76 FR 13101 (Mar. 

10, 2011). 

6Clearing Member Risk Management, 76 FR 

45724 (Aug. 1, 2011). 

7Adaption of Regulations to Incorporate Swaps, 

76 FR 33066 (Jun. 7, 2011). 

8See 76 FR 45730 (Aug. 1, 2011). 

9See 76 FR 13101 (Mar. 10, 2011). 

10See 76 FR 45724 (Aug. 1, 2011). 

11See 76 FR 33066 (Jun. 6, 2011). 

12See 76 FR 45730 at 45731, Aug. 1, 2011. 

13See http://www.futuresindustry.org/downloads/ 

ClearedDerivativesExecutionAgreement_June

142001.pdf. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 23, 37, 38, and 39 

RIN 3038–0092, –0094 

Customer Clearing Documentation, 

Timing of Acceptance for Clearing, and 

Clearing Member Risk Management 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is adopting rules to implement 

new statutory provisions enacted by 

Title VII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. 

These rules address: The documentation 

between a customer and a futures 

commission merchant that clears on 

behalf of the customer; the timing of 

acceptance or rejection of trades for 

clearing by derivatives clearing 

organizations and clearing members; 

and the risk management procedures of 

futures commission merchants, swap 

dealers, and major swap participants 

that are clearing members. The rules are 

designed to increase customer access to 

clearing, to facilitate the timely 

processing of trades, and to strengthen 

risk management at the clearing member 

level. 

DATES: This rule will become effective 

October 1, 2012. 

FOR FURTHER INFORMATION CONTACT: John 

C. Lawton, Deputy Director, 202–418– 

5480, jlawton@cftc.gov, and Christopher 

A. Hower, Attorney-Advisor, 202–418– 

6703, chower@cftc.gov, Division of 

Clearing and Risk, and Camden Nunery, 

Economist, 202–418–5723, Office of the 

Chief Economist, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581; and Hugh J. 

Rooney, Assistant Director, 312–596– 

0574, hrooney@cftc.gov, Division of 

Clearing and Risk, Commodity Futures 

Trading Commission, 525 West Monroe 

Street, Chicago, Illinois 60661. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

II. Customer Clearing Documentation 

A. Introduction 

B. Summary of Comments 

C. Discussion 

III. Time Frames for Acceptance Into Clearing 

A. Swap Dealer and Major Swap 

Participant Submission of Trades 

B. Swap Execution Facility and Designated 

Contract Market Processing of Trades 

C. Clearing Member and Clearing 

Organization Acceptance for Clearing 

D. Post-Trade Allocation of Bunched 

Orders 

IV. Clearing Member Risk Management 

A. Introduction 

B. Components of the Rule 

V. Effective Dates 

A. Summary of Comments 

B. Discussion 

VI. Consideration of Costs and Benefits 

VII. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

I. Background 

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(‘‘Dodd-Frank Act’’).1 Title VII of the 

Dodd-Frank Act amended the 

Commodity Exchange Act (‘‘CEA’’ or 

‘‘Act’’) 2 to establish a comprehensive 

new regulatory framework for swaps. 

The legislation was enacted to reduce 

risk, increase transparency, and promote 

market integrity within the financial 

system by, among other things: (1) 

Providing for the registration and 

comprehensive regulation of swap 

dealers and major swap participants; (2) 

imposing clearing and trade execution 

requirements on standardized derivative 

products; (3) creating 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 

regulatory framework for security-based 

swaps under the authority of the 

Securities and Exchange Commission 

(‘‘SEC’’). 

A fundamental premise of the DoddFrank Act is that the use of properly 

regulated central clearing can reduce 

systemic risk. Another tenet of the 

Dodd-Frank Act is that open access to 

clearing by market participants will 

increase market transparency and 

promote market efficiency by enabling 

market participants to reduce 

counterparty risk and by facilitating the 

offset of open positions. The 

Commission has adopted extensive 

regulations addressing open access and 

risk management at the derivatives 

clearing organization (‘‘DCO’’) level.3

Clearing members provide the portals 

through which market participants gain 

access to DCOs. Clearing members also 

provide the first line of risk 

management. Accordingly, in three 

related rulemakings, the Commission 

proposed regulations to increase 

customer access to clearing,4 to facilitate 

the timely processing of trades,5 and to 

strengthen risk management at the 

clearing member level.6 In addition, in 

a fourth rulemaking, the Commission 

proposed regulations relating to the 

allocation of bunched orders.7 The 

Commission is issuing final rules in 

each of these areas. 

More specifically, the regulations 

contained in this Adopting Release were 

proposed in four separate notices of 

proposed rulemaking (‘‘NPRMs’’). 

Sections 1.72, 1.74, 23.608, 23.610, 

39.12(a)(1)(iv), and 39.12(b)(7) were 

proposed in Customer Clearing 

Documentation and Timing of 

Acceptance for Clearing,8 sections 

23.506, 37.702(b), and 38.601(b) were 

proposed in Requirements for 

Processing, Clearing, and Transfer of 

Customer Positions,9 sections 1.73 and 

23.609 were proposed in Clearing 

Futures Commission Merchant Risk 

Management,10 and 1.35(a–1)(5)(iv) was 

proposed in Adaptation of Regulations 

to Incorporate Swaps.11 The 

Commission is finalizing the rules 

contained in this Adopting Release 

together because they address three 

overarching, closely-connected aims: (1) 

Non-discriminatory access to 

counterparties and clearing; (2) straightthrough processing; and (3) effective 

risk management among clearing 

members. Each of these provides 

substantial benefits for the markets and 

market participants. 

II. Customer Clearing Documentation 

A. Introduction 

As discussed in the notice of 

proposed rulemaking,12 industry groups 

have developed a template for use by 

swap market participants in negotiating 

execution-related agreements with 

counterparties to swaps that are 

intended to be cleared.13 The template 


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Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 21279 

14 Id. at 45732. 

15Comment files for each proposed rulemaking 

can be found on the Commission Web site, 

www.cftc.gov. Commenters include: Chris Barnard 

(‘‘Barnard’’); MarkitSERV (‘‘Markit’’); Swaps & 

Derivatives Market Association (‘‘SDMA’’); Better 

Markets; IntercontinentalExchange, Inc. (‘‘ICE’’); 

ISDA FIA (‘‘ISDA’’); The Alternative Investment 

Management Association Ltd. (‘‘AIMA’’); CME 

Group Inc. (‘‘CME’’); Morgan Stanley; Edison 

Electric Institute (‘‘EEI’’); State Street Corporation 

(‘‘State Street’’); New York Portfolio Clearing 

(‘‘NYPC’’); Asset Management Group of the 

Securities Industry and Financial Markets 

Association (‘‘SIFMA’’); Vanguard; 

AllianceBernstein L.P. (‘‘Alliance Bernstein’’); 

Minneapolis Grain Exchange, Inc. (‘‘MGEX’’); 

Atlantic Trading USA LLC; Belvedere Trading; 

Bluefin Trading, LLC; Chopper Trading LLC; CTC 

Trading Group, LLC; DRW Holdings, LLC; Eagle 

Seven, LLC; Endeavor Trading, LLC; Flow Traders 

US LLC; Geneva Trading USA, LLC; GETCO; Hard 

Eight Futures; HTG Capital Partners; IMC Financial 

Markets; Infinium Capital Management LLC; Kottke 

Associates, LLC; Marquette Partners, LP; Nico 

Holdings LLC; Optiver US LLC; RGM Advisors, 

LLC; Templar Securities, LLC; Tower Research 

Capital LLC; TradeForecaster Global Markets LLC; 

Traditum Group, LLC; WH Trading LLC; XR 

Trading LLC (‘‘Trading Firms’’); Managed Funds 

Association (‘‘MFA’’); Arbor Research & Trading 

Inc. (‘‘Arbor’’); Eris Exchange (‘‘Eris’’); ICI; DRW 

Trading Group (‘‘DRW’’); Spring Trading, Inc. 

(‘‘Spring Trading’’); Javelin Capital Markets, LLC 

(‘‘Javelin’’); The Committee on Investment of 

Employee Benefit Assets (‘‘CIEBA’’); Citadel LLC 

(‘‘Citadel’’); Vizier Ltd. (‘‘Vizier’’); Federal Home 

Loan Banks (‘‘FHLB’’); Jefferies & Company, Inc. 

(‘‘Jeffries’’); UBS Securities LLC (‘‘UBS’’); Wells 

Fargo Securities (‘‘WF’’); LCH.Clearnet Group 

Limited (‘‘LCH’’); D. E. Shaw group (‘‘D. E. Shaw’’); 

Bank of America, Merrill Lynch, BNP Paribas, Citi, 

Credit Suisse Securities (USA) LLC, Deutsche Bank 

AG, Goldman Sachs, HSBC, J.P. Morgan, Morgan 

Stanley (‘‘Banks’’); Deutsche Bank (‘‘DB’’); Societe 

Generale (‘‘SG’’); The Association of Institutional 

Investors (‘‘AII’’); and The Committee on Capital 

Markets Regulation (‘‘Committee’’). 

16AII, AIMA, AllianceBernstein, Arbor, Better 

Markets, Barnard, CIEBA, Citadel, CME, D. E. Shaw, 

DRW, Eris, FHLB, ICE, ICI, Javelin, Jeffries, LCH, 

Markit, MFA, MGEX, NYPC, SDMA, SIFMA, Spring 

Trading, State Street, Trading Firms, Vanguard, 

Vizier, and WF. 

17 DB, ISDA, SG, UBS, Morgan Stanley, the Banks, 

EEI, and the Committee. 

18AIMA, Javelin, SG, SIFMA, Spring Trading, 

and Vanguard. 

19 Vanguard. 

20Banks, DB, EEI, ISDA, Morgan Stanley, SG, and 

UBS. 

includes optional annexes that make the 

clearing member to one or both of the 

executing parties a party to the 

agreement (the trilateral agreements). 

The trilateral agreements contain 

provisions that would permit a 

customer’s futures commission 

merchant (‘‘FCM’’), in consultation with 

the swap dealer (‘‘SD’’) that is the 

customer’s counterparty, to establish 

specific credit limits for the customer’s 

swap transactions with the SD. The 

provisions further provide that the FCM 

will only accept for clearing those 

transactions that fall within these 

specific limits. The limits set for trades 

with the SD or MSP might be less than 

the overall limits set for the customer 

for all trades cleared through the FCM. 

The result would be to create a 

‘‘sublimit’’ for the customer when 

trading with that SD or MSP. 

When a trade is rejected for clearing, 

the parties to that trade may incur 

significant costs. As the clearing of 

swaps increases pursuant to the DoddFrank Act, the likelihood and size of 

such potential costs could also increase, 

according to the proponents of the 

trilateral agreements. The trilateral 

agreements were intended to limit these 

potential costs. 

The Commission expressed concern 

in the notice of proposed rulemaking 

that such arrangements potentially 

conflict with the concepts of open 

access to clearing and competitive 

execution of transactions.14 To address 

these concerns and to provide further 

clarity in this area, the Commission 

proposed § 1.72 relating to FCMs, 

§ 23.608 relating to SDs and MSPs, and 

§ 39.12(a)(1)(vi) relating to DCOs. These 

regulations would prohibit 

arrangements involving FCMs, SDs, 

MSPs, or DCOs that would (a) disclose 

to an FCM, SD, or MSP the identity of 

a customer’s original executing 

counterparty; (b) limit the number of 

counterparties with whom a customer 

may enter into a trade; (c) restrict the 

size of the position a customer may take 

with any individual counterparty, apart 

from an overall credit limit for all 

positions held by the customer at the 

FCM; (d) impair a customer’s access to 

execution of a trade on terms that have 

a reasonable relationship to the best 

terms available; or (e) prevent 

compliance with specified time frames 

for acceptance of trades into clearing. 

B. Summary of Comments 

The Commission received a total of 38 

comment letters directed specifically at 

the proposed documentation rules.15 Of 

the 38 commenters, 30 supported the 

proposed rules.16 They included asset 

managers, market makers, trading 

platforms, clearing organizations, bank/ 

dealers, a non-profit organization, and a 

private citizen. Within this group, some 

commenters addressed only certain 

aspects of the rules and were silent on 

other sections and some requested 

clarification of certain provisions. 

Eight commenters expressed 

opposition.17 They include bank/ 

dealers, an association of electric 

utilities, and an asset manager. Within 

this group as well, some commenters 

addressed only certain aspects of the 

rules and were silent on other sections 

and some requested clarification of 

certain provisions. 

Three commenters in support—Arbor, 

Citadel, and Eris—urged the 

Commission to make these rules a top 

priority in the final rulemaking process. 

Numerous commenters stated that the 

proposed rules would increase open 

access to clearing and execution, reduce 

risk, foster competition, lower costs, and 

increase transparency. FHLB expressed 

the view that the proposed rules will 

facilitate the transition to central 

clearing. Barnard and Vanguard asserted 

that the proposed rules will prevent 

conflicts of interest, and achieve clear 

walls between clearing and trading 

activities involving FCMs and affiliates. 

Six commenters went into detail why 

the trilateral agreements are bad for the 

markets, noting that such agreements 

discourage competition and efficient 

pricing, compromise anonymity, reduce 

liquidity, increase the time between 

execution and clearing, introduce 

conflicts of interest, and prevent the 

success of swap execution facilities 

(‘‘SEFs’’).18 SDMA commented that 

while ‘‘the SDMA is philosophically 

loathe to encourage possible 

government [interference] with private 

contracts between two parties,’’ the 

proposed rules are necessary in their 

entirety in this instance, and that the 

proposed rules are not overly 

prescriptive. Vanguard, estimated that if 

it was required to enter into trilateral 

agreements, it would have to negotiate 

approximately 4,800 new trilateral 

agreements per year.19

Seven commenters in opposition 

contended that without the trilateral 

agreements, some market participants 

may have reduced access to markets.20

(ISDA and the Committee did not 

address this issue.) They asserted that 

the trilateral agreements facilitate risk 

management and certainty of execution. 

DB believes that the trilateral 

agreements provide a means of ensuring 

compliance with mandatory clearing. 

DB also commented that if an SD does 

not know whether a swap will be 

cleared prior to execution, it will not 

know whether it should apply risk 

filters that take account of the swap as 

a cleared transaction or a bilateral one. 

SG commented that the rules will 

decrease liquidity and limit market 

participation, and that without the 

certainty of trilateral agreements, the 

rules may foster competing and 

inconsistent technology. 

UBS believes that potential abuse of 

credit arrangements could be more 

narrowly tailored than the proposed 

rule. The Banks asserted that the credit 

filter infrastructure necessary to 


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21280 Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 

21 ‘‘Swap Dealer and Major Swap Participant 

Recordkeeping and Reporting, Duties, and Conflicts 

of Interest Policies and Procedures; Futures 

Commission Merchant and Introducing Broker 

Conflicts of Interest Policies and Procedures; Swap 

Dealer, Major Swap Participant, and Futures 

Commission Merchant Chief Compliance Officer,’’ 

available at http://www.cftc.gov/LawRegulation/ 

DoddFrankAct/Rulemakings/ 

DF_4_BusConductStandardsInternal/ssLINK/ 

federalregister022312b. 

22 Id. 

23 76 FR 69334, Nov. 8, 2011. 

maximize execution choice for 

customers while ensuring prudent risk 

management is not currently available. 

The Banks suggested that instead of 

prohibiting the trilateral agreements, the 

Commission could require that the 

allocation of credit limits across 

executing counterparties be specified by 

the customer, rather than the FCM, who 

would confirm the customer’s allocation 

to the identified executing 

counterparties. 

Morgan Stanley requested 

clarification that the proposed rules 

only apply to arrangements between 

clearing firms and executing swap 

dealers and customers with respect to 

swaps, not futures. Morgan Stanley also 

commented that the Commission should 

alter the language in proposed § 1.72 

and § 23.608 from ‘‘relationship to the 

best terms available’’ to ‘‘execution with 

an executing swap dealer of the 

customer’s choice.’’ 

Spring Trading requested clarification 

that ‘‘on terms that have a reasonable 

relationship to the best terms available’’ 

refers to the best terms available on any 

market regulated by the Commission, 

which would prohibit an FCM from 

establishing special hurdles for its 

clearing customers in order to trade on 

a particular SEF. 

C. Discussion 

The Commission found persuasive the 

comments stating that the proposed 

rules would increase open access to 

clearing and execution, reduce risk, 

foster competition, lower costs, and 

increase transparency. The 

Commmission notes that cleared futures 

markets have operated for decades 

without any need for the types of 

provisions prohibited by the rules. 

Similarly, trades executed over-thecounter (‘‘OTC’’) have been successfully 

cleared by CME and ICE on behalf of 

customers for approximately ten years 

without such provisions. 

Specifically, the Commission believes 

that, as discussed by numerous 

commenters, (1) disclosure of a 

customer’s original executing 

counterparty could have potentially 

anticompetitive effects, (2) limiting the 

number of counterparties would hurt 

the customer’s access to the best price 

as well as general market liquidity, (3) 

restricting the size of trades with 

particular counterparties also would 

hurt the customer’s access to the best 

price as well as general market liquidity, 

and (4) restrictions on the number of 

counterparties and on the size of trades 

with them would slow down acceptance 

for clearing thereby causing the very 

problem the restrictions were 

purportedly designed to address. 

The Commission believes that the 

risks the trilateral agreements were 

designed to address can be mitigated by 

other means without incurring the 

negative consequences described above. 

Specifically, the processing rules 

described in section III. below and the 

risk management rules described in 

section IV. below would significantly 

diminish the exposure of dealers, their 

counterparties, and their respective 

FCMs to risk. 

Moreover, the Commission notes that 

there are several sections of the CEA 

and Commission regulations that 

support the premise underlying these 

final rules. Section 4d(c) of the CEA, as 

amended by the Dodd-Frank Act, directs 

the Commission to require FCMs to 

implement conflict of interest 

procedures that address such issues the 

Commission determines to be 

appropriate. Similarly, section 4s(j)(5), 

as added by the Dodd-Frank Act, 

requires SDs and MSPs to implement 

conflict of interest procedures that 

address such issues the Commission 

determines to be appropriate. Section 

4s(j)(5) also requires SDs and MSPs to 

ensure that any persons providing 

clearing activities or making 

determinations as to accepting clearing 

customers are separated by appropriate 

informational partitions from persons 

whose involvement in pricing, trading, 

or clearing activities might bias their 

judgment or contravene the core 

principle of open access. 

Pursuant to these provisions, the 

Commission promulgated § 1.71(d) 

relating to FCMs and § 23.605(d) 

relating to SDs and MSPs.21 These 

regulations prohibit SDs and MSPs from 

interfering or attempting to influence 

the decisions of affiliated FCMs with 

regard to the provision of clearing 

services and activities, and prohibit 

FCMs from permitting them to do so. 

Section 4s(j)(6) of the CEA prohibits 

an SD or MSP from adopting any 

process or taking any action that results 

in any unreasonable restraint on trade or 

imposes any material anticompetitive 

burden on trading or clearing, unless 

necessary or appropriate to achieve the 

purposes of the Act. To implement 

Section 4s(j)(6) of the CEA, the 

Commission has promulgated § 23.607 

in a separate rulemaking.22

Section 2(h)(1)(B)(ii) of the CEA 

requires that DCO rules provide for the 

non-discriminatory clearing of swaps 

executed bilaterally or through an 

unaffiliated designated contract market 

(‘‘DCM’’) or SEF. The Commission has 

adopted § 39.12(b)(3) to implement this 

provision.23

The trilateral agreements potentially 

conflict with the recently-adopted 

§§ 1.71(d), 23.605(d), 23.607, and 39.12. 

As certain commenters have stated, the 

provisions of the trilateral agreements 

described above could lead to undue 

influence by FCMs on a customer’s 

choice of counterparties or undue 

influence by SDs on a customer’s choice 

of clearing member. They could 

constrain a customer’s opportunity to 

obtain competitive execution of the 

trade by limiting the number of 

potential counterparties. 

The documentation rules covered by 

this rulemaking are consistent with, and 

complementary to, the recently adopted 

rules. The rules in this Federal Register 

release address specific circumstances 

that have been identified to the 

Commission by market participants, 

while the previously adopted rules set 

forth more general principles. The 

Commission believes that, in this case, 

market participants and the general 

public would be best served by 

providing both the clarity of a brightline test for certain identifiable 

situations and the guidance of more 

broadly-articulated principles. 

Contrary to the assertion of some 

commenters, the rules do not prohibit 

trilateral agreements; they prohibit 

certain provisions whether contained in 

a trilateral or a bilateral agreement. The 

rules have been tailored to address 

specific issues identified by market 

participants. 

The Commission emphasizes that 

nothing in these rules would restrain an 

SD or MSP from establishing bilateral 

limits with each of its counterparties. 

Further, nothing in these rules would 

impair an SD’s or MSP’s ability to 

conduct due diligence with regard to 

each of its counterparties, including 

evaluation of balance sheet, credit 

ratings, overall market exposure, or 

similar factors. 

The Commission is revising the 

language in §§ 23.608 and 23.608(c) to 

clarify that, for swaps that will be 

submitted for clearing, an SD or MSP 

may continue to manage its risk by 

limiting its exposure to the counterparty 

with whom it is trading. This 


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24 ISDA. 

25The Commission notes that this rule does not 

impose a best execution requirement. This rule 

merely prohibits a contractual provision that would 

impair a customer’s access to execution of a trade 

on terms that have a reasonable relationship to the 

best terms available. 

26 7 U.S.C. 12a(5). 

27The Commission notes that it is not expressing 

an opinion at this time as to whether a mandatory 

clearing determination must be made in 

conjunction with a mandatory trading 

determination. 

clarification is intended to emphasize 

that SDs and MSPs may continue to 

conduct appropriate risk management 

exercises. Moreover, the Commission 

believes that this modification is 

responsive to the concern raised by 

some commenters that until straight 

through processing is achieved, SDs and 

MSPs will still need to manage risk to 

a counterparty before a trade is accepted 

or rejected for clearing.24 Furthermore, 

the Commission also believes that 

§ 23.608 does not preclude an SD or 

MSP from requiring that a counterparty 

confirm that the counterparty has an 

account with an FCM through which the 

counterparty will clear. 

In response to the Morgan Stanley 

request for clarification, the 

Commission confirms that the rules, as 

drafted, only apply to swaps. As noted, 

similar provisions have never been 

needed and, therefore, were not 

proposed for futures. 

The Commission has determined not 

to modify the language in §§ 1.72 and 

23.608 as suggested by Morgan Stanley 

from ‘‘relationship to the best terms 

available’’ to ‘‘execution with an 

executing swap dealer of the customer’s 

choice.’’ The rule should not imply that 

customers may only trade with swap 

dealers. Moreover, some swap markets 

operate anonymous central limit order 

books. In these instances, the 

counterparty is immaterial; trading 

decisions are based on solely the terms 

of the trade. 

The Commission also has determined 

not to adopt the clarification suggested 

by Spring Trading. Requiring execution 

on the best terms available on any 

market regulated by the Commission 

could impose burdensome search 

costs.25 Moreover, there could be 

operational costs in establishing 

connectivity to every market. It is not 

clear how many markets there will be or 

how compatible their systems will be 

with one another or with the systems of 

all FCMs and SDs. Upon review of the 

comments, the Commission is adopting 

§§ 1.72, and 39.12(a)(1)(vi) as proposed, 

and § 23.608 with the modification 

described above. 

III. Time Frames for Acceptance Into 

Clearing 

A. Swap Dealer and Major Swap 

Participant Submission of Trades 

1. Introduction 

Section 731 of the Dodd-Frank Act 

amended the CEA by adding a new 

section 4s, which sets forth a number of 

requirements for SDs and MSPs. 

Specifically, section 4s(i) of the CEA 

establishes swap documentation 

standards for those registrants. Section 

4s(i) requires SDs and MSPs to 

‘‘conform with such standards as may 

be prescribed by the Commission by 

rule or regulation that relate to timely 

and accurate confirmation, processing, 

netting, documentation, and valuation 

of all swaps.’’ Section 8a(5) of the CEA 

authorizes the Commission to 

promulgate such regulations as, in the 

judgment of the Commission, are 

reasonably necessary to effectuate any of 

the provisions or to accomplish any of 

the purposes of the Act.26 Pursuant to 

these provisions, and in order to ensure 

compliance with any mandatory 

clearing requirement issued pursuant to 

section 2(h)(1) of the CEA and to 

promote the mitigation of counterparty 

credit risk through the use of central 

clearing, the Commission proposed 

§ 23.506. 

As proposed, § 23.506(a)(1) would 

require that SDs and MSPs have the 

ability to route swaps that are not 

executed on a SEF or DCM to a DCO in 

a manner that is acceptable to the DCO 

for the purposes of risk management. 

Under § 23.506(a)(2), as proposed, SDs 

and MSPs would also be required to 

coordinate with DCOs to facilitate 

prompt and efficient processing in 

accordance with proposed regulations 

related to the timing of clearing by 

DCOs. 

As proposed, § 23.506(b) would set 

forth timing requirements for submitting 

swaps to DCOs in those instances where 

the swap is subject to a clearing 

mandate and in those instances when a 

swap is not subject to a mandate. Under 

§ 23.506(b)(1), as proposed, an SD or 

MSP would be required to submit a 

swap that is not executed on a SEF or 

DCM, but is subject to a clearing 

mandate under section 2(h)(1) of the 

CEA (and has not been electively 

excepted from mandatory clearing by an 

end user under section 2(h)(7) of the 

CEA) as soon as technologically 

practicable following execution of the 

swap, but no later than the close of 

business on the day of execution.27

For those swaps that are not subject 

to a clearing mandate, but for which 

both counterparties to the swap have 

elected to clear the swap, under 

§ 23.506(b)(2), as proposed, the SD or 

MSP would be required to submit the 

swap for clearing not later than the next 

business day after execution of the 

swap, or the agreement to clear, if later 

than execution. This time frame reflects 

the possibility that in the case of a 

bilateral swap, the parties may need 

time to agree to terms that would 

conform with a DCO’s requirements for 

swaps it will accept for clearing. As 

noted previously, any delay between 

execution and novation to a 

clearinghouse potentially presents 

credit risk to the swap counterparties 

and the DCO because the value of the 

position may change significantly 

between the time of execution and the 

time of novation, thereby allowing 

financial exposure to accumulate in the 

absence of daily mark-to-market. The 

proposed regulation was designed to 

limit this delay as much as reasonably 

possible. 

2. Summary of Comments 

MFA generally supported proposed 

§§ 23.506(a) and 23.506(b). 

CME commented that the regulations 

should not require any particular system 

or methodology that SDs or MSPs must 

use for submitting swaps to DCOs. 

Instead, the regulations should give 

each DCO the flexibility to work with 

SDs and MSPs to implement various 

systems and methodologies for swap 

submission, which may be subject to 

change over time as cleared swap 

markets continue to develop and grow. 

ISDA also indicated that the rule 

should permit SDs and MSPs, 

coordinating with their DCOs, to be free 

to select the manner by which they 

route their swaps to DCOs. ISDA, 

however, commented that it is not 

apparent what proposed § 23.506(a) 

adds to the § 39.12(a)(3) requirement 

that clearing members have adequate 

operational capacity to meet obligations 

arising from their participation in DCOs. 

ISDA also noted that market 

participants have for some time been 

developing industry standards for the 

prompt and efficient processing of 

cleared swap transactions, and it 

suggested that the Commission study 

these standards and defer to them 

wherever possible. 

MarkitSERV commented that the 

requirement to submit swaps ‘‘as soon 

as technologically practicable following 


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21282 Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 

28Swap Data Repositories: Registration 

Standards, Duties and Core Principles, 76 FR 54538 

(Oct. 31, 2011). 

execution’’ may be inappropriate in 

light of the Commission’s proposed rule 

regarding confirmation requirements, 

which requires that swap transactions 

be confirmed within a certain time 

period after execution. MarkitSERV 

suggested that the regulation reference 

the time of confirmation as opposed to 

the time of execution. MarkitSERV also 

noted that requiring SDs and MSPs to 

submit swaps for clearing ‘‘no later than 

the close of business on the day of 

execution’’ fails to accommodate 

transactions that occur late in the day 

and suggested a 24 hour time period. 

MarkitSERV also commented that 

there are numerous benefits to using 

third party middleware providers for 

routing and processing services, and it 

suggested that the Commission permit 

swap counterparties to control how they 

process transactions. According to 

MarkitSERV, counterparties should be 

permitted to use independent third 

party providers for confirming, routing, 

and satisfying the portfolio 

reconciliation requirements proposed by 

the Commission. MarkitSERV also 

suggested that the Commission clarify 

how proposed § 23.506 would interact 

with proposed § 23.501, which requires 

confirmation of all swaps, and with the 

then-proposed rules requiring reporting 

of swap transactions to an SDR.28

FIA commented that SDs and MSPs 

are unlikely to submit a swap directly 

to a DCO for clearing. Instead, they will 

first affirm the swap by, for example, 

submitting the relevant details to an 

affirmation platform and then submit 

the swap to their respective clearing 

members for submission to a DCO. 

FIA suggested that the Commission 

should require SDs and MSPs to have a 

clearing arrangement in place with 

clearing members that, in turn, have the 

capacity to route orders to a DCO in a 

manner acceptable to it. 

FIA also believes that the ‘‘no later 

than close of business’’ could not be 

satisfied by swaps that are entered into 

later in the day and suggests the 

proposed rule be revised to provide the 

parties greater flexibility to submit a 

swap for clearing within a reasonable 

time as prescribed by the applicable 

DCO. Finally, to encourage the 

voluntary use of clearing where such 

swaps are not required to be cleared, 

FIA suggests that the proposed 

§ 23.506(b)(2) be revised to permit the 

parties to submit such trades for 

clearing on any date to which the 

parties and their respective clearing 

firms agree. 

The Options Clearing Corporation 

(‘‘OCC’’) commented that the phrase 

‘‘for purpose of risk management’’ in 

proposed §§ 23.506(a)(1) and 

37.702(b)(1) creates ambiguity because a 

DCO may have established routing 

requirements for reasons unrelated to 

risk management such as increased 

efficiency or decreased administrative 

costs. OCC believes that a party that 

submits transactions to a DCO for 

clearing should be required to ensure 

that it has the ability to route the 

transactions to the DCO in a manner 

that meets all of the DCO’s legitimate 

requirements, and not only those that 

are related to risk management. OCC 

suggests that the Commission delete the 

phrase ‘‘for purpose of risk 

management’’ and substitute the phrase 

‘‘for clearing.’’ 

SDMA supported the amendments to 

proposed § 23.506, and suggested that 

the Commission promulgate rules that 

ensure post-trade and pre-trade 

integrity. According to SDMA, the buyer 

and seller must know immediately 

whether their trade has been accepted 

for clearing. Trade uncertainty, SDMA 

continued, caused by the time delay 

between the time of trade execution and 

the time of trade acceptance into 

clearing, undermines market integrity in 

the post-trade work process. SDMA also 

stated that trade uncertainty also 

directly impedes liquidity, efficiency, 

and market stability. 

CME commented that the technology 

for SDs and MSPs to route swaps to a 

DCO may be as simple as entering the 

necessary data in a web page. It 

suggested that a more apt standard may 

be ‘‘as soon as operationally feasible.’’ 

CME also believes that the proposed 

time frames for submission of swaps are 

appropriate and operationally feasible, 

and it is not aware of systemic obstacles 

to the coordination between DCOs, 

MSPs, and SDs required under the 

proposed regulation. 

FHLBanks commented that the time 

frames are appropriate provided that the 

Commission establishes a cut-off time 

for determining the day on which a 

swap is executed because it may not be 

‘‘technologically practicable’’ for a swap 

that is executed towards the end of a 

day to be submitted for clearing that 

day. FHLBanks suggests the rule specify 

that swaps executed after 4 p.m. New 

York time shall be deemed to be 

executed on the following business day. 

ISDA commented that submission by 

the close of business may not be 

technologically practicable. In addition, 

ISDA suggested that trades will need to 

go through an affirmation platform and 

clearing members will need to screen 

trades for compliance with their own 

standards and with DCO standards, and 

this may not occur before the end of the 

business day. ISDA also expressed 

concern that mandatory, same day 

submission may invite error because 

clearing members may focus on speed 

over accuracy. ISDA suggested that the 

Commission impose an ‘‘as soon as 

reasonably and technologically 

practicable’’ standard. 

ISDA also commented that 

§ 23.506(b)(2) should not set forth a time 

period for clearing. According to ISDA, 

limiting the flexibility of parties 

voluntarily seeking to clear will only 

create disincentives to such 

voluntarism, including confusion and 

potential legal uncertainty. Thus, ISDA 

suggested that where parties voluntarily 

elect to submit a swap for clearing, all 

aspects of that election should be left to 

the parties to determine contractually. 

Freddie Mac commented that swap 

dealers periodically enter mismatched 

data and send swap confirmations that 

incorrectly reflect the principal terms of 

transactions. As a result, Freddie Mac 

believes that a standard for submitting 

clearing submissions that starts the 

clock at execution would be confusing 

and impractical and it could be 

detrimental to counterparties who are 

subject to undue pressure to quickly 

assent to terms dictated by a market 

professional. Freddie Mac also 

commented that establishing a close of 

business deadline for submission of 

swaps for clearing would impair late 

day trading and potentially reduce 

market integrity. Freddie Mac suggested 

that the Commission modify proposed 

§ 23.506(b)(1) to provide that SDs and 

MSPs are required to submit swaps that 

are not executed on a SEF or DCM but 

that are subject to a clearing mandate as 

soon as commercially and operationally 

practical for both parties but no later 

than 24 hours after execution. 

LCH commented that swaps not 

subject to mandatory clearing 

obligations should not be subject to any 

timeline. LCH believes that a DCO 

should be able to accept such trades 

whenever they are submitted, provided 

that it has sufficient margin from both 

sides. 

3. Discussion 

Proposed § 23.506(a) does not 

prescribe the manner by which SDs or 

MSPs route their swaps to DCOs and 

provide for prompt and efficient 

processing. It is possible that DCOs will 

enable SDs and MSPs to submit their 

swaps to clearing via third-party 

platforms and other service providers. 

DCOs will certainly specify the role of 

their clearing members in the process. 


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Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 21283 

29See ISDA. 

30See Core Principles and Other Requirements for 

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

2011); 7 U.S.C. 7b–3(h); and 7 U.S.C. 12a(5). 

31See section 5h(f)(7) of the CEA, 7 U.S.C. 7b– 

3(f)(7). 

32See 76 FR at 1248. Section 37.702(b), as 

originally proposed, referred to ‘‘ongoing’’ risk 

management. In renumbering and finalizing this 

provision herein, the Commission is deleting the 

term ‘‘ongoing’’ because it is superfluous and could 

create confusion when read in conjunction with 

other Commission regulations that refer to ‘‘risk 

management.’’ See, e.g., proposed § 39.13 relating to 

risk management for DCOs, 76 FR at 3720. 

33See 76 FR 13101 (Mar. 10, 2011) (setting forth 

time frames for accepting or rejecting swaps for 

clearing). 

34See Core Principles and Other Requirements for 

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

2010); 7 U.S.C. 7(d)(1); and 7 U.S.C. 12a(5). 

35See Section 5(d)(11) of the CEA, 7 U.S.C. 

7(d)(11). 

36See 75 FR at 80618. 

37See 76 FR 13101. 

The flexibility of the rule makes it 

consistent with the comments of MFA, 

CME, ISDA, MarkitSERV, and FIA. The 

Commission concurs with OCC’s 

comment that a DCO may have 

requirements beyond risk management. 

The issue raised by SDMA is addressed 

in the customer documentation 

provisions. 

As discussed above, any delay 

between the time of execution and the 

time of clearing creates financial risk for 

the parties to the trade and for their 

clearing FCMs. For trades that are not 

subject to a clearing mandate, the 

parties are not bound by any submission 

deadlines unless and until they 

voluntarily agree to have the trade 

cleared. Once they make that decision, 

however, it will reduce risk for both the 

parties, as well as their respective 

clearing members, to get the trade 

submitted for clearing as soon as 

practicable. Therefore, in most cases it 

seems likely that the parties will comply 

with the timing set forth within the rule 

because it is in their own best interests 

to do so. But, to leave ‘‘all aspects’’ to 

the parties, as ISDA suggested, creates 

the possibility that one party could 

expose itself, its counterparty, and its 

clearing member to unnecessary risk by 

delaying submission.29 In light of all the 

comments, the Commission believes 

that the timeframes for submission set 

forth in the proposed rules are 

reasonable. 

The Commission is not defining 

‘‘business day’’ in this rule, in order to 

allow the entity accepting the trade for 

clearing, the DCO, to establish its own 

definition. The Commission 

understands that a DCO may choose to 

expand its business hours in order to 

offer a competitive advantage, and that 

this rule should not prescribe when 

swaps may be accepted for clearing. The 

Commission further believes that if a 

trade is submitted for clearing near the 

end of a business day for a particular 

DCO, but is ultimately not accepted or 

rejected before that deadline, the DCO 

will determine whether the trade will be 

accepted or rejected for clearing for the 

following day in accordance with 

§ 39.12. 

The Commission is adopting 

§ 23.506(a)(1) with the amendment 

suggested by OCC, changing ‘‘for 

purposes of risk management’’ to ‘‘for 

purposes of clearing.’’ 

The Commission is adopting 

§§ 23.506(a)(2) and 23.506(b) as 

proposed. 

B. Swap Execution Facility and 

Designated Contract Market Processing 

of Trades 

1. Introduction 

For prompt and efficient clearing to 

occur, the rules, procedures, and 

operational systems of the trading 

platform and the clearinghouse must 

align. Vertically integrated trading and 

clearing systems currently process high 

volumes of transactions quickly and 

efficiently. The Commission believes 

that trading platforms and DCOs under 

separate control should be able to 

coordinate with one another to achieve 

similar results. 

The Commission proposed §§ 37.700 

through 37.703 to implement SEF Core 

Principle 7 (Financial Integrity of 

Transactions), pursuant to its 

rulemaking authority under sections 

5h(h) and 8a(5) of the CEA.30 Core 

Principle 7 requires a SEF to ‘‘establish 

and enforce rules and procedures for 

ensuring the financial integrity of swaps 

entered on or through the facilities of 

the swap execution facility, including 

the clearing and settlement of the swaps 

pursuant to section 2(h)(1) [of the 

CEA].’’ 31 As originally proposed, 

§ 37.702(b) would require a SEF to 

provide for the financial integrity of its 

transactions cleared by a DCO by 

ensuring that the SEF has the capacity 

to route transactions to the DCO in a 

manner acceptable to the DCO for 

purposes of risk management.32 As part 

of the processing rulemaking, the 

Commission proposed to renumber 

previous § 37.702(b) as paragraph (b)(1) 

and add a new paragraph (b)(2) to 

require the SEF to additionally provide 

for the financial integrity of cleared 

transactions by coordinating with each 

DCO to which it submits transactions 

for clearing, in the development of rules 

and procedures to facilitate prompt and 

efficient transaction processing in 

accordance with the requirements of 

§ 39.12(b)(7) of the Commission’s 

regulations.33

Similarly, the Commission previously 

proposed §§ 38.600 through 38.607 to 

implement DCM Core Principle 11 

(Financial Integrity of Transactions) 

pursuant to its rulemaking authority 

under sections 5(d)(1) and 8a(5) of the 

CEA.34 Core Principle 11 requires a 

DCM to ‘‘establish and enforce-(A) rules 

and procedures for ensuring the 

financial integrity of transactions 

entered into on or through the facilities 

of the contract market (including the 

clearance and settlement of the 

transactions with a derivatives clearing 

organization); and (B) rules to ensure— 

(i) the financial integrity of any—(I) 

futures commission merchant; and (II) 

introducing broker; and (ii) the 

protection of customer funds.’’ 35

As originally proposed, § 38.601 

would require that transactions 

executed on or through a DCM, other 

than transactions in security futures 

products, must be cleared through a 

registered DCO in accordance with the 

provisions of part 39 of the 

Commission’s regulations.36 The 

Commission later proposed to renumber 

this provision as paragraph (a) of 

proposed § 38.601 and add a new 

paragraph (b) to specifically require the 

DCM to coordinate with each DCO to 

which it submits transactions for 

clearing, in the development of DCO 

rules and procedures to facilitate 

prompt and efficient transaction 

processing in accordance with the 

requirements of § 39.12(b)(7) of the 

Commission’s regulations.37

2. Summary of Comments 

FIA supported the rules and 

recommended that each SEF and DCM 

be required to assure equal access to all 

DCOs that wish to clear trades executed 

through the facilities of the SEF or DCM. 

According to FIA, failure to grant such 

access would be inconsistent with 

section 2(h) of the CEA as amended by 

the Dodd-Frank Act, which (1) provides 

for the non-discriminatory clearing of 

swaps executed bilaterally or on an 

unaffiliated SEF or DCM, and (2) 

provides that, with respect to a swap 

that is entered into by a SD or MSP, the 

counterparty shall have the sole right to 

select the DCO through which the swap 

is cleared. 

LCH also concurred with both rules. 

It commented that it is of paramount 

importance that: (1) A SEF or DCM 

seeking access to a DCO must first be 

required to meet all regulatory 

requirements; (2) each SEF and DCM 


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21284 Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 

38See 76 FR 1214, Jan. 7, 2011. 39See letter from Robert Pickel, Executive Vice 

Chairman, International Swaps and Derivatives 

Association, dated April 8, 2011. 

40See Requirements for Processing, Clearing, and 

Transfer of Customer Positions, 76 FR 13101 (March 

10, 2011). 

41See letter from Craig S. Donohue, Chief 

Executive Officer, CME Group, dated April 11, 

2011; letter from R. Trabue Bland, Vice President 

and Assistant General Counsel, ICE, dated April, 11, 

2011; letter from Iona J. Levine, Group General 

Counsel and Managing Director, LCH.Clearnet, 

dated April, 11, 2011; letter from William H. Navin, 

Executive Vice President and General Counsel, 

Options Clearing Corporation, dated April, 11, 

2011; letter from John M. Damgard, President, 

Futures Industry Association, dated April 14, 2011. 

42See 76 FR 45730, Aug. 1, 2011. 

43See 76 FR 13101, Mar. 10, 2011. 

must code to each DCO’s application 

programming interfaces; and (3) each 

SEF and DCM must treat DCOs on a 

nondiscriminatory basis. 

ISDA commented that coordination 

among the parties subject to the 

Commission’s new swap jurisdiction is 

critical to ensuring that the rulemaking 

process is effective without disrupting 

the swap markets and applauds this 

proposal. ISDA suggested that an 

existing standard managed by ISDA and 

used between participating companies 

be adopted. 

As noted above, OCC commented that 

the phrase ‘‘for purpose of risk 

management’’ in proposed 

§§ 23.506(a)(1) and 37.702(b)(1) creates 

ambiguity because a DCO may have 

established routing requirements for 

reasons unrelated to risk management 

such as increased efficiency or 

decreased administrative costs. OCC 

believes that a party that submits 

transactions to a DCO for clearing 

should be required to ensure that it has 

the ability to route the transactions to 

the DCO in a manner that meets all of 

the DCO’s legitimate requirements, and 

not only those that are related to risk 

management. OCC suggests that the 

Commission delete the phrase ‘‘for 

purpose of risk management’’ and 

substitute the phrase ‘‘for clearing.’’ 

3. Discussion 

Rules, procedures, and operational 

systems, along the lines set forth in the 

rules, currently work well for many 

exchange-traded futures. Similar 

requirements could be applied across 

multiple exchanges and clearinghouses 

for swaps. The parties would need to 

have clearing arrangements in place 

with clearing members in advance of 

execution. In cases where more than one 

DCO offered clearing services, the 

parties also would need to specify in 

advance where the trade should be sent 

for clearing. 

The Commission concurs with OCC’s 

comment that a DCO may have 

requirements beyond risk management. 

To the extent that FIA, LCH, and ISDA 

recommended that the Commission 

adopt additional requirements beyond 

those set forth in the rule as proposed, 

the Commission believes it is premature 

to adopt the additional requirements at 

the present time. However, the 

Commission will monitor the 

implementation of this rule and may 

propose amendments in the future. 

The Commission is adopting § 38.601 

as proposed. The Commission is 

adopting § 37.702 with the amendment 

suggested by OCC changing ‘‘for 

purposes of risk management’’ to ‘‘for 

purposes of clearing.’’ 

C. Clearing Member and Clearing 

Organization Acceptance for Clearing 

1. Introduction 

As noted above, a goal of the DoddFrank Act is to reduce risk by increasing 

the use of central clearing. Minimizing 

the time between trade execution and 

acceptance into clearing is an important 

risk mitigant. 

This time lag potentially presents 

credit risk to the swap counterparties, 

clearing members, and the DCO because 

the value of a position may change 

significantly between the time of 

execution and the time of novation, 

thereby allowing financial exposure to 

accumulate in the absence of daily 

mark-to-market. Among the purposes of 

clearing are the reduction of risk and the 

enhancement of financial certainty, and 

this time lag diminishes the benefits of 

clearing swaps that Congress sought to 

promote in the Dodd-Frank Act. A delay 

in clearing is also inconsistent with 

other proposed regulations concerning 

product eligibility and financial 

integrity of transactions insofar as the 

delay reduces liquidity and increases 

risk.38

In this rulemaking, the Commission is 

seeking to expand access to, and 

strengthen the financial integrity of, the 

swap markets subject to Commission 

oversight by providing for prompt 

processing, submission, and acceptance 

of swaps eligible for clearing by DCOs. 

This requires setting an appropriate 

time frame for the processing and 

submission of swaps for clearing, as 

well as a time frame for the clearing of 

swaps by the DCO. 

As originally proposed, 

§ 39.12(b)(7)(i) required DCOs to 

coordinate with DCMs and SEFs to 

facilitate prompt and efficient 

processing of trades. In response to a 

comment, the Commission later 

proposed to require ‘‘prompt, efficient, 

and accurate processing of trades.’’ 39

Recognizing the key role clearing 

members play in trade processing and 

submission of trades to central clearing, 

the Commission also proposed parallel 

provisions for coordination among 

DCOs and clearing members. Proposed 

§ 39.12(b)(7)(i)(B) would require DCOs 

to coordinate with clearing members to 

establish systems for prompt processing 

of trades. Proposed §§ 1.74(a) and 

23.610(a) would require reciprocal 

coordination with DCOs by FCMs, SDs, 

and MSPs that are clearing members. 

As originally proposed, 

§ 39.12(b)(7)(ii) required DCOs to accept 

immediately upon execution all 

transactions executed on a DCM or 

SEF.40 A number of DCOs and other 

commenters expressed concern that this 

requirement could expose DCOs to 

unwarranted risk because DCOs need to 

be able to screen trades for compliance 

with applicable clearinghouse rules 

related to product and credit filters.41

The Commission recognized that while 

immediate acceptance for clearing upon 

execution currently occurs in some 

futures markets, it might not be feasible 

for all cleared markets at this time. For 

example, where the same cleared 

product is traded on multiple execution 

venues, a DCO needs to be able to 

aggregate the risk of trades coming in to 

ensure that a clearing member or 

customer has not exceeded its credit 

limits. Accordingly, the Commission 

modified proposed § 39.12(b)(7)(ii) to 

permit DCOs to screen trades against 

applicable product and credit criteria 

before accepting or rejecting them.42

Consistent with principles of open 

access, the proposal would require that 

such criteria be non-discriminatory with 

respect to trading venues and clearing 

participants. 

Proposed § 1.74(b) would set up a 

parallel requirement for clearing FCMs; 

proposed § 23.610(b) would set up a 

parallel requirement for SDs and MSPs 

that are clearing members. These rules, 

again, would apply a performance 

standard, not a prescribed method for 

achieving it. 

As originally proposed, 

§§ 39.12(b)(7)(iii) and 39.12(b)(7)(iv) 

distinguished between swaps subject to 

mandatory clearing and swaps not 

subject to mandatory clearing.43 Upon 

review of the comments, the 

Commission concluded that this 

distinction was unnecessary with regard 

to processing time frames. If a DCO lists 

a product for clearing, it should be able 

to process it regardless of whether 

clearing is mandatory or voluntary. 

Accordingly, the Commission modified 

proposed § 39.12(b)(7)(iii) to cover all 

trades not executed on a DCM or SEF. 

It would require acceptance or rejection 


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Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 21285 

44AIMA, AllianceBernstein, Arbor, Barnard, 

CIEBA, Citadel, DRW, Eris, FHLB, ICI, Javelin, 

Jeffries, MFA, SDMA, State Street, Spring Trading, 

Trading Firms, and Vizier. 

45See letter from James Cawley, Swaps and 

Derivatives Market Association, dated April 19, 

2011. 

46 Katy Burne, UPDATE: Javelin, CME Claim 

Record Time To Clear Rate Swaps, Dow Jones 

Newswires, Nasdaq (Dec. 14, 2011; accessed Jan. 3, 

2012) http://www.nasdaq.com/aspx/stock-marketnews-story.aspx?storyid=201112141726dowjones

djonline000739&title=updatejavelincme-claimrecord-time-to-clear-rate-swaps. 

by the DCO as quickly after submission 

as would be technologically practicable 

if fully automated systems were used. 

Proposed § 1.74(b) would set up a 

parallel requirement for clearing FCMs; 

proposed § 23.610(b) would set up a 

parallel requirement for SDs and MSPs 

that are clearing members. These rules, 

again, would apply a performance 

standard, not a prescribed method for 

achieving it. 

The Commission also recognized that 

some trades on a DCM or SEF may be 

executed non-competitively. Examples 

include block trades and exchanges of 

futures for physicals (‘‘EFPs’’). A DCO 

may not be notified immediately upon 

execution of these trades. Accordingly, 

the proposal treated these trades in the 

same manner as trades that are not 

executed on a DCM or SEF. 

2. Summary of Comments 

Eighteen 44 commenters expressed 

support for the timing standard as 

proposed by the Commission. 

CME recommended that the standard 

be revised to ‘‘as quickly as would be 

technologically practicable if fully 

automated systems and filters were used 

or as quickly as possible if automated 

systems or filters are not used.’’ 

MGEX requested that the Commission 

codify the preamble text that the new 

timing standard would require action in 

a matter of ‘‘milliseconds or seconds or, 

at most, a few minutes, not hours or 

days.’’ MGEX also commented that 

proposed § 39.12(b)(7) should be a 

general acceptance and timing rule, not 

applicable for each specific contract 

listed to be cleared. MGEX argued that 

the rule only should apply to those 

swaps that a DCO has identified that it 

can and will clear, as opposed to 

variations of contracts listed for clearing 

or any contract not previously cleared 

by the DCO. 

Morgan Stanley believes that the 

timing standard should be intended to 

prohibit only those arrangements that 

prevent the use of automated systems 

that are available in the market to 

facilitate clearing. 

LCH suggested that the Commission 

modify proposed §§ 39.12(7)(ii) and (iii) 

by adding the language ‘‘and for which 

sufficient margins have been received 

by the derivatives clearing organization’’ 

prior to accepting and confirming a 

trade for clearing. 

NYPC requested clarification that in 

circumstances where a DCO 

automatically receives matched trade 

data from a DCM or SEF on a lockedin basis, no further systems 

development would be required in order 

to satisfy the above-referenced 

requirements of proposed regulations 

1.74(a) and 39.12(b)(7)(i)(B). 

Better Markets stated that the timing 

standard must be: (1) Provided by the 

DCO or FCM; (2) capable of receiving 

and processing trade data from multiple 

sources in real time; (3) able to screen 

against standards such as price levels 

and block trade sizes as a threshold 

matter; (4) able to decrease or increase 

available credit real time; and (5) 

automatic push notification of 

acceptance or rejection by the DCO or 

FCM. Better Markets also commented 

that systems provided by a DCO or FCM 

must be open and require no special 

capabilities on the part of the trade 

execution venue, and that once data is 

input, the systems must function on a 

first-come-first-served basis using a 

reliable and common time stamping 

regime, regardless of affiliation or 

contractual relationship between the 

trading venue and DCO or FCM. Better 

Markets noted that confirmation of 

acceptance or rejection must not differ 

between trading venues based on 

affiliation or relationship. 

SG suggested that the Commission 

establish one or both of the following: 

(1) Credit limits of customers and FCMs 

are stored at the DCO and provided to 

SEFs in real time upon electronic 

demand; or (2) an industry-wide utility 

that stores customer and FCM limits and 

provides them to DCOs and SEFs in real 

time upon electronic demand. 

3. Discussion 

The Commission continues to believe 

that acceptance or rejection for clearing 

in close to real time is crucial both for 

effective risk management and for the 

efficient operation of trading venues.45

Rather than prescribe a specific length 

of time, the Commission 

is implementing a standard that action 

be taken ‘‘as quickly as would be 

technologically practicable if fully 

automated systems were used.’’ This 

standard would require action in a 

matter of milliseconds or seconds or, at 

most, a few minutes, not hours or days. 

The Commission recognizes that 

processing times may vary by product or 

market. 

This requirement is intended to be a 

performance standard, not the 

prescription of a particular method of 

trade processing. The Commission 

expects that fully automated systems 

will be in place at some DCOs, FCMs, 

SDs, and MSPs. Others might have 

systems with some manual steps. The 

use of manual steps would be permitted 

so long as the process could operate 

within the same time frame as the 

automated systems. 

As discussed by numerous 

commenters, the proposed standard 

approximates real-time acceptance 

while providing flexibility to 

accommodate different systems and 

procedures. Avoiding a large gap 

between trade execution and acceptance 

for clearing is crucial to risk 

management for DCOs, FCMs, and 

market participants. 

The Commission notes that the time 

frame for acceptance by clearing 

members and DCOs set forth in this 

section is stricter than the time frames 

for submission by SDs and MSPs set 

forth in Section III.A., above. Where 

execution is bilateral and clearing is 

voluntary, the delay between execution 

and submission to clearing is, of 

necessity, within the discretion of the 

parties to some degree. The Commission 

believes, however, that prudent risk 

management dictates that once a trade 

has been submitted to a clearing 

member or a DCO, the clearing member 

or DCO must accept or reject it as 

quickly as possible. 

Assuring prompt acceptance or 

rejection for clearing also undermines 

much of the stated rationale for the 

provisions in the trilateral agreements. 

In those unusual circumstances in 

which trades are rejected, the parties 

will know almost immediately and be 

able to take appropriate steps to mitigate 

risk. 

The Commission disagrees with 

CME’s suggested standard of ‘‘as quickly 

as possible.’’ The Commission believes 

that this standard would introduce too 

much potential for delay. It could 

increase the very risks that this final 

rulemaking is designed to reduce or 

eliminate. 

In support of the final standard, the 

Commission notes that on December 13, 

2011, $4.1 billion of trades were 

executed on a trading platform and 

cleared by a DCO within the time frame 

contemplated by the proposed rules. 

Specifically, 21 interest rate swaps were 

executed and cleared with an average 

time of 1.9 seconds and a quickest time 

of 1.3 seconds.46


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47See 76 FR 33066 (Jun. 7, 2011). 

The Commission also disagrees with 

the MGEX suggestion that the timing 

standard should be codified as 

‘‘milliseconds, seconds, or minutes,’’ 

because this would provide a window 

for trade acceptance that might be too 

wide as faster systems become available. 

The Commission believes that its 

proposed standard will allow for 

innovation to bring faster trade 

acceptance or rejection to the market 

most efficiently. 

The Commission also disagrees with 

LCH’s proposed addition of the 

language ‘‘and for which sufficient 

margins have been received by the 

derivatives clearing organization’’ prior 

to accepting and confirming a trade for 

clearing. This standard may not be 

practicable for DCOs that are linked to 

high-volume automated trading systems. 

Currently, many DCOs in such 

circumstances calculate margin at the 

end of the day for collection the next 

day. Nothing in the final rules, however, 

precludes a DCO in its discretion from 

applying such a standard. 

The Commission confirms NYPC’s 

belief that in circumstances where a 

DCO automatically receives matched 

trade data from a DCM or SEF on a 

locked-in basis, no further systems 

development would be required. 

The Commission believes that the 

comments of Better Markets and SG are 

consistent with the intent of the rules 

but provide a level of detail that the 

Commission believes is unnecessary at 

the present time, and in some respects 

goes beyond what the Commission 

proposed. For example, Better Markets 

recommended that DCOs and FCMs be 

able to increase available credit in realtime and to have automatic push 

notification of acceptance or rejection 

from clearing. The first could conflict 

with risk management procedures that 

some DCOs or FCMs might wish to use. 

The second is likely to be in place at 

many firms, but the Commission 

continues to believe that it is 

appropriate to have a rule that sets a 

performance standard rather than 

specifying a particular means of 

achieving it. Fully automated systems 

would of course comply with the 

performance standard. Accordingly, the 

Commission has decided not to change 

the rule in the manner suggested by 

Better Markets and SG. The 

Commission, however, will monitor the 

implementation of this rule and may 

propose amendments in the future. 

The Commission received numerous 

comments in the customer clearing 

documentation rulemaking emphasizing 

that it is imperative for effective risk 

management to have the shortest 

possible gap between execution and 

clearing. To permit additional time as 

suggested by some of the commenters 

on this rule would increase risk for 

DCOs, clearing members, and market 

participants. 

However, in light of commenters’ 

concerns, the Commission is adopting 

§§ 1.75 and 23.611, which delegate to 

the Director of the Division of Clearing 

and Risk the authority to establish an 

alternative compliance schedule for 

requirements of §§ 1.74 and 23.610 for 

swaps that are found to be 

technologically or economically 

impracticable for an FCM, SD, or MSP 

affected by §§ 1.74 or 23.610. The 

purpose of §§ 1.75 and 23.611 is to 

facilitate the ability of the Commission 

to provide a technologically practicable 

compliance schedule for affected FCMs, 

SDs, or MSPs that seek to comply in 

good faith with the requirements of 

§§ 1.74 or 23.610. 

In order to obtain an exception under 

§§ 1.75 or 23.611, an affected FCM, SD, 

or MSP must submit a request to the 

Director of the Division of Clearing and 

Risk. FCMs, SDs, and MSPs submitting 

requests must specify the basis in fact 

supporting their claims that compliance 

with §§ 1.74 or 23.610 would be 

technologically or economically 

impracticable. Such a request may 

include a recitation of the specific costs 

and technical obstacles particular to the 

entity seeking an exception and the 

efforts the entity intends to make in 

order to ensure compliance according to 

an alternative compliance schedule. An 

exception granted under §§ 1.75 or 

23.611 shall not cause a registrant to be 

out of compliance or deemed in 

violation of any registration 

requirements. 

Such requests for an alternative 

compliance schedule shall be acted 

upon by the Director of the Division of 

Clearing and Risk or designees thereto 

within 30 days from the time such a 

request is received. If not acted upon 

within the 30 day period, such request 

will be deemed approved. 

The Commission is adopting §§ 1.74, 

23.610, and 39.12(b)(7) as proposed. 

D. Post-Trade Allocation of Bunched 

Orders 

1. Introduction 

Bunched orders are orders entered by 

an account manager on behalf of 

multiple customers, which are executed 

as a block and later allocated among 

participating customer accounts for 

clearing. Believing that procedures used 

in the futures markets could be adapted 

for use in the swaps markets, the 

Commission proposed § 1.35(a– 

1)(5)(iv).47 It provided that allocations 

must be made as soon as practicable 

after execution but in any event no later 

than the following times: (1) For cleared 

transactions, sufficiently before the end 

of the day to ensure that clearing 

records identify the customer accounts, 

and (2) for uncleared trades, no later 

than the end of the day the swap was 

executed. 

2. Summary of Comments 

In comments filed in connection with 

proposed §§ 1.74, 23.610, and 

39.12(b)(7), BlackRock and State Street 

stated that the Commission should 

clarify the rules to specifically allow for 

post-trade allocation of block trades. 

BlackRock also commented that the 

final rule should provide that at the 

time of trade execution, confirmation of 

trade economics may be done at the 

block level, and a two-hour delay be 

allowed before the trade must be 

submitted to a DCO for clearing. 

In comments also filed in connection 

with proposed §§ 1.74, 23.610, and 

39.12(b)(7), MFA and D. E. Shaw stated 

that it is not necessary to delay trades 

for post-execution allocation of trades to 

multiple funds. D. E. Shaw asserted that 

post-execution allocation is a ‘‘red 

herring’’ and should not prevent the 

Commission from mandating real-time 

clearing in the proposal. 

In a comment filed in connection with 

the proposed amendment to § 1.35, CME 

asserted that bunched orders in swaps 

should not be subject to the same type 

of regulatory regime as bunched orders 

in futures contracts because the ‘‘futures 

model’’ for treatment of bunched orders 

is not a suitable model for block trades 

of swaps. After a bunched trade in the 

futures market is accepted for clearing, 

an FCM generally holds the positions in 

a suspense account while awaiting 

allocation instructions from the asset 

manager. In contrast, the CME believes 

that an FCM holding bunched orders for 

swaps in a suspense account, while 

waiting for allocation instructions, may 

be exposed to substantially greater risk 

considering larger transaction sizes and 

the different risk profile of cleared 

swaps as compared to futures. CME 

stated that a time frame of two hours 

should allow sufficient time for asset 

managers to allocate block trades in 

swaps to their individual customers’ 

accounts. 

In contrast, in comments also filed in 

connection with proposed § 1.35, SDMA 

stated that there should be no delay for 

bunched orders that are allocated after 

execution. According to SDMA, the 

process for swaps trade allocation 


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Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 21287 

48Barnard; Futures Industry Association (‘‘FIA’’); 

SDMA; Better Markets; ICE; CME; Freddie Mac; 

ISDA; MGEX; MFA; Citadel; FHLB; Jeffries; Arbor; 

and Javelin. 

should be similar to that of the futures 

markets. 

The Commission received no 

substantive comments regarding 

allocation of uncleared trades. 

3. Discussion 

For many years in the futures markets, 

bunched orders have been executed as 

a block for immediate acceptance into 

clearing and allocated into individual 

accounts later in the day. Essentially, a 

‘‘stand-by’’ clearing member guarantees 

the trades until they can be allocated. 

Consequently, there is no need for a 

two-hour delay. 

The proposed amendments would 

apply the same process to swaps. By 

allowing post-trade allocation of 

bunched orders, the rule is responsive 

to all the comments. By not permitting 

a two-hour delay the rule is also 

responsive to the comments of State 

Street, MFA, D. E. Shaw, and SDMA, 

but is contrary to the comments of CME 

and BlackRock. 

The Commission does not find 

persuasive the arguments that cleared 

swaps should be subject to a standard 

that differs in this regard from the 

standard for cleared futures. The 

Commission believes that a two-hour 

delay would create risk rather than 

mitigate it. First, the counterparty or 

counterparties to the trade would incur 

a delay in acceptance of their side into 

clearing because of the happenstance of 

being opposite a bunched order. This 

result is untenable in fast-moving 

markets. Second, the customers whose 

orders were being bunched would also 

suffer the same delay thereby incurring 

the same risks. 

The futures model has worked well 

for many years. In most instances, the 

orders are successfully allocated and the 

stand-by FCM ultimately is not required 

to clear any trades. In those cases where 

there is a misallocation, it is corrected 

the next day and the stand-by FCM is 

compensated by the account manager. 

All parties receive the benefits of 

immediate acceptance into clearing. 

CME and BlackRock have not 

demonstrated why these procedures 

would not work for swaps. 

The Commission believes that a 

similar analysis applies to uncleared 

swaps. Certainty of allocation by the 

end of the calendar day that a swap is 

executed will reduce risk for both 

counterparties. The Commission 

received no comments indicating 

otherwise. 

The Commission is adopting § 1.35(a– 

1)(5)(iv) as proposed. 

IV. Clearing Member Risk Management 

A. Introduction 

CEA 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. CEA 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 risk, as evidenced 

by the statutory provisions cited below. 

CEA section 4s(j)(2) requires each SD 

and MSP to have risk management 

systems adequate for managing its 

business. CEA 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. 

CEA section 4d requires FCMs to 

register with the Commission. It further 

requires FCMs to segregate customer 

funds. CEA section 4f requires FCMs to 

maintain certain levels of capital. CEA 

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 requirements 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 

SDs, MSPs, and FCMs is essential to 

achieving these goals. For example, a 

poorly managed position in the 

customer account may cause an FCM to 

become undersegregated. A poorly 

managed position in the proprietary 

account may 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. 

Proposed § 1.73 set forth risk 

management requirements that would 

apply to clearing members that are 

FCMs; proposed § 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 

required each clearing member to: 

(1) Establish credit and market riskbased limits based on position size, 

order size, margin requirements, or 

similar factors; 

(2) Use automated means to screen 

orders for compliance with the riskbased limits; 

(3) Monitor for adherence to the riskbased 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. 

B. Components of the Rule 

The Commission received a total of 15 

comment letters directed specifically at 

the proposed risk management rules.48

A discussion of the comments received 

in response to each component of the 

rule follows. 

1. Establish Credit and Market Limits 

and Automated Screening of Orders 

a. Summary of Comments 

FIA stated that it does not believe that 

‘‘pre-execution’’ screening of orders is 

feasible in all market situations. For 

instance, the FIA noted four situations 

wherein ‘‘pre-execution screening’’ is 

not possible given current technology. 

Specifically, FIA does not believe that 

‘‘pre-execution’’ screening is possible in 

the case of floor execution, trading 

advisors using ‘‘bunched’’ orders, giveup agreements, and traders using 

multiple trading platforms. 

The CME also commented that 

automated screening is not feasible in a 

floor trading environment. The CME 

suggested that the Commission adopt 

the following language: ‘‘automated or 

otherwise appropriate means to screen 

orders for compliance with risk-baselimits.’’ 

ISDA made comments consistent with 

CME and recommended a more flexible 

approach. ISDA noted that the 


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21288 Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 

49The Dodd-Frank Wall Street Reform and 

Consumer Protection Act: Title VII, Derivatives, 

Mark Jickling & Kathleen Ann Ruane, 5 (Aug. 30, 

2010). 

50S. Rep. No. 111–176, at 32 (2010) (report of the 

Senate Committee on Banking, Housing, and Urban 

Affairs). 51The report can be found at www.iosco.org. 

52See ‘‘Swap Dealer and Major Swap Participant 

Recordkeeping and Reporting, Duties, and Conflicts 

of Interest Policies and Procedures; Futures 

Commission Merchant and Introducing Broker 

Conflicts of Interest Policies and Procedures; Swap 

Dealer, Major Swap Participant, and Futures 

Commission Merchant Chief Compliance Officer,’’ 

available at http://www.cftc.gov/LawRegulation/ 

DoddFrankAct/Rulemakings/ 

DF_4_BusConductStandardsInternal/ssLINK/ 

federalregister022312b. 

regulation may not take into account the 

manner in which swaps are executed. 

b. Discussion 

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. 

Central clearing will provide more 

stability to the markets, and increase 

transparency for market participants.49

As stated in the Committee report of the 

Senate Committee on Banking, Housing, 

and Urban Affairs: ‘‘Increasing the use 

of central clearinghouses * * * will 

provide safeguards for American 

taxpayers and the financial system as a 

whole.’’ 50

The Commission has finalized 

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. 

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 

price limits that would 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. 

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.’’ 51 The report set out a number 

of principles to guide markets, 

regulators, and intermediaries. Principle 

6 states that: 

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. 

Over the years, ‘‘rogue’’ traders have 

caused substantial financial damage to 

both small and large firms. The size or 

sophistication of the firm has not 

provided comprehensive protection. 

Traders have found ways to exploit gaps 

in internal controls. Automated 

screening procedures, such as Globex 

Credit Controls, are already in place in 

many markets and have proven to be 

effective tools for reducing risk. 

Therefore, the Commission believes that 

as proposed, the rule should require 

clearing members to use automated 

means for screening orders executed on 

automated trading systems. 

In response to the comments, the 

Commission has determined that, for 

non-automated markets such as open 

outcry exchanges or voice brokers, the 

rules would permit other forms of 

internal controls. For example, a 

clearing member cannot use an 

automated system to screen the orders 

of a floor trader. Proprietary or customer 

orders executed by open outcry or voice 

broker can be screened automatically if 

they are routed automatically. Many 

orders, however, continue to be placed 

by telephone. It is not practicable at this 

time to use automated means to screen 

such orders. A clearing member, 

however, can actively monitor a trader’s 

activities and be in communication if 

the trader approaches a limit. To 

incorporate this approach, the 

Commission is revising §§ 1.73(a)(2)(ii), 

1.73(a)(2)(iii), and 23.609(a)(2)(ii) using 

language suggested by ISDA. 

Specifically, as amended, these rules 

provide that clearing members must 

‘‘establish and maintain systems of risk 

controls reasonably designed to ensure 

compliance.’’ 

The Commission believes that, as 

amended, the rules will be responsive to 

the comments of FIA, CME, and ISDA. 

They will continue to emphasize the 

key role that order screening can play in 

managing risk while making 

accommodation for certain 

circumstances where automated 

screening may not be possible or 

practicable at this time. 

In response to the comments, the 

Commission has also determined to 

make changes with regard to give-ups 

and bunched orders. Give-ups are trades 

where the execution function and the 

clearing function are performed by 

different firms. Revised paragraph 

(2)(iv) requires the clearing firm, which 

bears the financial risk of the trade, to 

set limits and communicate them to the 

executing firm, which would apply 

them. This arrangement is consistent 

with current practice. The uniform giveup contract contains a provision 

allowing a clearing firm to establish 

limits on the trades it will accept from 

the executing firm. 

To the extent the executing firm is an 

SD or MSP, and the clearing firm is an 

affiliated FCM, the firms will also have 

to comply with the conflict of interest 

rules for SD/MSPs and the conflict of 

interest rules for FCMs.52 Those rules 

address appropriate partitions between 

the trading units of an SD/MSP and the 

clearing units of an affiliated FCM. For 

example, recently-promulgated 

§ 23.605(d)(1)(iv) prohibits an SD/MSP 


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from interfering with the setting of risk 

tolerance levels by an affiliated FCM. 

As noted above, for bunched orders, 

typically one firm acts as a ‘‘stand-by’’ 

clearing firm for purposes of getting the 

trade executed, but before the end of the 

day, the block is broken up and assigned 

among multiple clearing members, each 

of whom is acting on behalf of a 

particular customer. 

Revised paragraph (2)(v)(A) requires 

the stand-by clearing firm to establish 

limits for the block account and screen 

the order. Revised paragraph (2)(v)(B) 

requires each ultimate clearing firm to 

establish limits for each of its customers 

and enter an agreement with the 

account manager under which the 

account manager would screen orders 

for compliance. Revised paragraph 

(2)(v)(C) requires each ultimate clearing 

firm to establish controls to enforce its 

limits. The revisions adjust the rule to 

take into account the more complex 

procedures entailed in processing 

bunched orders. They narrow the scope 

of the screening required by various 

clearing participants from what was 

originally proposed. 

To the extent the account manager or 

one of the customers is an SD/MSP and 

one of the clearing firms is an affiliated 

FCM, the firms also will have to comply 

with the conflict of interest rules for SD/ 

MSPs and the conflict of interest rules 

for FCMs. As noted above, those rules 

address appropriate partitions between 

the trading units of an SD/MSP and the 

clearing units of an affiliated FCM. 

2. Stress Tests 

a. Summary of Comments 

Chris Barnard and Better Markets both 

recommended that the Commission 

require specific stress tests. Barnard 

recommended that the Commission 

adopt a minimum standard and Better 

Markets recommended an ‘‘extreme but 

plausible’’ standard for stress tests. In 

addition, Better Markets believes that 

stress test results should be reported to 

the Commission and the relevant DCO. 

FHLB recommended that stress test 

results be publicly disclosed. FHLB 

believes that public disclosure of stress 

test results would allow customers to 

mitigate risk. 

b. Discussion 

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. 

The Commission intentionally 

refrained from setting specific stress 

tests levels or a minimum threshold. 

The Commission believes that clearing 

members are in the best position to 

design stress tests based on their 

knowledge of markets and the types of 

customers they carry. In addition, the 

Commission believes that specifying 

certain stress tests might stifle 

innovation or cause firms to use 

minimum levels to meet regulatory 

compliance rather than implementing a 

vigorous risk management program. 

This approach is consistent with the 

approach recently adopted by the 

Commission for DCO stress tests. The 

Commission intends to monitor the 

implementation of this rule to 

determine whether clearing members 

are routinely conducting stress tests 

reasonably designed for the types of risk 

the clearing members and their 

customers face. 

The Commission believes that the 

concept of ‘‘extreme but plausible’’ 

conditions is commonly used and was 

implicit in the proposal. The 

Commission is adding the phrase to the 

rule text for clarity. 

The Commission believes that public 

disclosure of stress test results could be 

a disincentive to aggressive stress 

testing. Moreover, disclosure of results 

could have the effect of improper 

disclosure of confidential position 

information. 

The Commission is adopting the 

provisions as proposed, with 

amendments to §§ 1.73(a)(4) and 

23.609(a)(4) to incorporate the phrase 

‘‘extreme but plausible market 

conditions.’’ 

3. Margin Evaluation 

a. Summary of Comments 

ISDA and FIA believe that the 

requirement to evaluate initial margin 

once per week is unclear. ISDA pointed 

out that a clearing member generally 

knows the amount of initial margin and 

collects it promptly. 

The Commission received no 

comments regarding §§ 1.73(a)(6) and 

23.609(a)(6) regarding variation margin. 

b. Discussion 

The purpose of this provision is to 

require clearing firms to evaluate their 

ability to deal with certain 

contingencies on a routine basis. For 

example, a DCO might raise margin 

requirements, or option positions might 

be exercised, or a customer might 

default on a margin call. The clearing 

firm should make sure that it has 

resources available to meet its 

continuing obligations under such 

circumstances. 

The Commission is adopting 

§§ 1.73(a)(5), 1.73(a)(6), 23.609(a)(5), 

and 23.609(a)(6) as proposed. 

4. Estimated Cost of Liquidation 

a. Summary of Comments 

FIA commented that ‘‘even in normal 

markets, estimating the costs of 

liquidating such positions in an orderly 

manner will be difficult at best. In times 

of market stress, such estimates will be 

impossible.’’ 

b. Discussion 

The Commission recognizes that 

estimating the cost of liquidation is at 

times difficult. But the inevitable 

imprecision of any estimate does not 

justify abandoning efforts to quantify 

potential losses. 

The purpose of the calculation is to 

alert the clearing firm to potential risks 

that might otherwise go undetected. 

This exercise could lead a clearing firm 

to decide: (1) To arrange for additional 

financing to cover a potential loss; or (2) 

to reduce the positions prior to a period 

of market stress. Commission staff 

perform stress tests of FCM positions 

and have alerted FCMs about potential 

losses. Based on Commission staff’s 

experience in this area, the Commission 

believes that this is a topic that has not 

been fully addressed by some clearing 

members in recent years. 

In response to commenters, the 

Commission has decided to modify 

§ 1.73(a)(7) to require estimation of 

liquidation costs once per quarter, 

rather than once per month. 

Additionally, the Commission is renumbering § 23.609(a)(7) to 

§ 23.609(a)(8), and renumbering 

§ 23.609(a)(8) to § 23.609(a)(7), in order 

to follow the parallel structure in § 1.73. 

The Commission is adopting 

§§ 1.73(a)(8) and 23.609(a)(7) with the 

modifications discussed above. 

5. Testing Lines of Credit 

a. Summary of Comments 

The CME commented that the 

requirement to test lines of credit 

should only be done on an annual basis 

rather than a quarterly basis. The CME 

believes that quarterly testing is not cost 

efficient. ISDA sought clarification on 

whether the test requires an actual 

drawing of funds or an assessment of 

conditions precedent to drawing. 

b. Discussion 

The Commission accepts that 

quarterly testing might not be cost 

efficient under all circumstances. 

Nonetheless, the Commission 

encourages clearing members to test 

lines of credit more frequently based on 


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53See 76 FR 45730, Aug. 1, 2011. 

54 ‘‘Swap Dealer and Major Swap Participant 

Recordkeeping and Reporting, Duties, and Conflicts 

of Interest Policies and Procedures; Futures 

Commission Merchant and Introducing Broker 

Conflicts of Interest Policies and Procedures; Swap 

Dealer, Major Swap Participant, and Futures 

Commission Merchant Chief Compliance Officer,’’ 

available at http://www.cftc.gov/LawRegulation/ 

DoddFrankAct/Rulemakings/ 

DF_4_BusConductStandardsInternal/ssLINK/ 

federalregister022312b. 

market and credit events. For instance, 

if a line of credit is in place with a bank 

that has recently suffered a credit rating 

downgrade, a test may be appropriate. 

The Commission believes that the 

actual drawing of funds is essential to 

testing a line of credit. Among other 

things, the test should ensure the ability 

of the bank or other institution to move 

the funds in a timely fashion and that 

the clearing member can assess its 

ability to approve the drawing and 

properly make accounting entries. This 

approach is consistent with the 

approach the Commission recently 

adopted for DCOs. 

The Commission is adopting 

§§ 1.73(a)(8) and 23.609(a)(7) as 

proposed, but with an amendment to 

provide for annual—rather than 

quarterly—testing of lines of credit. 

6. Vagueness, Conflict, and/or Overlap 

Among Regulations 

a. Summary of Comments 

FIA expressed concern that 

paragraphs (a)(1) and (a)(4) through (6) 

of § 1.73 are too vague. FIA also 

expressed concern that the limits 

required by § 1.73 ‘‘may conflict with 

the provisions of proposed Rule 1.72(c), 

which provides that an FCM may set 

only ‘an overall limit for all positions 

held by the customer’ at the FCM. 

Further, such limits may indirectly 

‘limit’ the number of counterparties 

with whom a customer may enter into 

a trade, in apparent violation of 

proposed Rule 1.72(b).’’ Regulation 1.72 

was proposed in the customer clearing 

documentation rules 53 and is discussed 

in Part II, above. 

ISDA commented that the thenproposed § 23.600 imposes a risk 

management program for SDs and MSPs 

that must include ‘‘policies and 

procedures to monitor and manage, 

market, credit, liquidity, foreign 

currency, legal, operational, and 

settlement risk, as well as controls on 

business trading.’’ ISDA believes that 

the broad requirements of § 23.600 that 

pertain to liquidity and funding make 

proposed § 23.609(a)(5)–(8) redundant. 

The Commission recently promulgated 

§ 23.600 as a final rule.54

b. Discussion 

The Commission does not believe that 

§ 1.73 is too vague. Paragraph (a)(1) 

addresses risk-based limits, paragraph 

(a)(4) addresses stress tests, and 

paragraphs (a)(5) and (6) address 

margin. While FIA asserts that these 

requirements are vague, it provides no 

additional detail on the issue. 

The regulation was intentionally 

drafted in a non-prescriptive manner. 

Risk management is a complex process 

that requires firms to make judgment 

calls on a daily basis. Moreover, each 

firm has a different customer base, 

different resources, and a different risk 

appetite. The Commission envisions 

that each clearing member will comply 

with § 1.73 using procedures and 

technology appropriate to its business 

model and customer base. As drafted, 

these provisions allow flexibility and 

innovation in complying with the 

regulation. 

The Commission does not believe that 

§§ 1.73 and 1.72 conflict. As proposed, 

§ 1.72(b) would prohibit limits as to the 

number of counterparties, whereas 

§ 1.73 would require limits set 

according to criteria such as position 

size or margin amount. FIA asserts that 

the regulations could conflict because 

§ 1.73 may ‘‘indirectly’’ limit the 

number of counterparties. A position 

limit, of course, can have the effect of 

limiting the number of counterparties in 

the sense that if a trader can only 

execute 100 lots, the trader cannot have 

more than 100 counterparties. But such 

an indirect result is distinguishable 

from the conduct prohibited by 

§ 1.72(b)—the deliberate setting of limits 

on the number of counterparties. The 

first is a legitimate risk management 

tool; the second is an unnecessary 

impediment to the free and open trading 

that would promote liquidity. 

Section 1.72(c) would prohibit only 

limits on the size of positions with 

specific counterparties. It does not 

prohibit limits tied to executing firms. 

Moreover, it specifically provides that 

overall position limits are permissible. 

Thus, there is no conflict between 

§ 1.72(c) and § 1.73. 

The Commission also does not believe 

that the broad requirements of the 

recently-promulgated § 23.600 make 

proposed § 1.73 redundant. Section 

23.600 sets out broad principles 

applicable to all SDs and MSPs. As 

proposed, § 23.609 would apply only to 

those SDs and MSPs that are clearing 

members of a DCO. The Commission 

believes that if an SD or MSP takes on 

the additional risks and responsibilities 

of clearing, it should undertake risk 

management procedures similar to those 

undertaken by clearing FCMs for their 

proprietary accounts. Clearing members 

pose risks to DCOs and users of DCOs 

that are not posed by SDs and MSPs that 

are not clearing members. 

V. Effective Dates 

A. Summary of Comments 

Arbor, Citadel, and Eris urged the 

Commission to prioritize the entire rule 

in the final rulemaking process. 

The Banks, DB, EEI, and ISDA 

commented that the Commission should 

not rush this proposal. 

Wells Fargo commented that the 

Commission should delay compliance 

until most industry systems meet the 

real-time acceptance standard. LCH 

requested that the Commission delay 

compliance for 9 months, if the rules are 

adopted as proposed. AllianceBernstein 

commented that the Commission’s 

recently proposed phased 

implementation provides ample time for 

the market to make final preparations, 

and no ‘‘interim’’ execution 

documentation arrangements are 

necessary. Morgan Stanley stated that 

real-time clearing and risk limit 

compliance verification cannot be 

developed quickly enough to abandon 

trilateral agreements. 

B. Discussion 

This rulemaking includes rules 

applicable to FCMs, SDs, MSPs, DCMs, 

SEFs, and DCOs. In addressing 

implementation, it is important to 

distinguish between FCMs, DCMs, and 

DCOs, on the one hand, and SDs, MSPs, 

and SEFs, on the other. 

FCMs, DCMs, and DCOs are currently 

involved in clearing swaps. Entity 

definitions are not necessary for them. 

Product definitions are not necessary for 

the implementation of the rules 

applicable to them. The products 

currently being cleared as swaps by 

DCOs are commonly characterized as 

such by market participants. To delay 

implementation of these rules pending 

implementation of the further product 

definition rules would be to deny 

market participants pricing, operational, 

and risk-management benefits 

unnecessarily. 

No firms are currently registered as 

SDs, MSPs, or SEFs. Therefore, the rules 

applicable to these entities will have no 

practical effect until other rulemakings 

are completed, such as the further entity 

definition rulemaking. Nevertheless, 

many entities currently expect to 

operate as SDs, MSPs, or SEFs, 

regardless of the precise contours of the 

entity definitions. It would be more 

efficient for such entities, particularly 

those that are currently active in the 


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55Registration of Swap Dealers and Major Swap 

Participants, 77 FR 2613 (Jan. 19, 2012). 

56Core Principles and Other Requirements for 

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

2011). 

57 7 U.S.C. 19(a). 

58See 76 FR 45730 (Aug. 1, 2011). 

59See 76 FR 13101 (Mar. 10, 2011). 

60See 76 FR 45724 (Aug. 1 2011). 

61See 76 FR 33066 (Jun. 6, 2011). 

62See §§ 1.72, 23.608, and 39.12(a). 

63Trilateral agreements were introduced in June 

2011. On August 1, 2011 the Commission issued the 

NPRM of this rule prohibiting certain terms that are 

central to the trilateral agreements and as a 

consequence, adoption of the agreements thus far 

has been extremely limited. 

64See §§ 1.35, 1.74, 23.506, 23.610, 37.702, 

38.601, and 39.12(b) of the Commission’s 

regulations. 

markets, to develop their systems and 

procedures in anticipation of being 

subject to these rules as soon as they 

become applicable. Indeed, failing to 

take such measures would disadvantage 

those that did not prepare for the 

imminent regulatory framework. This 

approach would also avoid temporary 

gaps or discrepancies in the system of 

rules addressing client clearing 

documentation, trade processing, and 

clearing member risk management 

resulting from differing implementation 

schedules for various entities. 

As discussed above, the Commission 

believes that implementation of these 

rules is essential to effective clearing of 

swaps. The Commission has determined 

that for FCMs, DCMs, and DCOs, these 

rules shall become effective October 1, 

2012. For SDs and MSPs, these rules 

shall become effective on the later of 

October 1, 2012, or the date that the 

registration rules become effective.55

For SEFs, these rules shall become 

effective on the later of October 1, 2012, 

or the date that the rules implementing 

the core principles for SEFs become 

effective.56 The Commission believes 

that this approach strikes an appropriate 

balance between those commenters who 

urged implementation as quickly as 

possible and those who urged delayed 

implementation. 

VI. Consideration of Costs and Benefits 

Introduction 

CEA Section 15(a) requires the CFTC 

to consider the costs and benefits of its 

action before promulgating a regulation 

under the CEA, specifying that the costs 

and benefits shall be evaluated in light 

of five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; 

(2) efficiency, competitiveness and 

financial integrity of futures markets; 

(3) price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations.57 To the 

extent that these final regulations repeat 

the statutory requirements of the DoddFrank Act, they will not create costs and 

benefits beyond those resulting from 

Congress’s statutory mandates in the 

Dodd-Frank Act. However, to the extent 

that the regulations reflect the 

Commission’s own determinations 

regarding implementation of the DoddFrank Act’s provisions, such 

Commission determinations may result 

in other costs and benefits. It is these 

other costs and benefits resulting from 

the Commission’s determinations 

pursuant to and in accordance with the 

Dodd-Frank Act that the Commission 

considers with respect to the Section 

15(a) factors. 

The regulations contained in this 

Adopting Release were proposed in four 

separate notices of proposed rulemaking 

(‘‘NPRMs’’). Sections 1.72, 1.74, 23.608, 

23.610, 39.12(a)(1)(iv), and 39.12(b)(7) 

were proposed in Customer Clearing 

Documentation and Timing of 

Acceptance for Clearing,58 sections 

23.506, 37.702(b), and 38.601(b) were 

proposed in Requirements for 

Processing, Clearing, and Transfer of 

Customer Positions,59 sections 1.73 and 

23.609 were proposed in Clearing 

Futures Commission Merchant Risk 

Management,60 and 1.35(a–1)(5)(iv) was 

proposed in Adaptation of Regulations 

to Incorporate Swaps.61 The 

Commission is finalizing the rules 

contained in this Adopting Release 

together because they address three 

overarching, closely-connected aims: (1) 

Non-discriminatory access to 

counterparties and clearing; (2) straightthrough processing; and (3) effective 

risk management among clearing 

members. Each of these provides 

substantial benefits for the markets and 

market participants. 

The regulations related to nondiscriminatory access concern customer 

clearing documentation. Specifically, 

they prohibit FCMs, SDs, MSPs, and 

DCOs from entering into agreements, 

including those known in the industry 

as ‘‘trilateral agreements,’’ with terms 

restricting an FCM’s customer’s ability 

to access all willing counterparties in 

the market and obtain a swap on 

reasonably competitive terms.62 Open 

access, unrestrained by contractual 

terms of this type, is critical to the 

efficiency and financial integrity of the 

swap markets. 

This first set of rules is designed to 

avoid the undesirable consequences 

likely to result from trilateral 

agreements, which include limits on the 

range of eligible counterparties with 

whom market participants can transact, 

reduced competition for customers’ 

business, fragmentation of customers’ 

trading limits at the FCM, and distorted 

price discovery.63 Reduced competition 

in this context may lead to wider 

spreads, higher transaction fees (i.e., 

increased costs for customers), and 

reduced market efficiency. Moreover, 

limiting a market participant’s access to 

less than all willing counterparties, 

including those offering trades on terms 

approximating the best available in the 

market could undermine price 

discovery, and market efficiency. The 

first cluster of rules seeks to mitigate 

these problems through provisions 

fostering open access to all available 

counterparties and democratized access 

to clearing services. To that end, it 

prevents FCMs, SDs, MSPs, and DCOs 

from entering into any agreement that 

would: (a) Disclose the identity of a 

customer’s original executing 

counterparty to the FCM, SD, or MSP; 

(b) limit the number of counterparties 

available to the customer; (c) set any 

limits on the size of position a customer 

may take (other than the general limit 

established by their FCM); (d) impede a 

customer’s access to trades that 

approximate the best terms available; or 

(e) prevent compliance with timeframes 

for processing swaps that are required 

by other parts of these rules. 

A second group of regulations 

mandates straight-through processing— 

rapid processing of swap transactions, 

including rapid submission to the DCO 

for acceptance or rejection from 

clearing—for swaps required to be 

cleared or that the counterparties elect 

to clear. In this regard, the regulations 

impose requirements on FCMs, SDs, 

MSPs, DCMs, SEFs, and DCOs that, 

taken together, are designed to ensure 

that counterparties know whether a 

swap will be accepted for clearing at, or 

soon after, the time of execution which 

is a critical condition for eliminating 

counterparty risk that undermines 

democratized access to the swap 

markets.64 When two parties enter into 

a bilateral swap transaction with the 

intention of clearing a swap, each party 

bears counterparty risk with respect to 

the other until the swap enters clearing. 

Once the swap enters clearing, the 

clearinghouse becomes the counterparty 

to each side of the trade, which 

minimizes and standardizes 

counterparty risk.To the extent that 

there is a period of time between 

execution and clearing, counterparty 

risk may develop as post-execution 

market movements impact the swap’s 

value and each party could face 

significant costs if the swap is 


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eventually rejected from clearing and 

subsequently broken. Both 

counterparties run the risk that they 

may have to replace the swap under 

different, less desirable terms if the 

market has moved against them during 

the intervening time. In addition, SDs, 

whether providing liquidity to a non-SD 

or SD counterparty, may have to 

unwind or offset any positions they 

have taken on to hedge the original 

swap; this can also be costly, again, 

particularly if the market has moved 

against them since the execution of the 

original swap. Bilateral agreements 

typically address such ‘‘breakage’’ costs, 

but the effectiveness of those provisions 

could be compromised if either 

counterparty is unwilling or unable to 

make the other whole for losses. Such 

costs are potentially significant, 

particularly when the markets are 

volatile and the latency period is long, 

giving SDs an incentive to discriminate 

among counterparties on the basis of 

their credit quality. To mitigate those 

costs and promote more democratized 

access to the markets, it is critical that 

executed swap transactions be accepted 

or rejected from clearing quickly. 

These rules contain several 

requirements that are designed to ensure 

that swaps are processed and accepted 

or rejected promptly from clearing, 

including requirements that FCMs, SDs, 

MSPs, SEFs, DCMs, and DCOs 

coordinate with one another to ensure 

they have the capacity to accept or reject 

trades ‘‘as quickly as technologically 

practicable if fully automated systems 

were used.’’ For trades executed on a 

DCM or SEF, the Commission 

anticipates that processing and 

submitting a trade for clearing would be 

near real-time, thus substantially 

eliminating the potential for significant 

counterparty risk accumulation during 

the latency period. For trades that are 

not executed on an exchange, but are 

required to be cleared, the rules require 

submission for clearing ‘‘as soon as is 

technologically practicable after 

execution’’ but no later than by the close 

of business on the day of execution. 

Similarly, swaps not executed on an 

exchange and for which clearing is 

elected by the counterparties (but not 

required by law) must also be submitted 

for clearing as soon as technologically 

practicable, but not later than the day 

following the latter of execution or the 

decision to clear. 

The Commission expects that these 

rules requiring coordination to ensure 

rapid processing and acceptance or 

rejection of swaps for clearing will be 

beneficial in several respects. First, they 

will promote rapid adoption in the 

market of currently existing 

technologies that will make possible 

near real-time processing of exchange 

traded swaps. For trades that are prescreened, or executed on an exchange, 

this will virtually eliminate 

counterparty credit risks associated with 

clearing rejection. The rules will also 

significantly reduce the amount of time 

needed to process swaps that are not 

traded on an exchange; although costs 

associated with latency-period 

counterparty credit risk cannot be 

completely eliminated in this context, 

the rules will substantially reduce the 

need to discriminate among potential 

counterparties in off-exchange trades, as 

well as the potential costs associated 

with rejected trades. By reducing or 

eliminating the counterparty risk that 

could otherwise develop during the 

latency period, these rules promote a 

market in which all eligible market 

participants have access to 

counterparties willing to trade on terms 

that approximate the best available 

terms in the market. This rule may 

improve price discovery and promote 

market integrity. 

The third set of rules in this Adopting 

Release requires that FCMs, SDs, and 

MSPs who are clearing members of a 

DCO implement sound risk management 

practices that help ensure their financial 

strength. A DCO’s financial strength 

depends on the continued financial 

strength of its clearing members. The 

Commission believes that requiring 

clearing members to engage in certain 

risk management procedures will 

provide additional assurance of their 

ability to meet their financial 

obligations to their respective DCOs, 

particularly in times of market stress. 

The third group of rules in this 

Adopting Release therefore requires 

clearing members to establish overall 

risk-based position limits for their 

proprietary trading accounts and each of 

their customer accounts, and to screen 

trades for compliance with those limits. 

The rules also require clearing members 

to monitor for adherence to such riskbased position limits, both intra-day and 

overnight; to conduct rigorous stress 

tests on significant accounts at least 

once per week; to evaluate their ability 

to meet initial and variation margin 

requirements at least once per week; to 

evaluate the probable cost of liquidating 

various accounts at least once per 

month; to test all lines of credit at least 

once per year; and to establish 

procedures and records that ensure and 

verify their compliance with these 

requirements. Many of these 

requirements reflect common practices 

for clearing members. These rules 

promote consistent use of risk 

management best practices among 

clearing members, while also allowing 

flexibility to encourage innovation and 

adaptation to the specific operating 

requirements of diverse clearing 

members. The Commission anticipates 

that the requirements themselves will 

help to ensure that clearing members 

and their respective DCOs remain 

financially sound during periods of 

market stress. Moreover, the 

Commission believes that the flexibility 

these requirements allow will minimize 

attendant costs and enable members to 

adapt their risk management practices to 

new market demands and develop more 

effective strategies for monitoring and 

managing risk. 

In the sections that follow, the 

Commission evaluates the costs and 

benefits relevant to each of the three 

groups of rules pursuant to Section 15(a) 

of the CEA. Each section specifically 

addresses the individual Section 15(a) 

factors with respect to the rule group 

and responds to comments pertaining to 

that group. In its analysis, the 

Commission has endeavored, where 

possible, to quantify costs and benefits. 

However, the costs and benefits are 

either indirect, highly variable, or both 

and therefore are not subject to reliable 

quantification at this time. Nevertheless, 

the Commission has considered all the 

comments received, a broad range of 

costs and benefits pertaining to 

democratized swap market access, 

improvements and challenges in risk 

management, development and 

implementation of necessary 

technology, market liquidity, and 

several others as detailed below. 

Cost Benefit Consideration by Rule 

Group 

1. Customer Clearing Documentation 

Sections 1.72, 23.608, and 

39.12(a)(1)(vi) restrict FCMs, SDs and 

MSPs, and DCOs, respectively, from 

entering into any arrangements that 

would (a) disclose the identity of a 

customer’s original executing 

counterparty to any FCM, SD, or MSP; 

(b) limit the number of counterparties 

with whom a customer may trade; (c) 

restrict the size of a position that the 

customer may take with any individual 

counterparty apart from the overall limit 

for all positions held by the customer at 

the FCM; (d) limit a customer’s access 

to trades on terms that have a reasonable 

relationship to the best terms available; 

or (e) prevents compliance with other 

regulations requiring rapid processing 

and acceptance or rejection from 

clearing. 

The Commission believes that these 

rules proscribe certain terms in trilateral 

agreements that were proposed by some 


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65To the extent that changes will occur, the costs 

attendant to them are indirect and cannot be 

estimated without data that is not available at this 

time. 

66The term ‘‘market participants’’ as it is used 

throughout the cost benefit considerations section 

includes SDs, MSPs, FCMs, and the customers of 

FCMs (i.e., SD, MSP, and non-SD/MSP swap 

counterparties). 67See 76 FR 45730, Aug. 1, 2011. 

68See MFA, Arbor, SIFMA, D. E. Shaw, AIMA, 

and Vizer. 

SDs and FCMs. However, the 

Commission notes that trilateral 

agreements were not used in swap 

markets prior to June 2011. SDs 

historically have provided liquidity and 

managed risk without the use of 

trilateral agreements, and the 

Commission understands that such 

agreements have not yet been widely 

adopted. Therefore, it is unlikely that 

these rules, by preventing certain terms 

in trilateral agreements, will cause 

widespread changes in current market 

practices for managing counterparty risk 

or for negotiating bilateral agreements.65

Moreover, the rules adopted in this 

Adopting Release will enhance risk 

management in other ways, obviating 

any perceived need for terms in 

trilateral agreements that can harm 

market competitiveness, efficiency, and 

price discovery. In that context, the 

Commission concludes that these 

changes are justified. 

a. Protection of Market Participants 66

and the Public 

The Commission is concerned that by 

giving FCMs the ability to establish and 

communicate sub-limits on the 

positions a specific SD may clear with 

a specific customer, the trilateral 

agreements may allow FCMs to 

influence the amount of business that a 

customer conducts with specific 

counterparties, or to constrain the 

number or choice of counterparties with 

whom a customer is able to trade. This 

concern is amplified because a number 

of FCMs have affiliated SDs who (along 

with other SDs with whom the FCMaffiliated SD competes for swap 

transaction business) are potential 

counterparties to the FCM’s customers. 

To the extent that FCMs could use terms 

in trilateral agreements to influence a 

customer’s choice from among potential 

SD counterparties, the agreements could 

provide a means for FCMs to direct 

business toward an associated SD (or to 

raise the cost of doing business with an 

unassociated SD) to the diminution of 

competition to provide swap liquidity 

generally; in this way, the agreement 

may work to the disadvantage of those 

market participants that might benefit 

from better competition. Moreover, by 

limiting a customer’s range of potential 

counterparties and the size of positions 

that may be entered with specific 

counterparties, the FCM establishes a 

condition that in some circumstances 

could preclude matching of the 

customer’s order with the counterparty 

that is willing to provide the best 

available terms in the market at that 

time. This sub-optimal outcome 

increases costs for the customer, and 

any systematic increases in costs to the 

customer will indirectly impact prices 

that the public ultimately pays for 

related goods and services. 

In addition, such limitations also 

impose costs on potential counterparties 

who are prevented from trading with 

customers by restrictions in the trilateral 

agreements. If those counterparties are 

dealers, they lose the opportunity to win 

that customer’s business. If those 

counterparties are non-dealers, they lose 

the liquidity that would have otherwise 

been available to them as a consequence 

of the customer’s need to execute a 

swap. Last, an FCM could, intentionally 

or unintentionally, signal to the market 

information about the customer through 

designation notices. For example, 

clearing members may be more likely to 

reduce a customer’s limits during a time 

of market stress. Communicating 

reductions on various sub-limits to 

potential SD counterparties may signal 

(perhaps wrongly) that the credit quality 

of the customer is deteriorating. This 

signal could make it more difficult for 

the customer to transact at a time when 

their ability to transact is particularly 

critical. 

These potential costs to customers 

and the public will be forestalled or 

altogether eliminated by these rules. 

These benefits, however, are 

unquantifiable for several reasons. First, 

many of the potential costs and benefits 

associated with trilateral agreements are 

indirect and dispersed to a degree that 

they would be difficult to estimate even 

if there were ample data available. 

Second, ample data is not available. The 

Commission does not have any data that 

characterizes pricing, liquidity, or other 

important variables in the presence and 

absence of trilateral agreements. Last, 

trilateral agreements were introduced in 

mid-June 2011, and the Commission 

believes that adoption of trilateral 

agreements thus far has been extremely 

limited. Further, the Commission 

believes that the NPRM of this rule, 

which was released a few weeks after 

trilateral agreements were introduced, 

may be a primary factor deterring rapid 

adoption of these agreements.67 To the 

extent that this is correct, the current 

rate of adoption and impact on the 

market is unlikely to be a reflection of 

what the impact of trilateral agreements 

would be in the absence of this rule. In 

other words, even if the Commission 

had the data necessary to estimate the 

current impact of trilateral agreements 

(which it does not), those estimates 

would not accurately reflect the 

potential impact of these agreements. 

However, by prohibiting contractual 

terms that would limit the number of 

potential counterparties, set sub-limits 

on a customer’s positions, or restrict a 

customer’s access to terms reasonably 

related to the best terms available in the 

market, these rules provide significant 

protection to market participants. 

With respect to the customer-identity 

nondisclosure requirement, several 

commenters stated that protecting 

anonymity is critical as a condition for 

open, efficient, and competitive swap 

markets.68 Maintaining the anonymity 

of a customer’s counterparty prevents 

the clearing member from sharing with 

any affiliated SDs competitively 

sensitive information about its 

customers’ counterparties—who may be 

competitors and/or subsequent swap 

counterparties to the affiliated SD—that 

affiliated SDs can use for their own gain 

(and that of the SD/FCM affiliate group). 

This rule, together with the rule that 

prevents FCMs from establishing sublimits, prohibits arrangements that 

allow FCMs to share competitively 

sensitive information that could 

undermine competition to provide swap 

liquidity—including information that 

provides transparency into customer 

swap positions and exposures. In so 

doing, the rules better protect those 

swap counterparty market participants 

that benefit from greater competition 

(e.g., as may be reflected in improved 

bid/ask spreads) to provide the desired 

swaps. The value of such protection 

would vary depending on the specific 

type and timing of information that is 

communicated as well as the role and 

incentives of the entity receiving that 

information relative to the entity about 

which the information is disclosed. 

These factors are highly variable and 

impracticable to quantify, and, as a 

consequence, the Commission does not 

have adequate information to reasonably 

estimate the additional costs that might 

be caused by such disclosures, or the 

value of preventing such costs. 

In addition, SDs, FCMs, and FCM 

customers may soon expend resources 

negotiating trilateral agreements. By 

prohibiting certain provisions from 

inclusion in trilateral agreements, these 

rules reduce the likelihood that SDs, 

FCMs, and customers will enter into 

them. To the extent that this occurs, 


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69See AllianceBernstein, Citadel, D. E. Shaw, 

MFA, SIFMA, and Vanguard. 

70See Vanguard. 

71See e.g., Citadel, Alliance Bernstein, and MFA. 

72These costs, if compared against the baseline of 

current market practice, depend on the extent to 

which trilateral agreements containing terms 

proscribed in these rules are currently being used. 

Based on anecdotal feedback from market 

participants, the Commission believes that trilateral 

agreements have not yet been widely adopted. 

Moreover, as suggested above, the Commission 

believes that requiring more rapid swap processing 

and clearing determinations will offset these costs, 

diminishing them significantly over time. However, 

the Commission does not have sufficient data 

regarding the number of trilateral agreements 

currently in place, or the number and terms of swap 

transactions that they impact, to estimate these 

costs. 73See e.g., AIMA, SIFMA, Vanguard, and MFA. 

SDs, FCMs, and customers will save the 

substantial costs that otherwise would 

be required to negotiate such 

agreements.69 Vanguard, for example, 

estimates that, if it was forced by SDs to 

implement trilateral agreements, it may 

have to negotiate and enter into 

approximately 4,800 new trilateral 

agreements per year.70 In addition, those 

agreements would create significant 

administrative and ongoing legal costs 

associated with review, periodic update, 

and, for customers, compliance to 

monitor their own activities. Some 

commenters suggested that the 

resources necessary to create and 

administer trilateral agreements would 

divert resources from implementing 

market infrastructure that is necessary 

to facilitate straight through 

processing.71

The Commission recognizes that 

prohibiting certain arrangements that 

are currently in trilateral agreements 

may increase counterparty risks (costs) 

that SDs face due to the possibility that 

swaps they enter could be rejected from 

clearing. Trilateral agreements are 

intended to increase the degree of the 

SD’s certainty that trades with certain 

customers and within certain limits will 

be accepted for clearing. The 

prohibitions contained in the first group 

of rules are likely to prevent SDs from 

using trilateral agreements in this way, 

creating certain potential costs for the 

SDs who have established trilateral 

agreements with some of their 

customers and the customers’ FCMs.72

However, as noted above, there are also 

significant costs associated with 

trilateral agreements. Moreover, in the 

Commission’s judgment, provisions 

contained within the second cluster of 

rules (i.e., rules pertaining to straightthrough processing) will mitigate the 

potential costs to SDs and other market 

participants substantially. More 

specifically, as discussed below, the 

second group of rules mitigates costs 

associated with pre-clearing-approval 

counterparty risk through straightthrough-processing requirements; the 

Commission anticipates these rules will 

drive rapid implementation of existing 

market technology to substantially 

narrow the window of counterparty risk 

for SDs between execution and clearing 

acceptance/rejection. 

Moreover, commenters have 

suggested that in certain circumstances, 

the sub-limits associated with trilateral 

agreements may actually exacerbate the 

counterparty risk problem by delaying 

processing and increasing the latency 

period during which counterparty 

exposure develops.73 If a customer 

enters a swap with an SD without a 

trilateral agreement in place, the FCM 

may need to check with and adjust the 

limits of various SDs who do have 

trilateral agreements set up with that 

customer before making a clearing 

determination. The administrative 

requirements of these steps could delay 

clearing. By prohibiting agreements that 

create such delays, the rules reduce the 

latency period for some transactions, 

which also reduces the amount of 

counterparty risk that can develop 

during that period. 

Notwithstanding the inability to 

quantify in dollar terms the costs of this 

change in risk avoidance and mitigation 

practice, in the Commission’s judgment 

the change is justified by the critical 

benefits that the rules provide regarding 

open access to, and democratization of, 

swap markets. 

b. Efficiency, Competitiveness and 

Financial Integrity of Markets 

These rules specifically prohibit any 

agreement that would limit a customer’s 

potential available counterparties. This 

prohibition encourages competition 

among SD counterparties for the 

customer’s business, which is likely to 

reduce spreads and promote the 

customer’s ability to obtain swap 

positions on terms approaching or 

equaling the best available terms in the 

market at that time. Accordingly, the 

Commission expects the spreads and 

terms under which customers are able to 

obtain swaps to improve when 

compared with a situation in which 

customers’ range of potential 

counterparties is constrained by 

counterparty-specific sub-limits 

established by the FCM. It is possible 

that the effect of greater competition on 

spreads and terms may be mitigated by 

the impact of increased risk to the 

dealers, which is also likely to impact 

spreads and terms. However, the 

Commission believes that the latter 

effects will be minimized and diminish 

over time as the processing of trades 

becomes more rapid. 

As suggested above, counterpartyspecific sub-limits increase expenses 

related to monitoring and administrative 

requirements, and commenters have 

stated that in some circumstances 

trilateral agreements may actually slow 

swap processing. The prohibitions 

contained in these rules will prevent 

such arrangements, thereby leading to 

greater swap processing speed in those 

circumstances. 

c. Price Discovery 

If certain customers are prevented 

from accessing swaps on terms that 

approximate the best available terms in 

the market at that time, and then the 

terms of that trade are reported in real 

time, it risks sending misleading signals 

to the market about the price at which 

certain swaps are available. This result 

has the potential to undermine price 

discovery. The prohibitions in these 

rules will help ensure that customers in 

the market can access trades on 

approximately the best terms available 

in the market, both in general by 

prohibiting agreements that would 

prevent such an outcome, and more 

specifically by prohibiting any (1) 

agreements that would limit the number 

of counterparties with whom a customer 

may trade, and (2) counterparty-specific 

sub-limits on the customer’s positions. 

d. Sound Risk Management Practices 

By ensuring that customers are able to 

trade with all willing counterparties in 

the market, the rules promote greater 

liquidity available to the customer and 

to potential counterparties, which 

makes it more likely they will be able 

to enter swaps and offset positions as 

needed. This result is important for 

maintaining effective offsetting 

positions as underlying positions 

change. Moreover, greater liquidity may 

push transaction costs downward, 

which enables market participants to 

execute their risk management strategies 

in a more cost-effective manner. 

To the extent that prohibiting certain 

terms typical of trilateral agreements 

will reduce an SD’s certainty about 

whether the swap will be cleared, it may 

increase the SD’s risk management 

costs. However, as noted above, 

trilateral agreements did not appear 

until June 2011, which suggests that SDs 

are capable of managing their risks 

effectively in the absence of certain 

terms contained in those agreements. 

For example, SDs conduct due diligence 

in order to evaluate their counterparty’s 

credit-worthiness, and may choose to 

negotiate terms in the bilateral 

agreement that determine what 


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Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 21295 

74Several commenters pointed out that in an 

environment where real-time clearing 

determinations are made, bilateral execution 

agreements are not necessary. As evidence, 

commenters pointed to Clearport, Globex, and 

WebICE. Each of these platforms facilitate real-time 

clearing determinations, and each does so without 

bilateral execution agreements. See e.g., SDMA and 

Javelin. 

75See section 2, Timing of Acceptance of Trades 

for Clearing, below. 

76See AllianceBernstein, Arbor, CBA, CIEBA, 

Citadel, D. E. Shaw, and MFA. 

77See AllianceBernstein, Arbor, Citadel, D. E. 

Shaw, and MFA. 

78 Id. 

79See AllianceBernstein, Arbor, and CIEBA. 

80See AllianceBernstein, Citadel, D. E. Shaw, and 

MFA. 

81See AllianceBernstein, Citadel, D. E. Shaw, and 

MFA. 

82See AllianceBernstein, Citadel, D. E. Shaw, 

MFA, SIFMA, and Vanguard. 

83See also MFA, Citadel. 

84See SDMA, AIMA, Trading Firms, MFA, Arbor, 

DRW, and Jeffries. 

85See AIMA, Trading Firms, CIEBA, Citadel. 

86See Morgan Stanley, FIA/ISDA, Banks. 

87See Morgan Stanley. 

obligations each counterparty has in the 

event that a swap should be rejected 

from clearing. SDs may have to adjust 

their risk management strategies for the 

possibility that their counterparty may 

not be able to meet the terms of the 

bilateral agreement if the trade is 

rejected. If such bilateral agreements 

provide that the swap will be 

terminated when rejected from clearing, 

the dealer may have to unwind or offset 

certain aspects of positions that they 

have taken to offset the original 

position. The Commission anticipates 

that SDs will account for these potential 

additional costs in the terms and pricing 

of the swaps they offer. In most cases, 

however, the risk management strategies 

described above reflect current market 

practice. Therefore, much of the costs 

associated with those practices are not 

a function of these rules. Last, these 

potential costs will be mitigated by 

faster processing, and, in cases where 

prescreening or near real-time postexecution screening are possible, 

eliminated.74

Some SDs have posited that market 

liquidity for some customers may 

decrease because SDs will not provide 

swaps to counterparties whose credit 

quality is lower unless a trilateral 

agreement is executed. The Commission 

recognizes that any factor that 

undermines SDs’ confidence that swaps 

will be cleared may cause them to avoid 

certain trades or to increase the price at 

which they are willing to offer swaps to 

certain counterparties. However, 

because SDs have been providing 

liquidity to market participants for years 

in the absence of trilateral agreements, 

and adoption of such agreements is not 

yet widespread, the Commission does 

not believe that preventing certain 

provisions of these agreements will 

significantly reduce liquidity in swap 

markets. Moreover, certain aspects of 

these rules, such as requirements for 

rapid swap processing and clearing 

determinations, are likely to promote 

additional liquidity by reducing the 

counterparty risk that could develop for 

SDs between the time of execution and 

clearing.75

e. Other Public Interest Considerations 

The Commission has not identified 

additional public interest considerations 

beyond those discussed above. 

f. Response to Comments 

Several commenters noted that the 

benefits of the proposed rules include: 

reduced systemic risk; 76 reduced 

barriers to entry and greater competition 

among liquidity providers, clearing 

members, and execution venues; 77

enhanced market depth and liquidity; 78

substantially reduced transaction 

costs; 79 narrower bid-ask spreads; 80

and increased access to best execution 

via the freedom to execute with any 

counterparty in the market.81 D. E. Shaw 

and MFA commented that the proposed 

rules would preserve anonymity among 

trading participants, and facilitate the 

development of electronic trading and 

central limit order books. 

Additionally, several commenters 

remarked that without the final rules, 

the framework for trilateral agreements 

would substantially increase costs for 

market participants.82 AllianceBernstein 

suggested that without the proposed 

rules, resources would be diverted from 

forward-looking technological solutions 

for clearing certainty, and instead used 

to prop-up legacy systems for credit 

intermediation.83 Vanguard stated that 

the trilateral agreement will introduce 

significant costs and delays to the 

timeline for swaps clearing 

implementation because parties will be 

forced to execute a myriad of documents 

as a pre-condition to clearing and 

trading. 

Moreover, multiple commenters 

stated that while they are generally 

loathe to encourage regulations that 

interfere with private contracts between 

two parties, they believe that the 

undesirable consequences of trilateral 

agreements, such as limiting a 

customer’s choice of counterparties and 

trading venues, impairing their access to 

the best terms available, the potential 

for anticompetitive effects, creating 

barriers to entry for new liquidity 

providers, delaying adoption of 

technology that will enable real time 

processing and clearing determinations, 

and precluding anonymity that is a 

necessary condition for trading on 

central limit order books, justify these 

rules.84 In this vein commenters 

maintained that the largest SDs have 

sufficient power deriving from their role 

as swap liquidity providers to coerce at 

least some market participants into 

signing ‘‘optional’’ trilateral agreements, 

and expressed concern that the 

agreement could rapidly become an 

industry standard despite the resistance 

of buy-side firms.85 The Commission 

agrees that it is necessary, in this case, 

to establish rules that prevent trilateral 

agreements from being used to limit 

open and competitive swap markets. 

In supporting the use of trilateral 

agreements some commenters have 

suggested that they are analogous to the 

FIA/FOA sponsored International 

Uniform Brokerage Execution Services 

(‘‘Give-Up’’) Agreement (‘‘Futures GiveUp Agreement’’), which is used in the 

futures markets. The Futures Give-Up 

Agreement is between an executing 

broker, clearing broker, and customer, 

and allows the clearing broker to ‘‘place 

limits or conditions on the positions it 

will accept for the give-up for 

customer’s account.’’ 86 Commenters 

expressed the opinion that the risks 

faced by executing brokers and clearing 

firms in futures markets are 

substantially similar to the risks faced 

by SDs and clearing members in the 

swap markets, and therefore the use of 

trilateral agreements should be 

acceptable.87

However, the Commission is not 

persuaded that the points of similarity 

between Futures Give-Up Agreements 

and trilateral agreements provide 

sufficient evidence to demonstrate that 

the latter may be used in swap markets 

without adverse effects on market 

participants as discussed above. The 

two types of agreements are 

distinguishable in important respects. 

The parties to a Futures Give-Up 

Agreement include a customer and two 

brokers acting on behalf of the customer. 

The parties do not include the 

customer’s trading counterparty in the 

relevant transaction. Moreover, Futures 

Give-Up Agreements do not: (a) Disclose 

the identity of a customer’s original 

executing counterparty to any FCM, SD, 

or MSP; (b) limit the number of 

counterparties with whom a customer 

may trade; (c) restrict the size of a 

position that the customer may take 

with any individual counterparty apart 


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21296 Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 

88See Morgan Stanley, UBS, and EEI. 

89The first page of the FIA–ISDA Cleared 

Derivatives Execution Agreement states that 

‘‘EXECUTION PARTIES MAY REQUEST THAT A 

FORM OF THIS AGREEMENT (OR THE ANNEXES 

HERETO) BE EXECUTED AS A CONDITION TO 

ENTERING INTO TRANSACTIONS INTENDED TO 

BE CLEARED.’’ See http://www.futuresindustry.org/ 

downloads/ClearedDerivativesExecution

Agreement_June142001.pdf. 

90See Banks, Morgan Stanley. 

91See http://www.futuresindustry.org/downloads/ 

ClearedDerivativesExecutionAgreement_June

142001.pdf. The trilateral agreement template 

includes terms dictating what happens in the event 

that a swap is rejected from clearing. The CFTC 

believes, therefore, that these terms are likely 

negotiated and addressed even where trilateral 

agreements are used. 

92See FIA/ISDA. 

93See Morgan Stanley. See also FIA/ISDA, Banks. 

94See n.71, above. 

95See the OCC’s Quarterly Report on Bank 

Trading and Derivatives Activities Third Quarter 

2011, available at http://www.occ.gov/topics/

capital-markets/financial-markets/trading/

derivatives/dq311.pdf, which states, ‘‘Derivatives 

activity in the U.S. banking system continues to be 

dominated by a small group of large financial 

institutions. Five large commercial banks represent 

96% of the total banking industry notional amounts 

and 85% of industry net current credit exposure.’’ 

While the report only includes data related to 

positions held by U.S. banks, and incorporates 

derivatives that are not swaps, anecdotal evidence 

also supports the likelihood that a relatively small 

dealer population accounts for significant portions 

of swap liquidity. 

from the overall limit for all positions 

held by the customer at the FCM; (d) 

limit a customer’s access to execution of 

trades on terms that have a reasonable 

relationship to the best terms available; 

or (e) prevent compliance with other 

regulations requiring rapid processing 

and acceptance or rejection from 

clearing. 

Some commenters suggested that by 

specifying the types, size, and volume of 

trades that they are willing to engage in 

with certain customers, trilateral 

agreements help increase the range of 

counterparties with whom SDs are 

willing to trade.88 There is not sufficient 

data available to the Commission to 

evaluate these assertions, and 

commenters did not provide any data to 

support them. The Commission 

acknowledges that factors reducing an 

SD’s certainty about whether a swap 

will be cleared could prompt it to limit 

its business with certain counterparties 

or to change the terms under which it 

offers swaps to certain counterparties, 

but the trilateral agreements could also 

constrain either the range of 

counterparties with whom an SD is 

willing to trade, the size of positions it 

is willing to offer to certain 

counterparties, or both.89 In other 

words, while some commenters are 

concerned that prohibiting certain terms 

in trilateral agreements may constrain 

liquidity, the Commission recognizes 

that trilateral agreements also constrain 

liquidity. It is not knowable at this time 

which force is likely to have the greater 

constrictive effect on the liquidity that 

an SD is willing to provide to certain 

counterparties. Moreover, as stated 

above, some aspects of these rules, 

including the straight-throughprocessing and risk management 

provisions, are likely to substantially 

reduce, if not eliminate, SD latency 

exposure and encourage SDs to provide 

greater liquidity. Accordingly, in the 

Commission’s judgment, proscribing 

certain terms of trilateral agreements 

(with their negative implications for 

competition, efficiency and price 

discovery) is the preferable approach 

from a systemic standpoint to promote 

liquidity. 

Commenters opposed to the rules 

stated that prohibiting trilateral 

agreements would require buy-side and 

sell-side firms to subject themselves to 

risks that they do not face today and 

would make it necessary for dealers to 

expend resources negotiating bilateral 

agreements with customers and 

evaluating the customer’s credit prior to 

executing a transaction.90 However, this 

would only be true to the extent that 

trilateral agreements are (1) being used 

today to mitigate certain risks, and (2) 

make it unnecessary to negotiate 

bilateral agreements and evaluate a 

customer’s counterparty risk. As stated 

above, the Commission believes that 

trilateral agreements are not widely 

used at this time and, thus, are 

providing dealers risk protection only to 

a limited extent. Moreover, it does not 

appear that trilateral agreements obviate 

the need to negotiate what might 

happen in the event of breakage; the 

Commission, therefore, does not believe 

that prohibiting certain provisions of 

trilateral agreements is likely to 

significantly impact the expenses 

associated with bilateral agreements.91

Furthermore, commenters opposed to 

the rules stressed that the trilateral 

agreements are optional.92 They also 

noted that the trilateral agreements ‘‘do 

not affirmatively limit’’ a customer’s 

ability to trade with willing 

counterparties or prohibit dealers and 

customers from entering positions 

greater than the sub-limit established by 

the FCM.93 However, even in the 

absence of ‘‘affirmative’’ limitations, the 

agreement may have much the same 

effect. Some commenters stated that 

certain dealers have expressed 

unwillingness to continue providing 

swaps to certain customers if they did 

not sign a trilateral agreement; the 

agreement itself contemplates this 

possibility.94 The Commission’s 

concern with conduct of this type is 

heightened by information suggesting 

that a relatively small number of dealers 

provide a significant amount of swap 

liquidity available.95 Under these 

circumstances, each dealer that refuses 

to offer swaps in the absence of a 

trilateral agreement may significantly 

reduce liquidity available to a customer. 

Absent sufficient competition to provide 

liquidity, dealers may be able to impose 

restrictive, undesirable trilateral 

agreement terms on customers. 

Commenters in favor of trilateral 

agreements suggested that concern 

about anti-competitive behavior could 

be addressed by allowing the customer 

to determine how their overall limit at 

the clearinghouse is allocated across 

potential counterparties. The 

Commission agrees that such an 

approach would mitigate the concern 

that FCMs could use trilateral 

agreements to influence a customer’s 

choice of counterparties in an anticompetitive manner. However, it would 

not allow customers to take positions in 

excess of previously established sublimits with certain counterparties 

without walking through the process of 

reallocating sub-limits, a process that 

could be time consuming. This result 

risks delay of swap processing and 

clearing determinations, or inducement 

of market participants to select 

suboptimal offers that comply with preestablished limits to avoid the delay. 

Such a delay could be particularly 

problematic in volatile market 

situations, where the ability to enter 

into positions quickly may be necessary 

in order to manage risk effectively. 

2. Timing of Acceptance of Trades for 

Clearing 

Taken as a whole, the regulations in 

this cluster require SEFs, DCMs, SDs, 

MSPs, and DCOs to coordinate in order 

to facilitate real-time acceptance or 

rejection of trades for clearing, 

including through development of the 

technology necessary to do so. In the 

case of cleared trades, the swaps must 

be processed and submitted to the DCO 

as soon as technologically practicable 

using fully automated systems. In the 

case of non-cleared trades, the swaps 

will be processed and submitted to the 

DCO as soon as is technologically 

practicable, but allows for processing to 

take slightly longer. More specifically: 

Regarding Clearing Members 

Sections 1.74 and 23.610 require that 

FCMs, and SDs and MSPs, respectively, 

coordinate with the DCO to accept or 

reject trades for clearing ‘‘as quickly as 


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Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 21297 

96SDs, however, did not provide estimates of or 

seek to quantify such risks. 

97See Citadel and SDMA. Neither commenter 

provided calculations to substantiate their 

estimates, so the Commission is not able to verify 

their accuracy. However, as stated above, the 

Commission does believe that the benefits of such 

systems and procedures will be substantial. 

would be technologically practicable if 

fully automated systems were used’’ and 

do so by one of the following methods: 

(1) Pre-screening orders; (2) enabling the 

DCO to screen orders using criteria 

established by the FCM, SD or MSP; or 

(3) setting up systems that enable the 

DCO to communicate with and receive 

a reply from the FCM, SD, or MSP as 

soon as would be practicable if fully 

automated systems were used. 

Section 23.506 requires SDs and 

MSPs to: (1) Have the capacity to submit 

swaps that are not executed on a DCM 

or SEF (‘‘OTC swaps’’) to the DCO for 

clearing in a way that is acceptable to 

the DCO; (2) work with the DCO to 

process swaps in a manner that is 

‘‘prompt and efficient’’ and that 

complies with 39.12(b)(7); (3) submit 

bilateral swaps to the DCO as soon as is 

technologically practicable but no later, 

if it is a swap subject to mandatory 

clearing, than the close of business on 

the day of execution, or, if it is a swap 

not subject to mandatory clearing, no 

later than the end of the following 

business day from the later of execution 

or the date when the parties decide to 

clear. 

Section 1.35 requires that for bunched 

trades that are cleared, post-trade 

allocations must occur on the day of 

execution, so that clearing records 

properly reflect the ultimate customers. 

(Bunched trades that are cleared are not 

given a delay for post-trade allocation 

before being submitted for clearing.) For 

bunched trades that are not cleared, 

post-trade allocations must happen by 

the end of the day they are executed. 

Regarding Execution Platforms 

Section 38.601 requires that 

transactions executed on or through a 

DCM, other than transactions in security 

futures products, must be cleared on a 

DCO, and the DCM must work with 

DCOs to ensure ‘‘prompt and efficient’’ 

transaction processing such that the 

DCO can comply with § 39.12(b)(7). 

Section 37.702(b) requires that SEFs 

coordinate with DCOs in order to route 

transactions to the DCO in a manner 

acceptable to the DCO, and to develop 

rules and procedures that facilitate 

prompt transaction processing in 

accordance with § 39.12(b)(7). 

Regarding DCOs 

Section 39.12(b)(7) requires DCOs: (1) 

To coordinate with SEFs and DCMs to 

develop rules and procedures that 

facilitate ‘‘prompt, efficient, and 

accurate’’ processing of transactions 

received by the DCO; (2) to coordinate 

with FCMs, SDs, and MSPs to set up 

systems that enable the clearing member 

or the DCO acting on its behalf to accept 

or reject trades for clearing as swiftly as 

if fully automated systems were used; 

(3) for trades executed on SEFs or 

DCMs, to establish rules to accept or 

reject trades for clearing as fast as if 

fully automated systems were used, and 

to accept all trades for which both 

executing parties have a clearing 

member, and that satisfy the criteria of 

the DCO; and (4) for trades that are not 

executed on SEFs or DCMs, but that are 

for contracts listed by the DCO, to 

satisfy requirements similar to those 

applicable to trades that are executed on 

SEFs or DCMs. 

a. Protection of Market Participants and 

the Public 

The Commission anticipates that this 

group of rules will provide significant 

benefits to market participants. First, by 

requiring that SEFs, DCMs, SDs, and 

MSPs coordinate in ways that will lead 

to faster processing and acceptance or 

rejection of swaps for clearing, the rules 

reduce the latency period during which 

counterparty risk can accumulate for 

parties who have executed a swap that 

they intend to clear. If, following a long 

latency period, the swap is rejected from 

clearing and is cancelled as a 

consequence, the SD will be forced to 

recoup breakage costs from their 

counterparty to the extent that their 

bilateral agreement provides and their 

counterparty is able to meet the terms of 

that agreement; the SD also may need to 

unwind or offset any position it has 

established, potentially at a loss. SDs 

have pointed out that the size of many 

swap transactions, as well as the 

illiquidity and volatility of these 

markets, create the potential for these 

risks to be substantial,96 so by reducing 

the time between execution and 

clearing, these rules provide 

considerable benefits to SDs. Moreover, 

for swaps where real-time acceptance or 

rejection from clearing occurs, the 

latency period, and the potential for 

post-execution termination costs, is 

eliminated. 

Likewise, non-SD market participants 

will be able to better judge their 

counterparty risk and hedging strategies. 

The possibility exists that a non-SD 

market participant could have to 

unwind or offset other positions at a 

loss if a swap position is cancelled 

unexpectedly, or need to create the 

same position but on less favorable 

terms if the market has moved against 

them. It is also possible that the non-SD 

market participant may not be able to 

negotiate terms with the SD that would 

allow it to recoup much or all of the 

costs associated with the cancelled 

swap. Reducing or eliminating the 

latency period through more rapid 

processing and acceptance or rejection 

of swaps from clearing will reduce those 

costs to the benefit of both SD and nonSD market participants. If there is less 

time between execution and clearing, 

there will be less time for counterparty 

exposure to develop, which mitigates 

the need for extensive due diligence or 

for elaborate procedures to address 

breakage costs. 

With respect to costs, some capital 

investment will be necessary to develop 

the processes and implement the 

technology necessary to meet the 

requirements specified in these rules. 

However, in the case of DCMs, SDs, 

MSPs, and DCOs, the Commission 

believes that many entities are already 

using procedures and technology that 

comply with the standards in some 

measure. The necessary investments, 

therefore, will be incremental and will 

depend significantly on the current 

processes and technology in place at 

each of these institutions. Moreover, 

many of these entities may have to 

modify or upgrade their systems in 

order to comply with other aspects of 

the Dodd-Frank Act. The costs 

necessary to adjust technology platforms 

to meet these other requirements are 

being considered in each of those rules, 

and so the costs attributable to these 

rules are only those that create 

improvements that would not otherwise 

be made pursuant to those other rules. 

The incremental costs attributable to 

these rules cannot be quantified, due to 

the flexibility the rules provide 

regulated entities to meet the applicable 

standards and to the differing 

technology already in use by those 

entities, but the Commission anticipates 

that the necessary capital expenditures 

by some entities may be significant. 

However, as discussed above, the 

benefits of such technology and 

procedures are substantial as well, and, 

based on comments, the Commission 

believes potentially of a magnitude to 

offset the costs of implementing such 

systems. Citadel believes the rules will 

save enough resources to benefit the 

economy as a whole, and SDMA 

estimates that the total benefits for 

corporate America will have a value of 

approximately $15 billion annually.97


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21298 Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Rules and Regulations 

98See n. 77, above. 

99A Central Limit Order Book (CLOB) is a system 

used by many exchanges to consolidate and match 

orders. An open CLOB exposes available pricing 

and market depth for listed products. Market 

participants are allowed to see limit orders that 

have been placed but have not yet been executed 

or cancelled. Usually, exchanges use open CLOBs 

to match customer trade orders with a ‘‘price time 

priority.’’ 100See DB. 

b. Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

The general requirement that 

processing and acceptance or rejection 

from clearing must occur ‘‘as quickly as 

is technologically practicable’’ or ‘‘as 

quickly as is technologically practicable 

if fully automated systems are used’’ 

creates an enforceable standard that 

provides SEFs, DCMs, SDs, MSPs, and 

DCOs the freedom to establish systems 

that meet their unique operational needs 

and that is, in their judgment, most cost 

effective. By accommodating 

innovation, and further system 

improvements, this approach will 

promote continued improvements in the 

reliability and efficiency of these 

systems that, indirectly, may benefit 

financial market efficiency generally. 

Rapid processing and acceptance or 

rejection from clearing will help to 

ensure that eligible counterparties are 

not exposed in transactions that are 

ultimately rejected from clearing and 

broken. With respect to dealers, this 

helps to ensure that they will be 

available to other eligible customers by 

reducing the amount of their balance 

sheet that is ‘‘tied up’’ supporting 

transactions that are eventually rejected 

from clearing and broken. By limiting 

the duration of transactional exposure, 

the rules’ rapid processing requirements 

serve to help protect market liquidity 

that dealers in significant part 

provide.98

Required coordination among SEFs, 

DCMs, SDs, MSPs, and DCOs, together 

with the requirements for rapid 

processing and acceptance or rejection 

from clearing, is likely to promote broad 

adoption of standardized technologies 

and processes. The rules, in this respect, 

will provide an incentive to further 

improvements in the speed of 

processing, and may reduce switching 

costs for customers by ensuring that 

their technology platforms are able to 

interface with a wide array of FCMs and 

counterparties without significant 

modifications. Lower switching costs, in 

turn, are conducive to greater 

competition among SD counterparties 

and lower bid-ask spreads may result. 

Limit order books 99 cannot exist in an 

environment where there is uncertainty 

about clearing because each participant 

will want to identify its potential 

counterparty and evaluate its 

creditworthiness in order to manage 

risks that could develop if the trade is 

rejected from clearing. Enabling clearing 

members and exchanges to pre-screen 

orders in real time for compliance with 

clearing member limits for each 

customer facilitates the development of 

a central limit order book and the pure 

price competition it affords by ensuring 

that each trade executed on the 

exchange will proceed to clearing. This 

certainty, and the central limit order 

book that it makes possible, enables 

anonymous, exchange-based execution. 

This execution method is an effective 

mechanism for providing all-to-all 

market access, placing all eligible 

market participants on equal footing 

when bidding on or offering positions; 

the only distinguishing characteristic 

among them is the price they bid or 

offer. Participants do not need to know 

the identity of entities on the other side 

of the trade or to concern themselves 

with the creditworthiness of those 

entities because each participant knows 

they will be facing the clearinghouse as 

their counterparty. 

Efficiency, certainty of clearing, and 

liquidity in the U.S. based swap markets 

are attractive characteristics that may 

prompt additional customers and 

dealers to send business to U.S.-based 

exchanges. To the extent that this 

occurs, it will promote greater liquidity 

and competition. 

c. Price Discovery 

Pre-trade price transparency is 

enhanced by central limit order books, 

where market participants can view the 

prices at which market participants are 

willing to ‘‘buy’’ or ‘‘sell’’ certain 

positions. Pre-screening capabilities 

help to ensure that only bids and offers 

from parties whose transactions will be 

accepted for clearing are represented in 

the central limit order book. This 

promotes the integrity of the order book, 

and the informational value of the bids 

and offers contained within it, which 

promotes effective price discovery. 

To the extent that a swap moves from 

execution to acceptance or rejection 

from clearing and receives an answer in 

real time that speed eliminates the need 

for SDs to price idiosyncratic 

counterparty risk (i.e. risk that is 

different than that posed by the 

clearinghouse as a counterparty) into 

the swap. This result means that the 

price at which a swap is transacted 

more accurately reflects the price that 

other market participants would receive 

for the same product at that time. 

Therefore, the prices reported in real 

time have greater informational value 

for all market participants. 

d. Sound Risk Management Practices 

If an SD is uncertain whether a trade 

will clear, it will not know whether it 

should account for idiosyncratic 

counterparty risk because it will not 

know whether the clearinghouse or their 

counterparty will face them for the life 

of the swap.100 Or, if the agreement 

between the SD and the customer 

counterparty calls for the trade to be 

cancelled in the event of clearing 

rejection, the SD’s hedging strategies 

will be complicated by uncertainty until 

the clearing outcome is known. Faster 

processing and acceptance or rejection 

of trades from clearing facilitates sound 

risk management by eliminating these 

uncertainties, or at least by reducing the 

period of time during which they are 

relevant. This result makes it easier and 

potentially less costly for dealers to 

develop and execute sound risk 

management strategies. 

Similarly, faster processing and 

acceptance or rejection from clearing 

makes it easier and potentially less 

costly for other non-SD market 

participants to manage their risk 

effectively. The more certainty SDs have 

that a trade will clear, the less they need 

to charge for clearing-acceptance risk. 

This result makes it less expensive for 

non-SD market participants to acquire 

the positions they need to execute their 

risk management strategies. It also 

obviates the need that an SD would 

otherwise have to evaluate counterparty 

credit-worthiness, which may decrease 

the amount of time required for a market 

participant to execute a needed trade. In 

volatile markets, this increased speed 

can be valuable, if not essential, when 

managing complex risks. 

On the other hand, some processes 

will still be manual even after these 

rules are adopted. This result may be 

true particularly for swap transactions 

that are executed bilaterally and then 

communicated to clearing members. 

Speed requirements may increase the 

possibility of errors in manual 

processes. The potential range of 

mistakes and range of costs associated 

with those mistakes is broad, and 

impossible to estimate. However, market 

participants have an incentive to avoid 

such mistakes, and the Commission 

anticipates that the requirements related 

to the timing of acceptance or rejection 

from clearing will encourage automated, 

straight-through processing, which over 

time is likely to reduce the number of 

manual processes and therefore the 

number of opportunities for errors. 

Also, while these rules require 

clearing members, SEFs, DCMs, and 


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101See e.g., Arbor, Eris, CME, SDMA, Vanguard, 

and Javelin. 

102See AllianceBernstein, Arbor, Citadel, D.E. 

Shaw, Eris, Javelin, MFA, SDMA, and State Street. 

103See AllianceBernstein, Arbor, D.E. Shaw, 

MFA, and SDMA. 

104See Morgan Stanley, and Banks. 

105See Morgan Stanley. 

106 Id. 

107See SDMA, Vanguard, State Street, Arbor, Eris, 

CME, and Javelin. Multiple commenters cited 

Clearport as an example of immediate post-trade (or 

’’low latency’’) solution that is already providing 

clearing acceptance/rejection decisions within 

milliseconds of execution in some markets. 

Continued 

DCOs to develop the ability to process 

swaps and make clearing 

determinations in a timeframe that is 

likely to be a matter of milliseconds, 

seconds, or at most, a few minutes, 

bilateral transactions will still take some 

amount of time to submit to the 

appropriate clearing member. The rules 

require SDs and MSPs to submit OTC 

swaps for clearing as soon as is 

technologically practicable and in no 

case later than the close of business on 

the date of execution for swaps that are 

required to be cleared, and in no case 

later than the end of the business day 

following execution or the decision to 

clear (whichever is later) for swaps that 

are not required to be cleared. Moreover, 

until the mandatory clearing regime 

becomes effective, all OTC swaps will 

be subject to the requirement that they 

be submitted for clearing as soon as is 

technologically practicable but in no 

case later than the day following 

execution or the decision to clear 

(whichever is later). Therefore, some 

time lapse between execution and 

clearing as well as some breakage risk 

will remain for OTC swaps and that risk 

may be greater prior to the mandatory 

clearing regime becoming effective. 

However, the Commission notes that 

these rules establish timelines for 

submission to clearing that are 

considerably shorter than what some 

market participants practice today. 

Moreover, the close of business on the 

date of execution and the end of the 

business day following execution or the 

decision to clear (whichever is later) are 

outer bounds on the timeline for 

submitting swaps to clearing. The rules 

still require these swaps to be submitted 

‘‘as soon as is technologically 

practicable,’’ which in many cases will 

likely be sooner than these outer limits. 

Last, to the extent that market 

participants bear breakage cost risk, they 

have an incentive to submit OTC swaps 

for clearing promptly and to implement 

and promote technological 

improvements that will allow them to 

do so. Each of these considerations are 

likely to significantly reduce the amount 

of time between execution and 

submission for clearing for OTC swaps, 

and therefore, are likely to mitigate the 

breakage risks that counterparties face 

when engaging in OTC transactions. 

e. Other Public Interest Considerations 

As described above, rapid and 

predictable clearing provides substantial 

benefits for both SDs and other market 

participants. As market entities come 

into compliance with these rules, the 

Commission anticipates that rapid 

processing and clearing determinations 

will make the U.S. markets more 

attractive to foreign entities, which 

could further increase liquidity and 

reduce spreads. 

Also, the Commission observes that 

much of the technology that will be 

necessary to meet these requirements 

has been implemented in certain venues 

with marked success.101 This 

circumstance, together with the fact that 

many market participants already may 

have systems capable of at least partial 

compliance, will serve to limit the 

overall outlay necessary to bring 

regulated entities into compliance. 

f. Response to Comments 

Many commenters agreed that the 

technology for real time acceptance or 

rejection already exists in other cleared 

derivatives markets and is currently 

being rolled out for cleared OTC 

swaps.102 Commenters also noted that 

the benefits of the rules far exceed any 

incremental costs in upgrading 

infrastructure, and that any required 

infrastructure upgrades would be 

minimal due to existing industry 

capabilities.103 Furthermore, Citadel 

stated that any costs to upgrade existing 

infrastructure have already been 

factored into industry investment plans, 

because many SDs, FCMs, DCOs, and 

SEFs are already launching real-time 

acceptance. 

Eris noted that it is currently able to 

execute and clear interest rate swaps. 

Arbor stated that it supports both the 

Globex and Clearport solutions for 

swaps because they are proven, work 

well, and would be inexpensive 

alternatives for market participants to 

implement. Arbor continued to state 

that because such workflow and 

technology are currently used by 

clearinghouses and clearing members 

today, these technologies could be 

ported quickly into the cleared swaps 

context. Finally, Arbor remarked that by 

compelling market adoption of 

workflow and systems currently 

deployed in other cleared markets, 

implementation will be less costly and 

more rapid. 

Javelin calculated that Clearport’s 

daily trade volume increased from 

139,177 contracts in 2005 to over 

450,000 contracts today. Javelin also 

noted that Clearport covers multiple 

asset classes including credit and 

interest rates, and is interfacing with 

over 16,000 registered users, and Globex 

had average daily volume of 6,368,000 

contracts in interest rates during August 

2011 and total exchange average daily 

volume of 14,420,000 contracts during 

the same period. 

Commenters opposed to the rules 

doubted that ‘‘market-wide real-time’’ 

clearing and risk limit compliance 

verification can be developed quickly 

enough or provided with sufficient 

reliability to eliminate the ‘‘functional 

benefits’’ of trilateral agreements.104

One commenter posited that to provide 

real-time clearing on a broad basis 

would require systems that have the 

capacity to share information, calculate 

risk metrics on a portfolio basis, adjust 

limits accordingly, and disseminate 

information in ways that are not 

currently possible and that are unlikely 

to be possible in the near future.105

However, the Commission is not 

persuaded by these opposing 

commenters’ arguments, which pivot on 

an assumption that the Commission’s 

determination to prohibit certain 

provisions commonly contained in 

trilateral agreements is premised on a 

faulty belief that the functional benefits 

of trilateral agreements will be entirely 

eliminated in the near term. Such a 

belief, however, is not the premise for 

the Commission’s determination. 

Rather, after careful consideration of 

costs and benefits associated with 

trilateral agreements, the Commission 

believes that certain provisions common 

to these agreements generate 

unacceptable costs and, thus, should be 

prohibited. In reaching this 

determination, the Commission has not 

concluded, and need not conclude, that 

the trilateral agreements, judged in 

isolation, are devoid of value. 

Moreover, the Commission believes 

that significant improvements in 

straight through processing and in the 

speed of processing and clearing 

determinations can be achieved even 

when the ideal is not yet attainable. In 

that regard, the Commission notes that 

the system requirements delineated by 

commenters opposed to the rules 

describe ‘‘requirements’’ that the 

Commission does not believe are 

necessary to straight through processing 

or real time clearing determinations.106

Several commenters noted that some 

technologies existing today provide near 

real-time clearing determinations with 

respect to certain swaps.107 Those 


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Similarly, commenters cited Globex and WebICE as 

examples of platforms that provide pre-trade 

screens against customer limits set by FCMs, which 

enables ‘‘perfect settlement’’ (i.e. every trade that is 

executed is accepted immediately for clearing) for 

the markets in which they operate. Commenters 

generally cited these examples as evidence that the 

requisite technology for real time clearing 

determinations already exists, and could be applied 

more broadly in order to facilitate compliance with 

the rules adopted in this release. 

108See Morgan Stanley. 

109See e.g., SDMA, AIMA, Vanguard, 

AllianceBernstein, Trading Firms, and MFA. In 

addition, Morgan Stanley, ISDA/FIA, Banks, and 

EEI implicitly acknowledge that real-time clearing 

determinations mitigate the need for trilateral 

agreements by arguing that trilateral agreements are 

a useful risk management tool because real-time 

clearing determinations are not yet possible in all 

parts of the market. 

110See e.g., Report of the Board of Banking 

Supervision Inquiry Into the Circumstances of the 

Collapse of Barings, (Jul. 18, 1995), available at: 

http://www.prmia.org/pdf/Case_Studies/ 

Barings_Case_Study.pdf; Factbox: Rise and Fall of 

the SocGen Rogue Trader, Reuters (Jan. 27, 2008), 

available at http://www.reuters.com/article/2008/ 

01/27/us-socgen-factbox-idUSL2733740320080127. 

111A key purpose of risk management procedures 

is to minimize the chance of a firm incurring losses 

that exceed its risk appetite. For example, in 1999, 

a CFTC-regulated futures commission merchant 

filed bankruptcy after a trader exceeded his trading 

limits. This event highlights the potential damage 

that occurs from a poorly designed risk 

management program or from a lack internal 

controls. 

systems function effectively despite the 

fact that they do not achieve the ideal 

system requirements described by other 

commenters. The Commission, 

therefore, believes that while many of 

the ‘‘requirements’’ described by some 

commenters are desirable, they are not 

essential to swap processing and 

clearing determinations that comply 

with these rules. Furthermore, the 

Commission believes that improvements 

that significantly mitigate the risks 

associated with counterparty exposure 

that trilateral agreements seek to address 

are possible with existing technology. 

One commenter suggested that sublimits with individual dealers need not 

delay clearing of swaps because the 

same technology that is used to satisfy 

the Commission’s requirements for 

clearing in real time could be used to 

automate the sub-limits.108 However, 

commenters generally agreed that realtime clearing determinations would 

mitigate or eliminate any legitimate 

need for sub-limits or the agreements 

necessary to establish them, a 

perspective that the Commission finds 

persuasive.109 Once the technology 

necessary for straight through 

processing and real time clearing 

determinations is in place, the economic 

rationale that commenters have 

advanced in favor of sub-limits will no 

longer be relevant, and therefore the 

elements of trilateral agreements that are 

prohibited in the first part of these rules 

will not assist SDs with risk 

management. 

3. Clearing Member Risk Management 

This cluster of rules establishes risk 

management requirements for FCMs, 

SDs, and MSPs who are clearing 

members. Section 1.73 of the 

Commission’s regulations requires 

FCMs who are clearing members to: (1) 

Establish limits for proprietary accounts 

and customer accounts based on 

position size, order size, margin 

requirements, etc.; (2) ensure that trades 

received by the FCM for automated or 

non-automated execution, that are 

executed bilaterally then delivered to 

the FCM, or that are executed by a 

broker and then delivered to the FCM, 

are screened by either the FCM or the 

broker (whichever encounters the 

transaction first) for compliance with 

overall position limits at the FCM for 

each customer; (3) monitor for 

compliance with overall position limits 

at the FCM for each customer both 

intraday and overnight; (4) conduct 

stringent stress tests for all positions 

that could impact its financial strength 

at least once per week; (5) evaluate its 

ability to meet initial margin 

requirements at least once per week; (6) 

evaluate its ability to, and the cost of, 

liquidating positions in its proprietary 

and customer accounts at least once per 

month; (7) test all lines of credit at least 

once per year; and (8) establish 

procedures and maintain records to 

ensure and document compliance with 

these requirements. 

Section 23.609 requires SDs and 

MSPs who are clearing members to do 

all the same things to manage risk, with 

the exception that bilateral execution, 

‘‘give up’’ agreements, and bunched 

orders are not addressed in this section, 

because SDs and MSPs may only clear 

customer trades if they are also 

registered as FCMs. 

a. Protection of Market Participants 

Several reported incidents over the 

last 15 years involving so called ‘‘rogue 

traders’’110 highlight the protective 

import of these rules. The rules in the 

second group require FCMs to establish 

overall position limits for each of their 

customers and promote the 

establishment of systems capable of 

more effectively pre-screening orders for 

compliance with these overall position 

limits. Automated screening 

mechanisms that are external to those of 

an FCM’s customer provide a second 

layer of defense against evasion by 

rogue traders within the customer’s 

organization. The Commission believes 

that these measures will help protect 

against rogue trading, thereby protecting 

market participants, who past events 

have shown to be vulnerable to harm 

from such conduct.111

With respect to the risk management 

requirement that each clearing member 

establish overall position limits for each 

customer, the rules promote restrictions 

that help prevent individual customers 

from establishing positions sufficiently 

large to jeopardize the financial health 

of their clearing member if they were to 

default. This is a critical safeguard that, 

due to its importance and relative 

simplicity, the Commission anticipates 

many clearing members may already 

have in place. But, by implementing 

these rules, the Commission is ensuring 

that every clearing member uses such 

safeguards to help ensure that they, and 

the DCOs on which they clear trades, 

remain financially sound even during 

times of financial market turbulence. 

The risk management requirements do 

prescribe certain timelines for regular 

testing and evaluation; however, they do 

not dictate (1) specific levels for 

position limits set by clearing members, 

or (2) specific methodologies of testing 

with respect to the clearing member’s 

ability to meet margin requirements, the 

cost of liquidating positions, or stress 

testing positions that could have a 

material impact on the entity’s financial 

strength. This flexibility gives market 

participants the opportunity to 

implement the requirements in ways 

that are suited to their operational 

patterns and minimize costs associated 

with changes and upgrades to existing 

technology systems. Moreover, it allows 

market participants ample room to 

innovate and adapt the most effective 

procedures as the market continues to 

evolve. This flexibility for innovation 

and adaptation is critical to the long 

term success of risk management 

practices. Over time the markets will 

continue to evolve with changes in 

products, connections among 

institutions, regulatory requirements, 

and broader economic realities. Each of 

these dynamic realities has the potential 

to impact the effectiveness of specific 

risk management strategies, making it 

essential for firms to continue adapting 

their approaches. The rules benefit 

FCMs, their counterparties, and the 

public by giving FCMs the flexibility 

they need to continue developing 

effective risk management strategies that 

address current market realities. 

Clearing members that do not 

currently practice one or more of the 

requirements established by this cluster 

of rules will incur some incremental 

costs to comply with them. Some initial 

investment will be required to develop 


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and implement processes necessary for 

compliance, and ongoing costs will be 

incurred as such entities engage in 

repeated testing. The incremental cost 

for each entity will depend on the 

degree to which its current practices are 

or are not in compliance, as well as the 

procedures they select and implement 

in order to comply. The Commission 

does not have, and has not been 

provided by commenters with, the 

information required to estimate those 

costs either on a per-entity or aggregate 

basis. However, the Commission expects 

that while the costs may be material for 

a small number of entities, most clearing 

members are currently using risk 

management strategies that are largely 

compliant with these requirements and, 

therefore, the incremental cost for most 

entities and for the market as a whole 

is likely to be relatively low. 

b. Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

With clearing mandates in place, the 

financial integrity of swap markets will 

depend significantly on the financial 

strength of DCOs. Moreover, the 

financial health of a DCO is dependent 

upon the strength of its clearing 

members and those members’ ability to 

meet any obligations pursuant to the 

terms of their agreement with the DCO. 

By requiring clearing members to 

implement sound risk management 

practices, the rules mitigate the risk that 

those members could experience 

financial strain that could undermine 

the financial strength of the DCO. 

In addition, by requiring that DCOs 

coordinate with clearing members and 

that clearing members coordinate with 

account managers who execute trades 

before submitting them to the clearing 

member, the rules promote market 

integrity by making it more difficult for 

market participants to circumvent the 

overall position limit established by 

their clearing member. 

c. Price Discovery 

The Commission does not expect 

these rules to materially affect price 

discovery. 

d. Sound Risk Management Practices 

As mentioned above, prescreening of 

trades for compliance with overall 

position limits set by the clearing 

member will help guard against the 

activities of rogue traders, particularly 

those that may be operating within one 

of the clearing members’ customers. 

Intraday and overnight monitoring of 

compliance with overall position limits 

is an additional line of defense against 

the same risk, but also serves to help 

protect the clearing member against any 

such activities within its own ranks. In 

this way, the rules mandate processes 

that provide a deterrent against and a 

screen for rogue trading, and help to 

protect market participants from these 

relatively infrequent, but potentially 

catastrophic, risks. 

Moreover, in situations where 

automated screening may not be 

possible, such as with bunched trades 

and give-up trades, the rules still specify 

requirements that should effect prescreening of trades against overall 

position limits with the clearing 

member. Non-automated systems may 

be slightly slower, but the manual 

screens still provide some measure of 

protection against the activities of rogue 

traders. Even in situations where nonautomated screening occurs postexecution, as is the case with screens on 

floor traders, manual systems—if 

carefully and rigorously practiced—can 

provide effective protection against 

excessive exposure. In the case of floor 

traders, the clearing member may 

monitor the trader’s positions 

throughout the day and intervene in 

person when the trader exceeds 

allowable limits, forcing him to close 

out positions immediately in order to 

come under such limits, even if he must 

close out those positions at a loss. Such 

monitoring reduces the opportunity that 

the trader has to exceed appropriate 

limits, and the amount of time that such 

excesses can last, thus limiting the 

associated potential risk for his firm and 

the clearing member. 

Also, as stated above, the flexibility 

that is implicit in these requirements is 

particularly critical as a precondition to 

innovation regarding testing 

methodologies. Clearing members might 

develop many different approaches to 

stress tests, one or more of which may 

be particularly well suited to a 

particular firm and set of market 

conditions, but which may not be well 

suited to other firms and market 

conditions. Flexibility is critical to 

enabling continued development and 

testing of new methodologies. It is likely 

to benefit the individual entities that 

engage in such innovation and testing, 

as well as a broader array of market 

participants introduced to 

developments at industry gatherings 

and through informal transfer of 

intellectual capital as personnel move 

between firms. 

The requirement for each clearing 

member to evaluate its ability to meet 

margin requirements at least once per 

week is a valuable tool to help clearing 

firms avoid liquidity crises, which 

could jeopardize the solvency of 

otherwise healthy clearing members. 

Margin calls can come as a result of 

significant movements in the price of 

the underlying commodity, or as a 

consequence of changes in price 

volatility. Counterparties may choose to 

exercise options at unanticipated times, 

which may have significant 

repercussions for a clearing member’s 

margin requirements. Additionally, a 

clearing member’s cash position may be 

negatively impacted if one of its 

customers becomes unable to meet 

margin calls on large positions. Clearing 

members must have sufficient liquidity 

to meet margin calls from the DCO, even 

at a time when the clearing member may 

have a depleted cash position due to the 

failure of its customers to meet margin 

requirements. Such stress tests may help 

to ensure that the clearing member has 

a clear sense for how much liquidity 

may be necessary in such 

circumstances, and may encourage them 

to preserve ample liquidity. 

Testing lines of credit also helps 

clearing members to ensure that (1) the 

credit provider is able to honor its 

commitment, and (2) the clearing 

member can access the line in a timely 

fashion. Liquidity crises seldom play 

out in slow motion, and time is likely 

to be of the essence when a clearing 

member needs to access its credit line. 

Therefore, it is important for the 

clearing member’s staff to know how to 

access the line quickly and reliably 

when it is needed. By requiring annual 

testing, the rules guard against the 

danger that an episode of financial 

strain for the member could be 

exacerbated by an inability to access its 

credit line in a timely manner. Such 

preventable problems could be fatal for 

the firm in the midst of a liquidity 

crisis. 

e. Other Public Interest Considerations 

The Commission understands that the 

past several years’ events in the 

financial markets have tested and 

strained the public’s confidence in 

financial institutions’ management of 

risks. To the extent that these 

regulations promote broader 

implementation of sound riskmanagement practices, they may serve 

to strengthen such public confidence in 

the integrity of the affected markets. 

Such public confidence, if justified by 

improved risk-management practices, is 

critical to the overall health and 

functioning of the swaps and 

commodity markets. 

To the extent that sound risk 

management practices are broadened, 

these regulations will help to promote 

such confidence, and as such will 

benefit the financial markets and the 

American public who ultimately 


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112See section IV.B(2)(a), above. 

113The Commission also notes that the approach 

taken in this rule is consistent with the approach 

recently adopted by the Commission for DCO stress 

tests. The Commission intends to monitor to 

determine whether the tests conducted by clearing 

members are reasonably designed for the types of 

risk the clearing members and their customers face. 

114See Investment of Customer Funds and Funds 

Held in an Account for Foreign Futures and Foreign 

Options Transactions, 76 FR 78776 (Dec. 19, 2011). 

115See Protection of Cleared Swaps Customer 

Contracts and Collateral; Conforming Amendments 

to the Commodity Broker Bankruptcy Provisions, 77 

FR 6336 (Feb. 7, 2012). 

116 5 U.S.C. 601 et seq. 

117 47 FR 18618 (Apr. 30, 1982). 

118 Id. at 18619. 

119See ‘‘Registration of Swap Dealers and Major 

Swap Participants,’’ 77 FR 2613, 2620 (Jan. 19, 

2012); ‘‘Business Conduct Standards for Swap 

Dealers and Major Swap Participants with 

Counterparties,’’ 77 FR 9734, 9803–04 (Feb. 17, 

2012). 

120 Id. 

benefits from the health of these 

markets. 

f. Response to comments 

Chris Barnard and Better Markets both 

recommend that the Commission 

require specific stress tests, and FHLB 

recommends that stress test results be 

publicly disclosed.112 FHLB believes 

that public disclosure of stress test 

results would allow customers to 

mitigate risk. 

The purpose of stress tests is for 

clearing members to monitor the 

potential losses they would face in the 

event of extreme market events as well 

as their ability to absorb such losses. 

The Commission has chosen not to set 

specific thresholds or specifying 

methodologies for stress tests for three 

reasons. First, appropriate thresholds 

and methodologies depend, at least in 

part, on the types of customers and 

positions that characterize each clearing 

member’s business. The clearing 

member is best positioned to account for 

these factors when developing an 

appropriate test. Second, the 

Commission believes that specifying 

certain stress test thresholds could 

prompt firms to focus tests on those 

minimum levels in order to meet 

regulatory requirements rather than 

establishing thresholds that further 

achieve the goal of maintaining a 

vigorous risk management program. 

Third, the Commission believes that 

specifying particular methodologies for 

stress testing would stifle innovation, 

which would undermine the 

effectiveness of stress tests as the swap 

markets and their clearing members 

continue to evolve.113

The Commission considered FHLB’s 

recommendation but believes that 

public disclosure of stress test results 

could be a disincentive to aggressive 

stress testing, which would undermine 

the intent of this rule and the strength 

of the FCM’s risk management program, 

and in so doing, increase risk to the 

DCO. Moreover, disclosure of results 

could have the effect of improper 

disclosure of confidential position 

information. Last, additional rules have 

been enacted limiting the range of assets 

in which FCMs can invest customer 

funds,114 and requiring careful 

segregation of customer funds,115 both 

of which are designed to protect 

customers in the event that an FCM 

should become insolvent. With these 

considerations in view, the Commission 

has chosen not to require FCMs to make 

the results of their stress tests public. 

The CME commented that clearing 

members should only be required to test 

lines of credit on an annual basis rather 

than a quarterly basis because they 

believe that more frequent testing is not 

cost efficient. ISDA inquired as to 

whether an institution must actually 

draw funds in order to properly test a 

line of credit. 

The Commission agrees that quarterly 

testing might not be cost efficient in 

every situation, and therefore has 

established an annual testing 

requirement in the Adopting Release. 

However, the Commission encourages 

clearing members to test lines of credit 

more frequently based on any 

developments that might impact the 

ability of the lender to provide the line 

of credit, or the clearing member’s 

ability to access it in a timely manner. 

Various market events, credit events, 

and operational changes could lead to a 

situation where testing lines of credit 

would be appropriate. For example, if, 

the clearing member changes personnel 

or reorganizes in a manner that changes 

the individuals who would be 

responsible for accessing the credit line, 

the Commission believes that it would 

be beneficial to test lines of credit. 

The Commission believes that the 

actual drawing of funds is essential to 

testing a line of credit. Among other 

things, the test should ensure the ability 

of the bank or other institution to move 

the funds in a timely fashion, which is 

likely to be particularly important at 

times when the firm most needs the 

additional liquidity provided by the line 

of credit. 

VII. 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.116 The final rules set forth in 

this release would affect FCMs, SDs, 

MSPs, DCOs, DCMs, and SEFs. The 

Commission has already established 

certain definitions of ‘‘small entities’’ to 

be used in evaluating the impact of its 

rules on such entities in accordance 

with the RFA. 

In the Commission’s ‘‘Policy 

Statement and Establishment of 

Definitions of ‘Small Entities’ for 

Purposes of the Regulatory Flexibility 

Act,’’ 117 the Commission concluded 

that registered FCMs should not be 

considered to be small entities for 

purposes of the RFA. The Commission’s 

determination in this regard was based, 

in part, upon the obligation of registered 

FCMs to meet the capital requirements 

established by the Commission. 

Likewise, the Commission determined 

‘‘that, for the basic purpose of protection 

of the financial integrity of futures 

trading, Commission regulations can 

make no size distinction among 

registered FCMs.’’ 118 Thus, with respect 

to registered FCMs, the Commission 

believes that the final rules will not 

have a significant economic impact on 

a substantial number of small entities. 

Like FCMs, SDs will be subject to 

minimum capital and margin 

requirements, and are expected to 

comprise the largest global firms. 

Moreover, the Commission is required 

to exempt from designation as an SD 

any entity that engages in a de minimis 

level of swaps dealing in connection 

with transactions with or on behalf of 

customers. Based, in part, on that 

rationale, the Commission previously 

has determined that SDs should not be 

considered to be ‘‘small entities’’ for 

purposes of the RFA.119 Thus, with 

respect to SDs, the Commission believes 

that the final rules will not have a 

significant economic impact on a 

substantial number of small entities. 

Further, the Commission previously 

has determined that large traders are not 

‘‘small entities’’ for RFA purposes, with 

the Commission considering the size of 

a trader’s position to be the only 

appropriate test for the purpose of large 

trader reporting. The Commission 

similarly has noted that MSPs, by 

definition, will maintain substantial 

positions in swaps, creating substantial 

counterparty exposure that could have 

serious adverse effects on the financial 

stability of the United States banking 

system or financial markets. Based, in 

part, on those facts, the Commission 

previously has determined that MSPs 

should not be considered to be ‘‘small 

entities’’ for purposes of the RFA.120


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121 In a recent rulemaking, the Commission 

discussed the applicability of the RFA with respect 

to SDs and MSPs as follows: ‘‘The Commission is 

carrying out Congressional mandates by proposing 

these rules. The Commission is incorporating 

registration of SDs and MSPs into the existing 

registration structure applicable to other registrants. 

In so doing, the Commission has attempted to 

accomplish registration of SDs and MSPs in the 

manner that is least disruptive to ongoing business 

and most efficient and expeditious, consistent with 

the public interest, and accordingly believes that 

these registration rules will not present a significant 

economic burden on any entity subject thereto.’’ 

‘‘Swap Dealer and Major Swap Participant 

Recordkeeping and Reporting, Duties, and Conflicts 

of Interest Policies and Procedures; Futures 

Commission Merchant and Introducing Broker 

Conflicts of Interest Policies and Procedures; Swap 

Dealer, Major Swap Participant, and Futures 

Commission Merchant Chief Compliance Officer,’’ 

available at http://www.cftc.gov/LawRegulation/ 

DoddFrankAct/Rulemakings/ 

DF_4_BusConductStandardsInternal/ssLINK/ 

federalregister022312b. 

122 76 FR 44776, 44789 (July 27, 2011) 

(‘‘Provisions Common to Registered Entities’’); see 

66 FR 45604, 45609 (Aug. 29, 2001); 47 FR 18618, 

18619 (Apr. 30, 1982). 

123See, e.g., Core Principle 2 applicable to SEFs 

under Section 733 of the Dodd-Frank Act. 124 44 U.S.C. 3501 et seq. 

Thus, with respect to MSPs, the 

Commission believes that the final rules 

will not have a significant economic 

impact on a substantial number of small 

entities.121

Certain of the final rules set forth in 

this release will affect DCMs, SEFs, and 

DCOs, some of which will be designated 

as systemically important DCOs. The 

Commission previously has determined 

that DCMs, SEFs, and DCOs are not 

‘‘small entities’’ for purposes of the 

RFA.122 In determining that these 

registered entities are not ‘‘small 

entities,’’ the Commission reasoned that 

it designates a contract market, or 

registers a DCO or SEF, only if the entity 

meets a number of specific criteria, 

including the expenditure of sufficient 

resources to establish and maintain an 

adequate self-regulatory program.123

Because DCMs, SEFs, and DCOs are 

required to demonstrate compliance 

with Core Principles, including 

principles concerning the maintenance 

or expenditure of financial resources, 

the Commission determined that such 

registered entities are not ‘‘small 

entities’’ for the purposes of the RFA. 

Thus, with respect to DCMs, SEFs, and 

DCOs, the Commission believes that the 

final rules will not have a significant 

economic impact on a substantial 

number of small entities. 

Accordingly, pursuant to Section 

605(b) of the RFA, 5 U.S.C. 605(b), the 

Chairman, on behalf of the Commission, 

certifies that these rules and rule 

amendments will not have a significant 

economic impact on a substantial 

number of small entities. 

B. Paperwork Reduction Act 

1. Customer Clearing Documentation 

Pursuant to the Paperwork Reduction 

Act (‘‘PRA’’),124 the Commission may 

not conduct or sponsor, and a registrant 

is not required to respond to, a 

collection of information unless it 

displays a currently valid Office of 

Management and Budget (‘‘OMB’’) 

control number. The final rules set forth 

in this Adopting Release relating to 

Customer Clearing Documentation will 

result in new collection of information 

requirements within the meaning of the 

PRA. 

Accordingly, the Commission 

requested control numbers for the 

required collection of information. The 

Commission has submitted this notice 

of final rulemaking along with 

supporting documentation for OMB’s 

review in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. The title for 

this collection of information is 

‘‘Customer Clearing Documentation and 

Timing of Acceptance for Clearing.’’ The 

OMB has assigned this collection 

control number 3038–0092. 

The collection of information under 

these regulations is necessary to 

implement certain provisions of the 

CEA, as amended by the Dodd-Frank 

Act. Specifically, it is essential to 

reducing risk and fostering open access 

to clearing and execution of customer 

transactions on a DCM or SEF on terms 

that have a reasonable relationship to 

the best terms available by prohibiting 

restrictions in customer clearing 

documentation of SDs, MSPs, FCMs, or 

DCOs that could delay or block access 

to clearing, increase costs, and reduce 

market efficiency by limiting the 

number of counterparties available for 

trading. These regulations are also 

crucial both for effective risk 

management and for the efficient 

operation of trading venues among SDs, 

MSPs, FCMs, and DCOs. 

Many responses to this collection of 

information will be mandatory. The 

Commission protects 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. 

a. Information Provided by Reporting 

Entities/Persons 

SDs, MSPs, FCMs, and DCOs will be 

required to develop and maintain 

written customer clearing 

documentation in compliance with 

§§ 1.72, 23.608, and 39.12. Section 

39.12(b)(7)(i)(B) requires DCOs to 

coordinate with clearing members to 

establish systems for prompt processing 

of trades. Sections 1.74(a) and 23.610(a) 

require reciprocal coordination with 

DCOs by FCMs, SDs, and MSPs that are 

clearing members. 

The annual burden associated with 

these regulations is estimated to be 16 

hours, at an annual cost of $1,600 for 

each FCM, SD, and MSP. 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 these regulations become 

increasingly standardized within the 

industry. 

Sections 1.72 and 23.608 require each 

FCM, SD, and MSP to ensure 

compliance with these regulations. 

Maintenance of contracts is prudent 

business practice and the Commission 

anticipates that SDs and MSPs already 

maintain some form of this 

documentation. Additionally, the 

Commission believes that much of the 

existing customer clearing 

documentation already complies with 

these rules, and therefore that 

compliance will require a minimal 

burden. 

In addition to the above, the 

Commission anticipates that FCMs, SDs, 

and MSPs will spend an average of 

another 16 hours per year drafting and, 

as needed, updating customer clearing 

documentation to ensure compliance 

required by §§ 1.72 and 23.608. 

For each DCO, the annual burden 

associated with these regulations is 

estimated to be 40 hours, at an annual 

cost of $4,000. Burden means the total 

time, effort, or financial resources 

expended by persons to generate, 

maintain, retain, disclose, or provide 

information to or for a federal agency. 

The Commission has characterized the 

annual costs as initial costs because the 

Commission anticipates that the cost 

burdens will be reduced dramatically 

over time as the documentation and 

procedures required by the regulations 


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are implemented. Any additional 

expenditure related to § 39.12 likely 

would be limited to the time required to 

review—and, as needed, amend— 

existing documentation and procedures. 

Section 39.12(b)(7) requires each DCO 

to coordinate with clearing members to 

establish systems for prompt processing 

of trades. The Commission believes that 

this is currently a practice of DCOs. 

Accordingly, any additional 

expenditure related to § 39.12(b)(7) 

likely would be limited to the time 

initially required to review—and, as 

needed, amend—existing trade 

processing procedures to ensure that 

they conform to all of the required 

elements and to coordinate with FCMs, 

SDs, and MSPs to establish reciprocal 

procedures. 

The Commission anticipates that 

DCOs will spend an average of 20 hours 

per year drafting—and, as needed, 

updating—the written policies and 

procedures to ensure compliance 

required by § 39.12, and 20 hours per 

year coordinating with FCMs, SDs, and 

MSPs on reciprocal procedures. 

The hour burden calculations below 

are based upon a number of variables 

such as the number of FCMs, SDs, 

MSPs, and DCOs 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 FCMs and 14 

DCOs based on industry data. SDs and 

MSPs are new categories of registrants. 

Accordingly, it is not currently known 

how many SDs and MSPs will become 

subject to these rules, and this will not 

be known to the Commission until the 

registration requirements for these 

entities become effective. The 

Commission believes there will be 

approximately 125 SDs and MSPs 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 

and Brokerage’’ industry is $74.41.125

Because SDs, MSPs, FCMs, and DCOs 

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. 

Accordingly, the estimated hour 

burden was calculated as follows: 

Developing Written Procedures for 

Compliance, and Maintaining Records 

Documenting Compliance for SDs and 

MSPs. This hourly burden arises from 

the requirement that SDs and MSPs 

make and maintain records 

documenting compliance related to 

client clearing documentation. 

Number of registrants: 125. 

Frequency of collection: As needed. 

Estimated number of annual 

responses per registrant: 1. 

Estimated aggregate number of 

annual responses: 125. 

Estimated annual hour burden per 

registrant: 16 hours. 

Estimated aggregate annual hour 

burden: 2,000 burden hours [125 

registrants × 16 hours per registrant]. 

Developing Written Procedures for 

Compliance, and Maintaining Records 

Documenting Compliance for FCMs. 

This hourly burden arises from the 

requirement that FCMs make and 

maintain records documenting 

compliance related to client clearing 

documentation. 

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: 16 hours. 

Estimated aggregate annual hour 

burden: 2,144 burden hours [134 

registrants × 16 hours per registrant]. 

Drafting and Updating Trade 

Processing Procedures for DCOs. This 

hour burden arises from the time 

necessary to develop and periodically 

update the trade processing procedures 

required by the regulations. 

Number of registrants: 14. 

Frequency of collection: Initial 

drafting, updating as needed. 

Estimated number of annual 

responses per registrant: 1. 

Estimated aggregate number of 

annual responses: 14. 

Estimated annual hour burden per 

registrant: 40 hours. 

Estimated aggregate annual hour 

burden: 560 burden hours [14 

registrants × 40 hours per registrant]. 

Based upon the above, the aggregate 

hour burden cost for all registrants is 

4,704 burden hours and $470,400 [4,704 

× $100 per hour]. 

2. Time Frames for Acceptance into 

Clearing 

The Commission believes that the 

final rules set forth in this Adopting 

Release relating to the Time Frames for 

Acceptance into Clearing will not 

impose any new information collection 

requirements that require approval of 

OMB under the PRA. 

3. Clearing Member Risk Management 

The final rules contained in this 

Adopting Release relating to Clearing 

Member Risk Management will result in 

new collection of information 

requirements within the meaning of the 

PRA. Accordingly, the Commission 

requested control numbers for the 

required collection of information. The 

Commission has submitted this notice 

of final rulemaking along with 

supporting documentation for OMB’s 

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 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 assigned this 

collection control number 3038–0094. 

The collection of information under 

these 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 on 

which SDs, MSPs, and FCMs 

participate. The position risk 

management requirement established by 

the rules diminishes the chance for a 

default, thus ensuring the financial 

integrity of markets as well as customer 

protection. 

Responses to this collection of 

information will be mandatory. The 

Commission protects 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. 

a. Information Provided by Reporting 

Entities/Persons 

SDs, MSPs, and FCMs will be 

required to develop and monitor 

procedures for position risk 

management in accordance with §§ 1.73 

and 23.609. 


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The annual burden associated with 

these regulations is estimated to be 524 

hours, at an annual cost of $52,400 for 

each FCM, SD, and MSP. 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 regulations become increasingly 

standardized within the industry. 

This hourly burden primarily results 

from the position risk management 

obligations that will be imposed by 

§§ 1.73 and 23.609. Sections 1.73 and 

23.609 will require each FCM, SD, and 

MSP 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 §§ 1.73 and 

23.609 likely will 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, §§ 1.73 and 23.609 will 

require each FCM, SD, and MSP 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 FCMs, SDs, 

and MSPs already maintain some form 

of this documentation. 

With respect to the required position 

risk management, the Commission 

estimates that FCMs, SDs, and MSPs 

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 FCMs, SDs, 

and MSPs will spend an average of 16 

hours per year drafting and, as needed, 

updating the written policies and 

procedures to ensure compliance 

required by §§ 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 FCMs, SDs, and 

MSPs in the marketplace and the 

average hourly wage of the employees of 

these registrants that will be responsible 

for satisfying the obligations established 

by the regulations. 

There are currently 134 FCMs based 

on industry data. SDs and MSPs are new 

categories of registrants. Accordingly, it 

is not currently known how many SDs 

and MSPs will become subject to these 

rules, and this will not be known to the 

Commission until the registration 

requirements for these entities become 

effective. The Commission believes 

there will be approximately 125 SDs 

and MSPs 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 

and Brokerage’’ industry is $74.41.126

Because SDs, MSPs, and FCMs include 

large financial institutions whose 

operations management employees’ 

salaries may exceed the mean wage, the 

Commission has estimated the cost 

burden of these regulations based upon 

an average salary of $100 per hour. 

Accordingly, the estimated hour 

burden was calculated as follows: 

Developing and Conducting Position 

Risk Management Procedures for SDs 

and MSPs. This hourly burden arises 

from the requirement that SDs and 

MSPs establish and perform testing of 

clearing member risk management 

procedures. 

Number of registrants: 125. 

Frequency of collection: Daily. 

Estimated number of responses per 

registrant: 252 [252 trading days]. 

Estimated aggregate number of 

responses: 31,500 [125 registrants × 252 

trading days]. 

Estimated annual burden per 

registrant: 504 hours [252 trading days 

× 2 hours per record]. 

Estimated aggregate annual hour 

burden: 63,000 hours [125 registrants × 

252 trading days × 2 hours per record]. 

Developing Written Procedures for 

Compliance, and Maintaining Records 

Documenting Compliance for SDs and 

MSPs. This hourly burden arises from 

the requirement that SDs and MSPs 

make and maintain records 

documenting compliance related to 

clearing member risk management. 

Number of registrants: 125. 

Frequency of collection: As needed. 

Estimated number of annual 

responses per registrant: 1. 

Estimated aggregate number of 

annual responses: 125. 

Estimated annual hour burden per 

registrant: 20 hours. 

Estimated aggregate annual hour 

burden: 2,500 burden hours [125 

registrants × 20 hours per registrant]. 

Developing and Conducting Position 

Risk Management Procedures for FCMs. 

This hourly burden arises from the 

requirement that FCMs 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 × 252 

trading days]. 

Estimated annual burden per 

registrant: 504 hours [252 trading days 

× 2 hours per record]. 

Estimated aggregate annual hour 

burden: 67,536 hours [134 registrants × 

252 trading days × 2 hours per record]. 

Developing Written Procedures for 

Compliance, and Maintaining Records 

Documenting Compliance for FCMs. 

This hourly burden arises from the 

requirement that FCMs 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 × 20 hours per registrant]. 

Based upon the above, the aggregate 

hour burden cost for all registrants is 

135,716 burden hours and $13,571,600 

[227,416 × $100 per hour]. 

In addition to the per hour burden 

discussed above, the Commission 

anticipates that SDs, MSPs, and FCMs 

may incur certain start-up costs in 

connection with the recordkeeping 

obligations. Such costs may include the 

expenditures related to re-programming 

or updating existing recordkeeping 

technology and systems to enable the 

SD, MSP, or FCM to collect, capture, 


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process, maintain, and re-produce any 

newly required records. The 

Commission believes that SDs, MSPs, 

and FCMs 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 $44.94.127 Because SDs, MSPs, and 

FCMs 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 is $3,600 

[$60 × 60 hours] per affected registrant 

or $932,400 [$3,600 × 259 registrants] in 

the aggregate. 

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. 

17 CFR Part 37 

Swaps, Swap execution facilities. 

17 CFR Part 38 

Block transaction, Commodity 

futures, Designated contract markets, 

Transactions off the centralized market. 

17 CFR Part 39 

Derivatives clearing organizations, 

Risk management, Swaps. 

For the reasons stated in the 

preamble, amend 17 CFR parts 1, 23, 37, 

38, and 39 as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

■ 1. Revise the authority citation for part 

1 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 DoddFrank Wall Street Reform and Consumer 

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

1376 (2010). 

■ 2. Amend § 1.35 by revising paragraph 

(a–1)(5)(iv) to read as follows: 

§ 1.35 Records of commodity interest and 

cash commodity transactions. 

* * * * * 

(a–1) * * * 

(5) * * * 

(iv) Allocation. Orders eligible for 

post-execution allocation must be 

allocated by an eligible account manager 

in accordance with the following: 

(A) Allocations must be made as soon 

as practicable after the entire transaction 

is executed, but in any event no later 

than the following times: For cleared 

trades, account managers must provide 

allocation information to futures 

commission merchants no later than a 

time sufficiently before the end of the 

day the order is executed to ensure that 

clearing records identify the ultimate 

customer for each trade. For uncleared 

trades, account managers must provide 

allocation information to the 

counterparty no later than the end of the 

calendar day that the swap was 

executed. 

(B) Allocations must be fair and 

equitable. No account or group of 

accounts may receive consistently 

favorable or unfavorable treatment. 

(C) The allocation methodology must 

be sufficiently objective and specific to 

permit independent verification of the 

fairness of the allocations using that 

methodology by appropriate regulatory 

and self-regulatory authorities and by 

outside auditors. 

* * * * * 

■ 3. Add § 1.72 to read as follows: 

§ 1.72 Restrictions on customer clearing 

arrangements. 

No futures commission merchant 

providing clearing services to customers 

shall enter into an arrangement that: 

(a) Discloses to the futures 

commission merchant or any swap 

dealer or major swap participant the 

identity of a customer’s original 

executing counterparty; 

(b) Limits the number of 

counterparties with whom a customer 

may enter into a trade; 

(c) Restricts the size of the position a 

customer may take with any individual 

counterparty, apart from an overall limit 

for all positions held by the customer at 

the futures commission merchant; 

(d) Impairs a customer’s access to 

execution of a trade on terms that have 

a reasonable relationship to the best 

terms available; or 

(e) Prevents compliance with the 

timeframes set forth in § 1.74(b), 

§ 23.610(b), or § 39.12(b)(7) of this 

chapter. 

■ 4. Add § 1.73 to read as follows: 

§ 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) Screen orders for compliance with 

the risk-based limits in accordance with 

the following: 

(i) When a clearing futures 

commission merchant provides 

electronic market access or accepts 

orders for automated execution, it shall 

use automated means to screen orders 

for compliance with the limits; 

(ii) When a clearing futures 

commission merchant accepts orders for 

non-automated execution, it shall 

establish and maintain systems of risk 

controls reasonably designed to ensure 

compliance with the limits; 

(iii) When a clearing futures 

commission merchant accepts 

transactions that were executed 

bilaterally and then submitted for 

clearing, it shall establish and maintain 

systems of risk management controls 

reasonably designed to ensure 

compliance with the limits; 

(iv) When a firm executes an order on 

behalf of a customer but gives it up to 

another firm for clearing, 

(A) The clearing futures commission 

merchant shall establish risk-based 

limits for the customer, and enter into 

an agreement in advance with the 

executing firm that requires the 

executing firm to screen orders for 

compliance with those limits in 

accordance with paragraph (a)(2)(i) or 

(ii) as applicable; and 

(B) The clearing futures commission 

merchant shall establish and maintain 

systems of risk management controls 

reasonably designed to ensure 

compliance with the limits. 

(v) When an account manager 

bunches orders on behalf of multiple 

customers for execution as a block and 

post-trade allocation to individual 

accounts for clearing: 

(A) The futures commission merchant 

that initially clears the block shall 

establish risk-based limits for the block 

account and screen the order in 

accordance with paragraph (a)(2)(i) or 

(ii) as applicable; 

(B) The futures commission 

merchants that clear the allocated trades 


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on behalf of customers shall establish 

risk-based limits for each customer and 

enter into an agreement in advance with 

the account manager that requires the 

account manager to screen orders for 

compliance with those limits; and 

(C) The futures commission 

merchants that clear the allocated trades 

on behalf of customers shall establish 

and maintain systems of risk 

management controls reasonably 

designed to ensure compliance with the 

limits. 

(3) Monitor for adherence to the riskbased limits intra-day and overnight; 

(4) Conduct stress tests under extreme 

but plausible conditions 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 quarter; and 

(8) Test all lines of credit at least once 

per year. 

(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. 

(3) All records required to be 

maintained pursuant to these 

regulations shall be maintained in 

accordance with Commission 

Regulation 1.31 (17 CFR 1.31) and shall 

be made available promptly upon 

request to representatives of the 

Commission and to representatives of 

applicable prudential regulators. 

■ 5. Add § 1.74 to read as follows: 

§ 1.74 Futures commission merchant 

acceptance for clearing. 

(a) Each futures commission merchant 

that is a clearing member of a 

derivatives clearing organization shall 

coordinate with each derivatives 

clearing organization on which it clears 

to establish systems that enable the 

futures commission merchant, or the 

derivatives clearing organization acting 

on its behalf, to accept or reject each 

trade submitted to the derivatives 

clearing organization for clearing by or 

for the futures commission merchant or 

a customer of the futures commission 

merchant as quickly as would be 

technologically practicable if fully 

automated systems were used; and 

(b) Each futures commission merchant 

that is a clearing member of a 

derivatives clearing organization shall 

accept or reject each trade submitted by 

or for it or its customers as quickly as 

would be technologically practicable if 

fully automated systems were used; a 

clearing futures commission merchant 

may meet this requirement by: 

(1) Establishing systems to pre-screen 

orders for compliance with criteria 

specified by the clearing futures 

commission merchant; 

(2) Establishing systems that authorize 

a derivatives clearing organization to 

accept or reject on its behalf trades that 

meet, or fail to meet, criteria specified 

by the clearing futures commission 

merchant; or 

(3) Establishing systems that enable 

the clearing futures commission 

merchant to communicate to the 

derivatives clearing organization 

acceptance or rejection of each trade as 

quickly as would be technologically 

practicable if fully automated systems 

were used. 

■ 6. Add § 1.75 to read as follows: 

§ 1.75 Delegation of authority to the 

Director of the Division of Clearing and Risk 

to establish an alternative compliance 

schedule to comply with futures 

commission merchant acceptance for 

clearing. 

(a) The Commission hereby delegates 

to the Director of the Division of 

Clearing and Risk or such other 

employee or employees as the Director 

may designate from time to time, the 

authority to establish an alternative 

compliance schedule for requirements 

of § 1.74 for swaps that are found to be 

technologically or economically 

impracticable for an affected futures 

commission merchant that seeks, in 

good faith, to comply with the 

requirements of § 1.74 within a 

reasonable time period beyond the date 

on which compliance by such futures 

commission merchant is otherwise 

required. 

(b) A request for an alternative 

compliance schedule under this section 

shall be acted upon by the Director of 

the Division of Clearing and Risk within 

30 days from the time such a request is 

received, or it shall be deemed 

approved. 

(c) An exception granted under this 

section shall not cause a registrant to be 

out of compliance or deemed in 

violation of any registration 

requirements. 

(d) Notwithstanding any other 

provision of this section, in any case in 

which a Commission employee 

delegated authority under this section 

believes it appropriate, he or she may 

submit to the Commission for its 

consideration the question of whether 

an alternative compliance schedule 

should be established. Nothing in this 

section shall be deemed to prohibit the 

Commission, at its election, from 

exercising the authority delegated in 

this section. 

PART 23—SWAP DEALERS AND 

MAJOR SWAP PARTICIPANTS 

■ 7. Revise the authority citation for part 

23 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. 

■ 8. Add subpart I to read as follows: 

Subpart I—Swap Documentation 

Sec. 

23.500–23.505 [Reserved] 

23.506 Swap processing and clearing. 

Subpart I—Swap Documentation 

§§ 23.500–23.505 [Reserved] 

§ 23.506 Swap processing and clearing. 

(a) Swap processing. (1) Each swap 

dealer and major swap participant shall 

ensure that it has the capacity to route 

swap transactions not executed on a 

swap execution facility or designated 

contract market to a derivatives clearing 

organization in a manner acceptable to 

the derivatives clearing organization for 

the purposes of clearing; and 

(2) Each swap dealer and major swap 

participant shall coordinate with each 

derivatives clearing organization to 

which the swap dealer, major swap 

participant, or its clearing member 

submits transactions for clearing, to 

facilitate prompt and efficient swap 

transaction processing in accordance 

with the requirements of § 39.12(b)(7) of 

this chapter. 

(b) Swap clearing. With respect to 

each swap that is not executed on a 

swap execution facility or a designated 

contract market, each swap dealer and 

major swap participant shall: 

(1) If such swap is subject to a 

mandatory clearing requirement 

pursuant to section 2(h)(1) of the Act 

and an exception pursuant to 2(h)(7) is 

not applicable, submit such swap for 

clearing to a derivatives clearing 

organization as soon as technologically 

practicable after execution of the swap, 

but no later than the close of business 

on the day of execution; or 

(2) If such swap is not subject to a 

mandatory clearing requirement 

pursuant to section 2(h)(1) of the Act 

but is accepted for clearing by any 

derivatives clearing organization and 


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the swap dealer or major swap 

participant and its counterparty agree 

that such swap will be submitted for 

clearing, submit such swap for clearing 

not later than the next business day after 

execution of the swap, or the agreement 

to clear, if later than execution. 

■ 9. Add § 23.608 to subpart J, as added 

at 77 FR 20128, April 3, 2012, effective 

June 4, 2012, to read as follows: 

§ 23.608 Restrictions on counterparty 

clearing relationships. 

No swap dealer or major swap 

participant entering into a swap to be 

submitted for clearing with a 

counterparty that is a customer of a 

futures commission merchant shall 

enter into an arrangement that: 

(a) Discloses to the futures 

commission merchant or any swap 

dealer or major swap participant the 

identity of a customer’s original 

executing counterparty; 

(b) Limits the number of 

counterparties with whom a customer 

may enter into a trade; 

(c) Restricts the size of the position a 

customer may take with any individual 

counterparty, apart from an overall limit 

for all positions held by the customer 

with the swap dealer or major swap 

participant; 

(d) Impairs a customer’s access to 

execution of a trade on terms that have 

a reasonable relationship to the best 

terms available; or 

(e) Prevents compliance with the 

timeframes set forth in § 1.74(b), 

§ 23.610(b), or § 39.12(b)(7) of this 

chapter. 

■ 10. Add § 23.609 to subpart J, as 

added at 77 FR 20128, April 3, 2012, 

effective June 4, 2012, to read as 

follows: 

§ 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) Screen orders for compliance with 

the risk-based limits in accordance with 

the following: 

(i) For transactions subject to 

automated execution, the clearing 

member shall use automated means to 

screen orders for compliance with the 

risk-based limits; and 

(ii) For transactions subject to nonautomated execution, the clearing 

member shall establish and maintain 

systems of risk controls reasonably 

designed to ensure compliance with the 

limits. 

(3) Monitor for adherence to the riskbased limits intra-day and overnight; 

(4) Conduct stress tests under extreme 

but plausible conditions 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) Evaluate its ability to liquidate the 

positions it clears in an orderly manner, 

and estimate the cost of the liquidation; 

and 

(8) Test all lines of credit at least once 

per year. 

(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. 

(3) All records required to be 

maintained pursuant to these 

regulations shall be maintained in 

accordance with Commission 

Regulation § 1.31 and shall be made 

available promptly upon request to 

representatives of the Commission and 

to representatives of applicable 

prudential regulators. 

■ 11. Add § 23.610 to subpart J, as 

added at 77 FR 20128, April 3, 2012, 

effective June 4, 2012, to read as 

follows: 

§ 23.610 Clearing member acceptance for 

clearing. 

(a) Each swap dealer or major swap 

participant that is a clearing member of 

a derivatives clearing organization shall 

coordinate with each derivatives 

clearing organization on which it clears 

to establish systems that enable the 

clearing member, or the derivatives 

clearing organization acting on its 

behalf, to accept or reject each trade 

submitted to the derivatives clearing 

organization for clearing by or for the 

clearing member as quickly as would be 

technologically practicable if fully 

automated systems were used; and 

(b) Each swap dealer or major swap 

participant that is a clearing member of 

a derivatives clearing organization shall 

accept or reject each trade submitted by 

or for it as quickly as would be 

technologically practicable if fully 

automated systems were used; a clearing 

member may meet this requirement by: 

(1) Establishing systems to pre-screen 

orders for compliance with criteria 

specified by the clearing member; 

(2) Establishing systems that authorize 

a derivatives clearing organization to 

accept or reject on its behalf trades that 

meet, or fail to meet, criteria specified 

by the clearing member; or 

(3) Establishing systems that enable 

the clearing member to communicate to 

the derivatives clearing organization 

acceptance or rejection of each trade as 

quickly as would be technologically 

practicable if fully automated systems 

were used. 

■ 12. Add § 23.611 to subpart J, as 

added at 77 FR 20128, April 3, 2012, 

effective June 4, 2012, to read as 

follows: 

§ 23.611 Delegation of authority to the 

Director of the Division of Clearing and Risk 

to establish an alternative compliance 

schedule to comply with clearing member 

acceptance for clearing. 

(a) The Commission hereby delegates 

to the Director of the Division of 

Clearing and Risk or such other 

employee or employees as the Director 

may designate from time to time, the 

authority to establish an alternative 

compliance schedule for requirements 

of § 23.610 for swaps that are found to 

be technologically or economically 

impracticable for an affected swap 

dealer or major swap participant that 

seeks, in good faith, to comply with the 

requirements of § 23.610 within a 

reasonable time period beyond the date 

on which compliance by such swap 

dealer or major swap participant is 

otherwise required. 

(b) A request for an alternative 

compliance schedule under this section 

shall be acted upon by the Director of 

the Division of Clearing and Risk within 

30 days from the time such a request is 

received, or it shall be deemed 

approved. 

(c) An exception granted under this 

section shall not cause a registrant to be 

out of compliance or deemed in 

violation of any registration 

requirements. 

(d) Notwithstanding any other 

provision of this section, in any case in 

which a Commission employee 

delegated authority under this section 

believes it appropriate, he or she may 

submit to the Commission for its 

consideration the question of whether 

an alternative compliance schedule 

should be established. Nothing in this 

section shall be deemed to prohibit the 

Commission, at its election, from 

exercising the authority delegated in 

this section. 


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■ 13–14. Revise part 37 to read as 

follows: 

PART 37—SWAP EXECUTION 

FACILITIES 

Sec. 

Subparts A–G [Reserved] 

Subpart H—Financial Integrity of 

Transactions 

37.700 [Reserved] 

37.701 [Reserved] 

37.702 General financial integrity. 

37.703 [Reserved] 

Subparts I–K [Reserved] 

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

2, 7b–3 and 12a, as amended by the DoddFrank Wall Street Reform and Consumer 

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

1376. 

Subparts A–G [Reserved] 

Subpart H—Financial Integrity of 

Transactions 

§ 37.700 [Reserved] 

§ 37.701 [Reserved] 

§ 37.702 General financial integrity. 

(a) [Reserved] 

(b) For transactions cleared by a 

derivatives clearing organization: 

(1) By ensuring that the swap 

execution facility has the capacity to 

route transactions to the derivatives 

clearing organization in a manner 

acceptable to the derivatives clearing 

organization for purposes of clearing; 

and 

(2) By coordinating with each 

derivatives clearing organization to 

which it submits transactions for 

clearing, in the development of rules 

and procedures to facilitate prompt and 

efficient transaction processing in 

accordance with the requirements of 

§ 39.12(b)(7) of this chapter. 

§ 37.703 [Reserved] 

Subparts I–K [Reserved] 

PART 38—DESIGNATED CONTRACT 

MARKETS 

■ 15. Revise the authority citation for 

part 38 to read as follows: 

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

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

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

Dodd-Frank Wall Street Reform and 

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

124 Stat. 1376. 

■ 16. Designate existing §§ 38.1 through 

38.6 as the contents of added subpart A 

under the following heading: 

Subpart A—General Provisions 

* * * * * 

■ 17. Add subpart L to read as follows: 

Subpart L—Financial Integrity of 

Transactions 

Sec. 

38.600 [Reserved] 

38.601 Mandatory clearing. 

38.602–38.606 [Reserved] 

Subpart L—Financial Integrity of 

Transactions 

§ 38.601 [Reserved] 

§ 38.601 Mandatory clearing. 

(a) Transactions executed on or 

through the designated contract market, 

other than transactions in security 

futures products, must be cleared 

through a registered derivatives clearing 

organization, in accordance with the 

provisions of part 39 of this chapter. 

(b) A designated contract market must 

coordinate with each derivatives 

clearing organization to which it 

submits transactions for clearing, in the 

development of rules and procedures to 

facilitate prompt and efficient 

transaction processing in accordance 

with the requirements of § 39.12(b)(7) of 

this chapter. 

§§ 38.602–38.606 [Reserved] 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

■ 18. Revise the authority citation for 

part 39 to read as follows: 

Authority: 7 U.S.C. 2, and 7a–1 as 

amended by the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, Pub. L. 

111–203, 124 Stat. 1376. 

Subpart B—Compliance With Core 

Principles 

■ 19. In § 39.12, add paragraphs 

(a)(1)(vi) and (b)(7) to read as follows: 

§ 39.12 Participant and product eligibility. 

(a) * * * 

(1) * * * 

(vi) No derivatives clearing 

organization shall require as a condition 

of accepting a swap for clearing that a 

futures commission merchant enter into 

an arrangement with a customer that: 

(A) Discloses to the futures 

commission merchant or any swap 

dealer or major swap participant the 

identity of a customer’s original 

executing counterparty; 

(B) Limits the number of 

counterparties with whom a customer 

may enter into trades; 

(C) Restricts the size of the position a 

customer may take with any individual 

counterparty, apart from an overall limit 

for all positions held by the customer at 

the futures commission merchant; 

(D) Impairs a customer’s access to 

execution of a trade on terms that have 

a reasonable relationship to the best 

terms available; or 

(E) Prevents compliance with the time 

frames set forth in § 1.74(b), § 23.610(b), 

or § 39.12(b)(7) of this chapter. 

* * * * * 

(b) * * * 

(7) Time frame for clearing. (i) 

Coordination with markets and clearing 

members. 

(A) Each derivatives clearing 

organization shall coordinate with each 

designated contract market and swap 

execution facility that lists for trading a 

product that is cleared by the 

derivatives clearing organization in 

developing rules and procedures to 

facilitate prompt, efficient, and accurate 

processing of all transactions submitted 

to the derivatives clearing organization 

for clearing. 

(B) Each derivatives clearing 

organization shall coordinate with each 

clearing member that is a futures 

commission merchant, swap dealer, or 

major swap participant to establish 

systems that enable the clearing 

member, or the derivatives clearing 

organization acting on its behalf, to 

accept or reject each trade submitted to 

the derivatives clearing organization for 

clearing by or for the clearing member 

or a customer of the clearing member as 

quickly as would be technologically 

practicable if fully automated systems 

were used. 

(ii) Transactions executed 

competitively on or subject to the rules 

of a designated contract market or swap 

execution facility. A derivatives clearing 

organization shall have rules that 

provide that the derivatives clearing 

organization will accept or reject for 

clearing as quickly after execution as 

would be technologically practicable if 

fully automated systems were used, all 

contracts that are listed for clearing by 

the derivatives clearing organization 

and are executed competitively on or 

subject to the rules of a designated 

contract market or a swap execution 

facility. The derivatives clearing 

organization shall accept all trades: 

(A) For which the executing parties 

have clearing arrangements in place 

with clearing members of the 

derivatives clearing organization; 

(B) For which the executing parties 

identify the derivatives clearing 

organization as the intended 

clearinghouse; and 

(C) That satisfy the criteria of the 

derivatives clearing organization, 

including but not limited to applicable 


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risk filters; provided that such criteria 

are non-discriminatory across trading 

venues and are applied as quickly as 

would be technologically practicable if 

fully automated systems were used. 

(iii) Swaps not executed on or subject 

to the rules of a designated contract 

market or a swap execution facility or 

executed non-competitively on or 

subject to the rules of a designated 

contract market or a swap execution 

facility. A derivatives clearing 

organization shall have rules that 

provide that the derivatives clearing 

organization will accept or reject for 

clearing as quickly after submission to 

the derivatives clearing organization as 

would be technologically practicable if 

fully automated systems were used, all 

swaps that are listed for clearing by the 

derivatives clearing organization and are 

not executed on or subject to the rules 

of a designated contract market or a 

swap execution facility or executed noncompetitively on or subject to the rules 

of a designated contract market or a 

swap execution facility. The derivatives 

clearing organization shall accept all 

trades: 

(A) That are submitted by the parties 

to the derivatives clearing organization, 

in accordance with § 23.506 of this 

chapter; 

(B) For which the executing parties 

have clearing arrangements in place 

with clearing members of the 

derivatives clearing organization; 

(C) For which the executing parties 

identify the derivatives clearing 

organization as the intended 

clearinghouse; and 

(D) That satisfy the criteria of the 

derivatives clearing organization, 

including but not limited to applicable 

risk filters; provided that such criteria 

are non-discriminatory across trading 

venues and are applied as quickly as 

would be technologically practicable if 

fully automated systems were used. 

* * * * * 

Issued in Washington, DC, on March 20, 

2012, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Appendices to Customer Clearing 

Documentation, Timing of Acceptance 

for Clearing, and 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 Sommers, Chilton, and 

Wetjen voted in the affirmative; 

Commissioner O’Malia voted in the negative. 

Appendix 2—Statement of Chairman 

Gensler 

I support today’s final rulemaking on 

clearing which will promote market 

participants’ access to central clearing, 

increase market transparency, foster 

competition, support market efficiency, and 

bolster risk management. These rules include 

provisions on client clearing documentation, 

so-called ‘straight-through’ processing, 

bunched orders, and clearing member risk 

management. 

These final rules have all benefited from 

broad public comment. 

One of the primary goals of the Dodd-Frank 

Wall Street Reform and Consumer Protection 

Act (Dodd-Frank Act) is to lower risks to the 

public by increasing the use of central 

clearing and to promote the financial 

integrity of the markets and the clearing 

system. These rules are an important step in 

furtherance of these goals. 

First, the final rule does so by establishing 

requirements for the documentation between 

a Futures Commission Merchant (FCM) and 

its customers and between a Swap Dealer and 

its counterparties. This rule will foster 

bilateral clearing arrangements between 

customers and their FCM. The rule will 

promote competition in the provision of 

clearing services and swap liquidity to the 

broad public by limiting one FCM or Swap 

Dealer from restricting a customer or 

counterparty access to other market 

participants. 

Second, the final rule does so by setting 

standards for the timely processing of trades 

through so-called ‘straight-through’ 

processing or sending transactions promptly 

to the clearinghouse upon execution. This 

lowers risk to the markets by minimizing the 

time between submission and acceptance or 

rejection of trades for clearing. These 

regulations would require and establish 

uniform standards for prompt processing, 

submission and acceptance for clearing of 

swaps eligible for clearing. Such uniform 

standards, similar to the practices in the 

futures markets, lower risk because they 

allow market participants to get the prompt 

benefit of clearing rather than having to first 

enter into a bilateral transaction that would 

subsequently be moved into a clearinghouse. 

Third, the final rule does so by allowing 

asset managers to allocate bunched orders for 

swaps consistent with long established rules 

for allocating bunched orders for futures. 

This will help promote access to clearing of 

swaps for pension funds, mutual funds and 

other clients of asset managers. 

Lastly, the final rule does so by 

strengthening the risk management 

procedures of clearing members. One of the 

primary goals of the Dodd-Frank Act was to 

reduce the risk that swaps pose to the 

economy. The final rule would require 

clearing members that are FCMs, Swap 

Dealers, and major swap participants to 

establish risk-based limits on their customer 

and house accounts. The 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. 

[FR Doc. 2012–7477 Filed 4–6–12; 8:45 am] 

BILLING CODE 6351–01–P 


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