Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 44441 

1Section 2(h)(7) of the CEA provides an 

exception to the Clearing Requirement when one of 

the counterparties to a swap (i) is not a financial 

entity, (ii) is using the swap to hedge or mitigate 

commercial risk, and (iii) notifies the Commission 

how it generally meets its financial obligations 

associated with entering into a non-cleared swap. 

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

must consider swaps listed for clearing by a DCO 

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

3Commission regulations referred to herein are 

found at 17 CFR Ch. 1. 

4See 76 FR 58186 (Sept. 20, 2011). 

following ways: By mail address to the 

Office of Inspector General (OIG), 

National Aeronautics and Space 

Administration, 300 E Street SW., 

Washington, DC 20546–0001 via the 

NASA OIG Hotline at 1–800–424–9183, 

or cyber hotline at http://oig.nasa.gov/ 

hotline.html. 

■ 3. Section 1275.101 is amended by 

revising paragraphs (a) and (m) to read 

as follows: 

§ 1275.101 Definitions. 

(a) Research misconduct means 

fabrication, falsification, or plagiarism 

in proposing, performing, or reviewing 

research, or in reporting research 

results. Research misconduct does not 

include honest error or differences of 

opinion. Research as used in this part 

includes all basic and applied research 

as defined in OMB Circular A–11 in all 

fields of science, engineering, and 

mathematics, including, but not limited 

to, research in space and Earth sciences, 

economics, education, linguistics, 

medicine, psychology, social sciences, 

statistics, and biological and physical 

research (ground based and 

microgravity), including research 

involving human subjects or animals. 

* * * * * 

(m) NASA Adjudication Official is the 

NASA Associate Administrator of a 

Mission Directorate, Chief Technologist, 

or Chief Engineer, depending on the 

research area involved in the 

misconduct allegation (as described in 

the list of NASA research disciplines 

and their associated directorates 

contained in the Appendix to this part). 

* * * * * 

■ 4. The Appendix to Part 1275 is 

revised to read as follows: 

Appendix to Part 1275—Research 

Misconduct 

NASA Research Disciplines and Respective 

Associated Directorates 

1. Aeronautics Research—Aeronautics 

Research Mission Directorate 

2. Space Science Research—Science 

Mission Directorate 

3. Earth Science Research and 

Applications—Science Mission Directorate 

4. Biomedical Research—Human 

Exploration and Operations Mission 

Directorate 

5. Fundamental Biology—Human 

Exploration and Operations Mission 

Directorate 

6. Fundamental Physics—Human 

Exploration and Operations Mission 

Directorate 

7. Research for Exploration Systems not 

covered by the disciplines above—Human 

Exploration and Operations Mission 

Directorate 

8. Research for the International Space 

Station not covered by the disciplines 

above—Human Exploration and Operations 

Mission Directorate 

9. Other engineering research not covered 

by disciplines above—NASA Chief Engineer 

10. Other technology research not covered 

by disciplines above—NASA Chief 

Technologist 

Charles F. Bolden, Jr., 

Administrator. 

[FR Doc. 2012–18435 Filed 7–27–12; 8:45 am] 

BILLING CODE P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 50 

RIN 3038–AD60 

Swap Transaction Compliance and 

Implementation Schedule: Clearing 

Requirement Under Section 2(h) of the 

CEA 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is adopting regulations to 

establish a schedule to phase in 

compliance with the clearing 

requirement under new section 

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

Act (CEA or Act), enacted under Title 

VII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(Dodd-Frank Act). The schedule will 

provide additional time for compliance 

with this requirement. This additional 

time is intended to facilitate the 

transition to the new regulatory regime 

established by the Dodd-Frank Act in an 

orderly manner that does not unduly 

disrupt markets and transactions. 

DATES: The rules will become effective 

September 28, 2012. 

FOR FURTHER INFORMATION CONTACT: 

Sarah E. Josephson, Deputy Director, 

202–418–5684, sjosephson@cftc.gov; 

Brian O’Keefe, Associate Director, 202– 

418–5658. bokeefe@cftc.gov; or Peter 

Kals, Attorney-Advisor, 202–418–5466, 

pkals@cftc.gov, Division of Clearing and 

Risk, Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

II. Comments on the Notices of Proposed 

Rulemaking 

A. Comment Period 

B. Harmonization 

C. Cross-Border and Affiliate Transactions 

D. Comprehensive Implementation 

Schedule 

E. Prerequisite Rules 

F. Definitions 

1. Active Fund 

2. Third-Party Subaccount 

3. Category 1 and Category 2 Entities 

G. Compliance Schedule for the Clearing 

Requirement 

4. Application to All Swap Types 

5. Timing of Implementation Schedules 

III. Cost-Benefit Considerations 

IV. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

I. Background 

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

Act amended the CEA to provide, under 

new section 2(h)(1)(A) of the CEA, that 

it shall be unlawful for any person to 

engage in a swap unless that person 

submits such swap for clearing to a 

derivatives clearing organization (DCO) 

that is registered under the CEA or a 

DCO that is exempt from registration 

under the CEA if the swap is required 

to be cleared (the Clearing 

Requirement).1 Section 2(h)(2) charges 

the Commission with the responsibility 

for determining whether a swap is 

required to be cleared (a Clearing 

Requirement determination), through 

one of two avenues: (1) Pursuant to a 

Commission-initiated review; or (2) 

pursuant to a submission from a DCO of 

each swap, or any group, category, type, 

or class of swaps that the DCO ‘‘plans 

to accept for clearing.’’ 2 The 

Commission is proposing its first 

Clearing Requirement determination 

concurrently with its adoption of this 

compliance schedule rule. The 

finalization of that proposal will trigger 

the compliance schedule provided for 

under this adopting release. 

On September 20, 2011, the 

Commission published proposed 

§ 39.5(e) 3 to phase in compliance of the 

Clearing Requirement upon the 

Commission’s issuance of a Clearing 

Requirement determination pursuant to 

§ 39.5(b) or (c).4 That notice of proposed 

rulemaking (NPRM) also included an 

implementation schedule for the 

requirement pursuant to amended 

section 2(h)(8)(A), which requires a 

swap subject to the Clearing 


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5The Commission will address the proposed 

compliance schedules for trading documentation 

and margining under section 4s of the CEA, 76 FR 

58176 (Sept. 20, 2011), at the same time that it 

finalizes the underlying documentation and margin 

rules. 

6A Category 1 Entity is defined under § 50.25(a) 

to include a swap dealer; security-based swap 

dealer; major swap participant; major securitybased swap participant; or active fund (also defined 

by § 50.25(a)). 

7A Category 2 Entity is defined under § 50.25(a) 

to include a commodity pool; a private fund as 

defined in section 202(a) of the Investment Advisers 

Act of 1940 other than an active fund; or a person 

predominantly engaged in activities that are in the 

business of banking, or in activities that are 

financial in nature as defined in section 4(k) of the 

Bank Holding Company Act of 1956, provided that, 

in each case, the entity is not a Third-Party 

Subaccount. As proposed, this category contained 

employee benefit plans under the Employee 

Retirement Income and Security Act of 1974, but 

under the final rule, these plans will not be 

included in Category 2. See below for further 

discussion. 

8As proposed, the rule required compliance 

within 90, 180, or 270 days after the effective date 

set by the Commission for a Clearing Requirement 

determination. In order to clarify precisely when 

the compliance period will commence, the 

Commission has modified the rule to indicate that 

the compliance periods begin as of the date of 

publication of final Clearing Requirement 

determination rules in the Federal Register. From 

this point, market participants have either 90, 180, 

or 270 days to come into compliance. 

Requirement to be executed on a 

designated contract market (DCM) or 

swap execution facility (SEF), unless no 

SEF or DCM makes the swap available 

to trade (the Trade Execution 

Requirement). The Commission is 

hereby adopting proposed § 39.5(e), as 

newly designated § 50.25, to establish a 

schedule for compliance only for the 

Clearing Requirement. A separate 

rulemaking will promulgate the final 

implementation schedule for the Trade 

Execution Requirement.5

The compliance schedule for the 

Clearing Requirement is based on the 

type of market participants entering into 

a swap subject to the Clearing 

Requirement. The compliance schedule 

balances several goals. First, the 

Commission believes that some market 

participants, such as certain managed 

accounts, referred to under § 50.25 as 

‘‘Third-Party Subaccounts,’’ may require 

additional time to bring their swaps into 

compliance with the Clearing 

Requirement. Pursuant to § 39.5(e) 

(finalized as § 50.25), these market 

participants would be afforded 

additional time to clear their swaps so 

that they will be able to document new 

client clearing arrangements, connect to 

market infrastructure such as DCOs, and 

prepare themselves and their customers 

for the new regulatory requirements. 

Another goal of the compliance 

schedule is to have adequate 

representation of market participants 

involved at the outset of implementing 

a new regime for requiring certain 

swaps to be cleared. The Commission 

believes that having a cross-section of 

market participants involved at the 

outset of formulating and designing the 

rules and infrastructure under which 

the Clearing Requirement is 

implemented will best meet the needs of 

all market participants. 

The compliance schedule set forth in 

§ 50.25 defines three categories of 

market participants: Category 1 

Entities,6 Category 2 Entities,7 and all 

other market participants. As described 

in § 50.25(b), a swap between two 

Category 1 Entities must comply with 

the Clearing Requirement no later than 

90 days after the publication of the 

Clearing Requirement determination in 

the Federal Register.8 A swap between 

a Category 2 Entity and a Category 1 

Entity or another Category 2 Entity must 

comply within 180 days, and all other 

swaps must be submitted for clearing no 

later than 270 days after the Clearing 

Requirement determination is published 

in the Federal Register. To clarify, the 

swap is subject to the latest compliance 

date for one of the counterparties. In 

other words, if a Category 1 Entity 

enters into a swap with a Category 2 

Entity, both parties have 180 days to 

submit the swap for clearing. However, 

the counterparty entitled to the later 

compliance date may elect to clear the 

swap earlier, and in that event, its 

counterparty is required to oblige. 

II. Comments on the Notices of 

Proposed Rulemaking 

The Commission received 26 

comments during the six-week public 

comment period following publication 

of the NPRM. The Commission 

considered each of these comments in 

formulating the final regulation, 

§ 39.5(e) (finalized as § 50.25). 

A. Comment Period 

The Commission published the NPRM 

in the Federal Register on September 

20, 2011, and the public comment 

period closed on November 4, 2011. 

Financial Services Roundtable (FSR) 

comments that the public should be able 

to comment on an implementation 

schedule for each swap subject to the 

Clearing Requirement because the 

characteristics of one particular swap 

may necessitate a very different 

schedule from another. 

Pursuant to § 39.5(b)(5) in the case of 

swap submissions and § 39.5(c)(2) in the 

case of Commission-initiated reviews, 

the public will have an opportunity to 

comment on each of the Commission’s 

proposed Clearing Requirement 

determinations, and to comment on 

whether the Commission should employ 

the compliance schedule for that 

determination. In this manner, the 

public will have an opportunity to 

comment on whether use of the 

compliance schedule is appropriate for 

a given Clearing Requirement 

determination covering particular 

swaps. 

B. Harmonization 

The NPRM reflects consultation with 

the staff of the Securities and Exchange 

Commission (SEC), prudential 

regulators, and international regulatory 

authorities. With respect to the latter, 

the Commission is mindful of the 

benefits of harmonizing its regulatory 

framework with that of its counterparts 

in foreign countries. The Commission 

therefore has monitored global advisory, 

legislative, and regulatory proposals, 

and has consulted with foreign 

regulators in developing the final 

regulations. 

Vanguard, the Federal Home Loan 

Banks (FHLBs), and the Investment 

Company Institute (ICI) each 

recommend that the Commission 

coordinate the compliance schedule for 

the Clearing Requirement, as well as 

implementation schedules concerning 

other Dodd-Frank Act requirements, 

with the SEC, the prudential regulators, 

and international regulators to avoid 

market disruption and avoid regulatory 

arbitrage. The American Council of Life 

Insurers (ACLI) urges the Commission to 

coordinate with the SEC and 

international regulators to achieve 

reductions in compliance costs. A joint 

letter by the Futures Industry 

Association, the International Swaps 

and Derivatives Association, and the 

Securities Industry and Financial 

Markets Association (FIA/ISDA/SIFMA) 

urges the Commission to coordinate 

implementation schedules with those 

introduced by the SEC, the National 

Futures Association, self-regulatory 

organizations, and market infrastructure 

providers. 

In addition to the regulators 

referenced above, the Commission has 

consulted with other U.S. financial 

regulators including: (1) The Board of 

Governors of the Federal Reserve 

System; (2) the Office of the Comptroller 

of the Currency; and (3) the Federal 

Deposit Insurance Corporation. Staff 

from each of these agencies has had the 

opportunity to provide oral and/or 

written comments to this adopting 

release, as well as to the proposal. 


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Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 44443 

9See Cross-Border Application of Certain Swaps 

Provisions of the Commodity Exchange Act, 77 FR 

41213 (July 12, 2012). 

10See, e.g., Swap Data Recordkeeping and 

Reporting Requirements, 77 FR 2136, 2195–2196 

(Jan. 13, 2012); Business Conduct Standards for 

Swap Dealers and Major Swap Participants with 

Counterparties, 77 FR 9734, 9803 (Feb. 17, 2012); 

and Derivatives Clearing Organization General 

Provisions and Core Principles, 76 FR 69334, 69408 

(Nov. 8, 2011). 

11See http://www.cftc.gov/LawRegulation/ 

DoddFrankAct/index.htm. 

12See Customer Clearing Documentation, Timing 

of Acceptance for Clearing, and Clearing Member 

Risk Management, 77 FR 21278 (April 9, 2012). 

C. Cross-Border and Affiliate 

Transactions 

The NPRM did not differentiate 

between domestic and foreign swap 

dealers (SDs), major swap participants 

(MSPs) or their counterparties, and did 

not address affiliate transactions. 

MarkitSERV and the Alternative 

Investment Management Association 

(AIMA) each comment that the NPRM, 

as well as other proposals setting forth 

implementation schedules for 

complying with Dodd-Frank Act 

requirements, should clarify the status 

of cross-border transactions. Better 

Markets states that trading relationships 

between an SD or MSP and its affiliate 

or an international counterparty should 

not be treated any differently than any 

other trading relationship. FIA/ISDA/ 

SIFMA comments that the Commission 

should publish guidance concerning the 

extraterritorial application of Title VII 

prior to the commencement of any 

implementation schedule. 

The Commission separately has 

issued guidance on the cross-border 

application of Title VII, including the 

Clearing Requirement.9 With regard to 

inter-affiliate transactions, the 

Commission will be considering this 

issue in an upcoming proposal. 

D. Comprehensive Implementation 

Schedule 

This adopting release pertains 

exclusively to the implementation of the 

Clearing Requirement. 

The Coalition for Derivatives EndUsers (CDE), a joint letter by the Edison 

Electric Institute, the National Rural 

Electric Cooperative Association, and 

the Electric Power Supply Association 

(Joint Associations); ICI; and 

MarkitSERV each argue that the 

Commission should create an 

implementation plan addressing all of 

its final Dodd-Frank rules and that the 

Clearing Requirement compliance 

schedule should be part of that 

comprehensive schedule. CDE 

comments further that a comprehensive 

schedule is important to end-users, 

particularly in the areas of 

recordkeeping and reporting. The Joint 

Associations also comment that a 

comprehensive schedule should detail 

compliance dates, both specific and 

market-wide, for each registered entity 

and that the Commission should request 

further comment on this subject as more 

final rules are published. 

Vanguard comments that in 

implementing Title VII, the Commission 

should focus first on systemic risk 

issues and then issues relating to 

transparency and trade practices. 

Implementation schedules should be 

organized by type of participant and 

asset class. The schedules should also 

allow for voluntary compliance. 

ACLI argues that the Commission has 

not provided sufficient guidance 

concerning new rules and effective 

dates in order for market participants to 

conduct a prudent review of resource 

planning. ACLI maintains that 

complying with only some rules creates 

a risk that documents will have to be 

renegotiated when other rules are 

phased in. 

In this adopting release, the 

Commission is focused on providing 

additional time to market participants 

that may require more time to comply 

with one of the key elements of the 

Dodd-Frank Act—the Clearing 

Requirement. The compliance schedule 

that is the subject of this adopting 

release was proposed at the same time 

as three other compliance schedules— 

schedules for the Trade Execution 

Requirement and two important 

requirements under section 4s of the 

CEA, documentation and margin for 

uncleared swaps. Each of these 

proposed compliance schedules 

responded to particular concerns from 

market participants, especially those 

that are not required to register with the 

Commission. The Commission also has 

published compliance dates for phasing 

in implementation in nearly all of its 

final rules.10 In addition, the 

Commission has twice published on its 

Web site general schedules regarding 

the sequence and timing for its own 

consideration of final rules.11

In response to ACLI, as discussed 

further below, the Commission has 

finalized all the documentation 

requirements necessary for compliance 

with the Clearing Requirement.12 With 

regard to Vanguard’s comment, the 

Commission intends to implement the 

Clearing Requirement based on specific 

classes of swaps, beginning with those 

asset classes that are currently being 

cleared. The Commission believes that 

implementation of the Clearing 

Requirement will serve to reduce 

systemic risk by mitigating counterparty 

credit risk through the use of the 

marking-to-market, margining, and risk 

mutualization provided by central 

counterparties. The adoption of this 

compliance schedule is an important 

step toward implementing that 

requirement. In addition, the 

compliance schedule expressly allows 

for voluntary clearing prior to the 

required compliance date, and market 

participants currently are free to clear 

all swaps offered for clearing by DCOs 

on a voluntary basis. 

E. Prerequisite Rules 

The preamble to the NPRM stated that 

prior to requiring compliance with any 

Clearing Requirement determination, 

the Commission must publish the 

following final rules: Definitions of 

swap, SD, and MSP; End-User 

Exception to Mandatory Clearing of 

Swaps; and Protection of Cleared Swaps 

Customer Collateral. 

The FHLBs comment that the rule text 

of an implementation rule should state 

that the compliance schedule will not 

take effect until the Commission has 

published applicable final rules. The 

FHLBs believe that it is insufficient for 

the preamble to make this point. 

The Joint Associations state that they 

cannot comment on the adequacy of 

either the compliance schedule for the 

Clearing Requirement or other 

implementation schedules until various 

final rules have been published, 

including the definitions of swap, SD, 

and MSP. The Joint Associations want 

to see how many of their comments to 

these rules have been adopted because 

this will affect how long it will take 

their members to comply with Title VII 

requirements. ICI comments that parties 

cannot prepare for centralized clearing 

until the Commission publishes the 

final rule concerning the definition of 

swap. 

Citadel, FHLBs, and FIA/ISDA/ 

SIFMA each recommend that the 

Commission publish final rules related 

to clearing, such as customer clearing 

documentation, timing of acceptance for 

clearing, and clearing member risk 

management, prior to phasing in the 

Clearing Requirement. FHLBs state that 

the prior publication of the Customer 

Clearing Documentation, Timing of 

Acceptance for Clearing, and Clearing 

Member Risk Management rules is 

important so that market participants 

can fully appreciate risks and not have 

to renegotiate documentation. 

The Committee on Investment of 

Employee Benefit Assets (CIEBA) 

recommends that the Commission not 

impose the Clearing Requirement until 

full physical segregation is available for 

margin of cleared swaps. CIEBA also 


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44444 Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 

13End-User Exception to the Clearing 

Requirement for Swaps, adopted by the 

Commission on July 10, 2012, available at 

www.cftc.gov. 

14Protection of Cleared Swaps Customer 

Contracts and Collateral; Conforming Amendments 

to the Commodity Broker Bankruptcy Provisions, 77 

FR 6336 (Feb. 7, 2012). 

15Further Definition of ‘‘Swap Dealer,’’ 

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

Participant,’’ ‘‘Major Security-Based Swap 

Participant’’ and ‘‘Eligible Contract Participant,’’ 77 

FR 30596 (May 23, 2012). 

16Further Definition of ‘‘Swap,’’ ‘‘Security-Based 

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

Mixed Swaps; Security-Based Swap Agreement 

Recordkeeping, Section VII, adopted by the 

Commission on July 10, 2012, available at 

www.cftc.gov. 

17Customer Clearing Documentation, Timing of 

Acceptance for Clearing, and Clearing Member Risk 

Management, 77 FR 21278, (April. 9, 2012). 

18 77 FR 6336 (Feb. 7, 2012). 

comments that if the Commission 

publishes final segregation rules for 

cleared swaps customer collateral at the 

same time that it phases in the Clearing 

Requirement, then market participants’ 

limited resources would be 

overwhelmed. ICI comments that parties 

cannot prepare for centralized clearing 

until the Commission publishes the 

final rule concerning the Protection of 

Cleared Swaps Customer Collateral. ICI 

also argues that the documentation 

requirements under section 4s(i) of the 

CEA must be finalized before market 

participants are required to comply with 

mandatory clearing. 

CME recommends that the 

Commission finalize the DCO Conflicts 

of Interest rules prior to requiring 

compliance with the Clearing 

Requirement. 

The American Bankers Association 

(ABA) believes that end-user banks not 

be required to comply with the Clearing 

Requirement until 180 days after the 

Commission determines whether enduser banks will be exempt from the 

Clearing Requirement. 

AIMA believes the Commission 

should publish final rules concerning 

the Margin Requirement, as well as 

customer collateral protection rules, 

prior to phasing in the Clearing 

Requirement. 

The Commission has finalized all four 

of the rules identified in the NPRM that 

it needed to be completed prior to 

requiring compliance with the Clearing 

Requirement (namely, the End-User 

Exception to Mandatory Clearing of 

Swaps; 13 Protection of Cleared Swaps 

Customer Collateral; 14 the Further 

Definition of ‘‘Swap Dealer,’’ ‘‘SecurityBased Swap Dealer,’’ ‘‘Major Swap 

Participant,’’ ‘‘Major Security-Based 

Swap Participant’’ and ‘‘Eligible 

Contract Participant’’; 15 and the Further 

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

Swap,’’ and ‘‘Security-Based Swap 

Agreement’’; Mixed Swaps; SecurityBased Swap Agreement 

Recordkeeping).16 In addition, the 

Commission has finalized rules related 

to Customer Clearing Documentation, 

Timing of Acceptance for Clearing, and 

Clearing Member Risk Management.17

Finalizing these rules addresses the 

FHLBs’ concerns about having to revise 

documentation more than once and 

provides certainty as to swap processing 

requirements and expectations 

regarding risk management for clearing 

members. On the other hand, in 

response to CME’s comment, the 

Commission does not believe it is 

necessary for final DCO Conflicts of 

Interest rules to be in effect before 

requiring compliance with the Clearing 

Requirement because these rules do not 

relate directly to the clearing process, 

customer connectivity, clearinghouse 

risk management, or other matters that 

would affect the implementation of the 

Clearing Requirement. 

In response to the FHLBs’ request that 

the implementation rule text include a 

provision that the rule is not effective 

until the definitions of SD, MSP, and 

swap are finalized, the Commission 

reiterates that all of the pre-requisite 

rules for the Clearing Requirement have 

been adopted. With regard to CIEBA’s 

comment about full physical 

segregation, the Commission published 

its final rule concerning Protection of 

Cleared Swaps Customer Collateral on 

February 7, 2012.18 In that rulemaking, 

the Commission indicated that it may 

address issues related to collateral held 

in third-party safekeeping accounts at 

some point in the future. However, 

given that a fully operational 

segregation regime is required to be in 

place by November 8, 2012, the 

Commission does not believe that it is 

necessary for this additional matter to 

be resolved prior to requiring 

compliance with the Clearing 

Requirement. 

In response to ICI’s comment, the 

Commission clarifies that finalization of 

the swap trading relationship 

documentation requirements for SDs 

and MSPs under section 4s(i) of the CEA 

is not required for compliance with the 

Clearing Requirement because the 

documentation that is the subject of 

those rules relates primarily to 

bilaterally-executed, uncleared swap 

transactions, and none of the provisions 

in proposed § 23.504 pertain directly to 

the Clearing Requirement. Similarly, in 

response to AIMA’s comment, final 

margin rules for uncleared swaps are 

not required to be finalized prior to 

requiring compliance with the Clearing 

Requirement as these are related, but 

distinct, provisions under the DoddFrank Act. 

F. Definitions 

Under § 39.5(e)(1), the Commission 

proposed definitions of the terms 

‘‘Category 1 Entity,’’ ‘‘Category 2 

Entity,’’ ‘‘Active Fund,’’ and ‘‘ThirdParty Subaccount.’’ The definitions set 

forth in proposed § 39.5(e) (now § 50.25) 

would apply specifically to provisions 

contained in part 39 (now part 50) and 

only those other rules that explicitly 

cross-reference these definitions. The 

Commission is adopting the definitions 

as proposed, with the exceptions 

discussed below. 

1. Active Fund 

As proposed under § 39.5(e)(1), ‘‘any 

private fund as defined in section 202(a) 

of the Investment Advisers Act of 1940, 

that is not a third-party subaccount and 

that executes 20 or more swaps per 

month’’ would be defined as an ‘‘Active 

Fund’’ and subject to the shortest 

implementation schedule for 

compliance with the Clearing 

Requirement. 

Numerous commenters, such as Better 

Markets, Chris Barnard, and AIMA, 

agree with the Commission that using a 

market participant’s average monthly 

trading volume would be an appropriate 

proxy for determining an entity’s ability 

to comply with the Clearing 

Requirement and would be better than 

a proxy based on notional volume or 

open interest. AIMA agrees with the 

NPRM’s proposal that Active Funds be 

subject to the 90-day deadline. 

Other commenters express concerns 

about solely relying on monthly 

volumes as a proxy, especially without 

further defining the types of swaps that 

would be included in the calculation. 

ACLI states that the frequency of trading 

is not an appropriate indicator of a 

market participant’s experience or 

resources. The Association of 

Institutional Investors (AII) states that 

the definition should specify the type of 

swaps that count towards the threshold. 

CDE recommends a minimum average 

monthly notional threshold to avoid 

capturing smaller end-users. CDE also 

states that hedges and inter-affiliate 

swaps should be excluded from this 

monthly average threshold. Managed 

Funds Association (MFA) similarly 

requests clarification regarding those 

swaps that would be included in the 

monthly swap calculation. Specifically, 

MFA requests clarification as to whether 

novations, amendments, or partial tearups would be included. 

Commenters also focus on the average 

monthly threshold of 20 swaps per 


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Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 44445 

month for the preceding 12 months. 

FIA/ISDA/SIFMA proposes that the 

threshold be an average of 200 trades 

per month. Vanguard proposes a similar 

threshold. Both AII and MFA think the 

proposed threshold was overly 

inclusive. MFA also highlights its belief 

that the proposed definition would be 

difficult to administer, while 

unnecessarily creating another tier of 

market participants for the purposes of 

the implementation schedules. 

In response to these comments, the 

Commission is increasing the average 

monthly threshold to 200 swap trades 

per month for the preceding 12 months. 

The Commission believes that monthly 

trading volume is a suitable proxy for 

determining the appropriate 

implementation schedule for a swap 

counterparty. By increasing the 

threshold to 200, as recommended by 

FIA/ISDA/SIFMA, as well as Vanguard, 

the risk of capturing smaller, less 

experienced swap counterparties should 

be substantially diminished. The market 

participants engaging in this level of 

swap activity should be able to access 

the resources necessary to meet the 90- 

day implementation schedule. In light 

of the number of transactions currently 

being cleared on a voluntary basis by 

funds, the Commission does not believe 

that an increase in the threshold of 

monthly swap trades will negatively 

impact the goal of broad market 

participation in the implementation of 

the Clearing Requirement. The 

Commission believes this increase in 

the average monthly threshold also 

addresses CDE’s concerns about smaller 

market participants using swaps only to 

hedge risk. 

Further, by maintaining the concept 

of Active Fund, the Commission 

believes that it will continue to ensure 

adequate representation across the 

spectrum of market participants during 

the first phase of the implementation of 

the Clearing Requirement. As a result of 

this participation, processes and 

infrastructure will be established to 

serve all segments of the market, not just 

SDs and MSPs, which are included in 

the initial phase of the compliance 

schedule for the Clearing Requirement. 

In response to AII and MFA, the 

Commission clarifies that the average 

monthly threshold of swaps applies to 

new swaps that the entity enters into, 

and it does not apply to novations, 

amendments, or partial tear-ups. In 

addition, the Commission clarifies that 

the 200 swap threshold includes any 

swap, as defined under the CEA and 

§ 1.3, and not just those swaps that 

would be subject to the relevant 

Clearing Requirement determination 

and attendant compliance schedule. 

2. Third-Party Subaccount 

Under § 39.5(e) (finalized herein as 

§ 50.25), Third-Party Subaccounts are 

excluded from the definitions of 

Category 1 Entity and Category 2 Entity, 

with the effect that such subaccounts 

will have 270 days, the longest period, 

in which to comply with the Clearing 

Requirement. The NPRM defined ThirdParty Subaccounts as ‘‘a managed 

account that requires the specific 

approval by the beneficial owner of the 

account to execute documentation 

necessary for executing, confirming, 

margining, or clearing swaps.’’ The 

purpose of excluding Third-Party 

Subaccounts from the defined categories 

was to ensure that investment managers, 

who may be faced with bringing 

numerous accounts into compliance, 

would have adequate time to do so. 

Commenters question whether the 

definition was broad enough to provide 

sufficient time for Third-Party 

Subaccounts to comply with the 

Clearing Requirement. ICI noted that 

Third-Party Subaccounts, whether 

subject to the specific execution 

authority of the beneficiary or not, 

require managers to work closely with 

clients when entering into trading 

agreements on the customer’s behalf. As 

such, ICI feels that no distinction should 

be made based on specific execution 

authority or lack thereof. ICI comments 

that all Third-Party Accounts should be 

uniformly classified and be given 270 

days to comply. AII similarly states that 

the definition is too narrow given the 

administrative work required to manage 

an account, regardless of the execution 

authority. Further, AII states that 

execution authority is not an industry 

standard. The term, as proposed, 

therefore divides the universe of 

managed accounts inappropriately. FIA/ 

ISDA/SIFMA recommends that all 

accounts managed by third parties, 

regardless of the execution authority, 

should be given the most time to 

comply with the Clearing Requirement. 

Based on the comments received, the 

Commission is revising the definition of 

Third-Party Subaccount to mean ‘‘an 

account that is managed by an 

investment manager that (1) is 

independent of and unaffiliated with 

the account’s beneficial owner or 

sponsor, and (2) is responsible for the 

documentation necessary for the 

account’s beneficial owner to clear 

swaps.’’ In modifying this definition, 

the Commission is taking into account 

the point made by AII, FIA/ISDA/ 

SIFMA, and ICI that all investment 

managers will need additional time to 

comply with a Clearing Requirement 

regardless of whether they have explicit 

execution authority. However, the 

definition retains the nexus between the 

investment manager and the 

documentation needed for clearing 

swaps. In other words, if the investment 

manager has no responsibility for 

documenting the clearing arrangements, 

then that account would be required to 

clear its swaps subject to required 

clearing within 180 days. For those 

accounts under the revised definition, 

however, the Commission believes that 

the 270-day deadline is more 

appropriate. Given the general notice 

investment managers have had about 

the Dodd-Frank Act’s Clearing 

Requirement since the enactment of the 

statute in July, 2010, managers should 

have been able to consider and plan the 

infrastructure and resources that are 

necessary for all of their accounts, 

including Third-Party Subaccounts, to 

comply with the Clearing Requirement. 

Thus, the 180- and 270-day deadlines 

should provide adequate time to 

accommodate all managed accounts. 

3. Category 1 and Category 2 Entities 

The compliance schedule is organized 

according to the type of market 

participant. To the extent that the 

Commission determines that a 

compliance schedule is warranted in 

connection with a Clearing Requirement 

determination (i.e. to comply with the 

Clearing Requirement) a market 

participant defined as a Category 1 

Entity will have 90 days to comply, a 

Category 2 Entity will have 180 days, 

and all others will have 270 days. 

According to the proposed definitions, a 

Category 1 Entity includes an SD, a 

security-based swap dealer, an MSP, a 

major security-based swap participant, 

or an Active Fund. A Category 2 Entity 

includes a commodity pool, a private 

fund, as defined by the Investment 

Advisers Act of 1940, an ERISA plan, or 

a person predominantly engaged in 

banking or other financial activities, as 

defined by section 4(k) of the Bank 

Holding Company Act. A Category 2 

Entity would not include an Active 

Fund or a Third-Party Subaccount. 

Encana Marketing (USA) Inc. (Encana) 

and the Joint Associations comment that 

non-financial end users should be 

expressly included in the category with 

the longest timeframe. CDE argues that 

financial end-users should be treated 

identically to non-financial end-users 

because they do not pose systemic risk, 

and, therefore, should be given the most 

time to comply with the Clearing 

Requirement, and not included in 

Category 2. ICI seeks clarification that a 

market participant can determine 

whether it is an MSP for purposes of the 

compliance schedule for the Clearing 


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44446 Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 

19Similarly, the Commission would consider 

allowing entities to petition for additional time to 

comply to the extent that they discover that they 

have exceeded the de minimis threshold under the 

swap dealer definition and are required to register 

during the 90-day period for Category 1. 

Requirement at the same time that it is 

required to review its status as an MSP 

under other Commission and SEC rules. 

CIEBA states that in-house ERISA 

funds should be in the group with the 

longest compliance time, and not 

Category 2 Entities. CIEBA notes that 

such funds do not pose systemic risk, 

and they typically rely upon third-party 

managers for some portion of their fund 

management. Splitting in-house and 

external accounts (i.e. those accounts 

meeting definition of Third-Party 

Subaccount and permitted 270 days) of 

the same ERISA plan will impact risk 

management given different 

implementation schedules. CIEBA also 

states that this distinction will cause 

pension funds to bear the costs of 

compliance because they will need to 

comply prior to their third-party 

managers, who would be better 

positioned to provide insight and 

service in this regard. 

The Commission believes that the 

definitions of Category 1 Entity should 

be finalized as proposed, but that the 

definition of Category 2 Entity should be 

modified by removing the reference to 

ERISA plans. In response to Encana and 

the Joint Associations, non-financial 

end users are adequately addressed in 

§ 39.5(e)(2)(iii) (now § 50.25(b)(3))— 

unless the swap transactions are eligible 

to claim the exception from the Clearing 

Requirement under section 2(h)(7) of the 

CEA, the parties are given 270 days to 

comply with the Clearing Requirement. 

With respect to issues raised by CDE 

regarding those financial entities 

included in Category 2, based on 

numerous meetings with participants in 

the swap market, the Commission 

believes that financial entities are 

capable of complying with the Clearing 

Requirement 90 days sooner than nonfinancial entities. Accordingly, the 

compliance schedule has correctly 

situated Category 2 Entities based upon 

their ability to meet the requirements of 

the underlying regulations. Moreover, 

the distinction between financial and 

non-financial entities has a statutory 

basis in section 2(h)(7) of the CEA. 

The Commission recognizes the 

concerns raised by CIEBA regarding 

splitting in-house and external accounts 

(i.e., those accounts meeting the 

definition of Third-Party Subaccount 

and permitted 270 days) of the same 

ERISA plan. In response to these 

concerns, the Commission is removing 

the reference to employee benefit plans 

as defined in paragraphs (3) and (32) of 

section 3 of the Employee Retirement 

Income and Security Act of 1974. As a 

result, these ERISA plans will be 

afforded the longest compliance period 

(270 days). 

With regard to ICI’s comment, a 

potential MSP can review its obligation 

to register as an MSP at the same time 

it is reviewing where it fits under the 

Clearing Requirement compliance 

schedule. In many instances, MSPs will 

have to review their registration 

obligations ahead of complying with the 

Clearing Requirement. However, if an 

entity discovers that it has crossed the 

threshold established under the MSP 

rules and is required to register during 

the 90-day period for Category 1 

Entities, the Commission would 

consider allowing that entity to petition 

for additional time to come into 

compliance with the Clearing 

Requirement.19

G. Compliance Schedule for the 

Clearing Requirement 

As mentioned above, § 39.5(e)(2) 

provides that when the Commission 

determines that an implementation 

schedule is appropriate in connection 

with a given Clearing Requirement 

determination, market participants 

within the definition of Category 1 will 

have 90 days to comply, those within 

the definition of Category 2 will have 

180 days, and all others 270 days to 

implement the Clearing Requirement. 

4. Application to All Swap Types 

The Clearing Requirement compliance 

schedule is based upon the nature of a 

given swap market participant, 

considering the participant’s risk 

profile, compliance burden, resources, 

and expertise. The schedule does not 

contemplate different implementation 

timeframes based upon the 

characteristics of particular swaps. 

AIMA states that it does not believe 

further implementation schedules are 

necessary based on the nature of the 

swap itself. Better Markets, Citadel, and 

MFA comment that the compliance 

schedule should apply, however, to all 

swaps within a ‘‘group’’ or ‘‘class,’’ as 

defined by the Commission’s Clearing 

Requirement determination. 

Commenters such as CDE state that 

the Commission should publish an 

implementation schedule specific to the 

characteristics of a particular type of 

swap. CDE comments that because it is 

unlikely that end-users, and other 

entities relied upon by end-users, will 

be able to meet the requirements 

necessary to comply with clearing 

determinations for all swap products at 

the same time, the Commission should 

phase in implementation deadlines by 

swap type, according to the amount of 

systemic risk posed by a particular 

swap. 

MarkitSERV asserts that all DoddFrank Act requirements should be 

phased-in by asset class, taking into 

account that different asset classes have 

various levels of product 

standardization, electronification, 

volumes, and types of counterparties. 

FIA/ISDA/SIFMA also states that there 

should be a separate compliance 

schedule for each asset class. FIA/ISDA/ 

SIFMA also states that the Commission 

should require credit default swaps and 

interest rate swaps to be cleared first 

because those products are already 

being cleared. Commodity and equity 

swaps, according to FIA/ISDA/SIFMA, 

should be required to be cleared later 

because the marketplace is currently 

clearing fewer of those products. 

AIMA, CDE, ICI, and MarkitSERV 

state that the compliance schedule 

should require the Commission to phase 

in each Clearing Requirement 

determination as set forth in § 39.5(e). 

FHLB and ICI comment that the 

Commission should have the flexibility 

to extend clearing implementation 

dates, but not shorten them. Citadel 

counters that the compliance schedule 

should only be triggered when a 

determination is issued for a new 

category of swaps. 

This rule affords the Commission 

discretion to determine whether to 

apply the compliance schedule in 

connection with a particular Clearing 

Requirement determination. The 

Commission agrees that while the 

schedule may be necessary in 

connection with some Clearing 

Requirement determinations, especially 

those covering new classes of swaps, 

there also may be determinations that 

are sufficiently similar to prior ones that 

no compliance schedule is necessary. 

As such, the Commission will 

determine whether or not to apply the 

§ 39.5(e) (now § 50.25) compliance 

schedule as part of its analysis in 

connection with each Clearing 

Requirement determination. 

Further, it remains the Commission’s 

intention that those swaps currently 

being cleared will be subject to the first 

Clearing Requirement determinations. 

As a result, market participants initially 

will comply with the Clearing 

Requirement using established 

platforms and technology. This should 

limit a market participant’s burden in 

transitioning to clearing, as the use of 

existing infrastructure will mean less 

time and expense necessary to develop 

independent programs, technology, or 

platforms to clear such transactions. 


tkelley on DSK3SPTVN1PROD with RULES
Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 44447 

20Further Definition of ‘‘Swap Dealer,’’ 

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

Participant,’’ ‘‘Major Security-Based Swap 

Participant’’ and ‘‘Eligible Contract Participant,’’ 77 

FR 30596 (May 23, 2012). 

5. Timing of Implementation Schedules 

Citadel and Better Markets comment 

that they agree with the proposed 

compliance schedule because market 

participants have had notice of the 

movement towards clearing for one to 

three years, and the clearing 

infrastructure already exists with regard 

to interest rate and credit default swap 

products. Citadel and Tradeweb believe 

the proposed schedule correctly staggers 

compliance according to category of 

market participant. Citadel does not 

support extending the 270-day 

timeframe because 270 days would 

grant sufficient time to market 

participants without providing so much 

time as to engender a material, 

competitive advantage or regulatory 

arbitrage. AIMA believes the proposed 

schedule grants sufficient time to each 

category of market participant so that 

they will be able to comply with the 

Clearing Requirement. Similarly, the 

Joint Associations and The Westpac 

Group (Westpac) generally agree with 

phasing in implementation with the 

Clearing Requirement according to 

category of participant. 

CIEBA states that because SDs, MSPs, 

and Active Funds will be the first focus 

for all third party vendors, ERISA plans 

will be competing for these resources 

only after the first implementation 

deadline has passed, leaving only 90 

days for a crowded market place to 

comply. With limited resources, such a 

tight timeframe may lead to inadequate 

agreements and/or increased risk 

exposure. Further, inadequate 

agreements caused by lack of resources 

and rushed documentation will create 

even further cost disparity for clearing 

between U.S. pension plans and 

European ones that will not be required 

to clear swaps. As such, CIEBA 

recommends that Category 2 Entities 

have more than 180 days to comply. 

Likewise, FIA/ISDA/SIFMA note that 

the compliance schedule should be 

lengthened and that buy-side entities, 

which may currently be categorized as 

Category 1 Entities, should not be 

required to commence clearing until the 

second quarter of 2013 at the earliest. 

CDE argues that SDs and MSPs should 

comply before establishing other enduser deadlines. CDE believes that if 

Category 1 Entities cannot comply, then 

that will compound problems for 

Category 2 and 3 Entities. If an 

implementation schedule must be set, 

the CDE recommends one year for endusers, in light of their limited internal 

resources and the competition for 

external resources. 

ACLI comments that complex issues 

will surface as market participants try to 

combine the agency framework 

presently existing in the futures markets 

(i.e., customer-futures commission 

merchant) with the principal-toprincipal framework that has existed in 

the over-the-counter swaps market. In 

addition to executing the necessary 

agreements, insurers will want to ensure 

they enter into agreements with parties 

that serve them best. The combination 

of these factors means that timeframes 

are too short and may result in smaller 

firms accepting unfavorable agreements 

with fewer counterparties, possibly 

concentrating risk. ACLI also highlights 

that insurers face an additional burden 

in ensuring that compliance with the 

Clearing Requirement is consistent with 

their state regulatory obligations. 

Vanguard argues that additional time 

will be required to enter into the new 

agreements necessitated by the move to 

a cleared derivatives market. Vanguard 

highlights the large volume of such 

agreements and the lack of market 

standards. ICI also finds the compliance 

schedule to be too short in light of the 

needs to build and test new systems, 

adapt to new regulatory requirements, 

and educate customers about these 

changes. 

Mastercard Worldwide urges the 

Commission to give non-bank firms at 

least 270 days to comply with the 

Clearing Requirement in respect of their 

foreign currency hedging activities, even 

if the firm is covered by section 4(k) of 

the Bank Holding Company Act. 

Westpac comments that Category 1 

Entities should have at least 180 days to 

comply with the Clearing Requirement, 

noting that not all SDs, particularly 

smaller ones, are currently DCO 

members. Regional Banks also request 

that small SDs have at least 180 days to 

comply with the Clearing Requirement 

in light of their relative lack of resources 

and experience, as compared to larger 

SDs. 

ACLI and FSR believe that the 

compliance schedule for the respective 

entity categories should run 

consecutively rather than concurrently. 

For example, the 180 days given to 

Category 2 Entities to comply with the 

Clearing Requirement should begin only 

after the expiration of the 90 days given 

to Category 1 Entities. 

FSR does not believe there are 

sufficient resources, either internally, at 

market participants, or externally, at 

third party vendors, for the compliance 

schedule to run concurrently. If the 

schedule were to run concurrently, then 

resources would be allocated 

sequentially to the detriment of entities 

in the later implementation groups. 

ACLI, Joint Associations, and the 

Coalition of Physical Energy Companies 

(COPE) each express concern that the 

proposed compliance schedule does not 

provide sufficient time for the software 

companies and other vendors, upon 

which many smaller market participants 

rely, to develop, test, and debug the 

software and other technology that will 

be needed to ensure compliance with 

the Clearing Requirement. The Joint 

Associations and COPE each suggests 

the Commission take affirmative steps to 

solicit feedback from these software 

makers, particularly from vendors that 

provide ‘‘position and trade capture 

software,’’ in order to determine the 

amount of time market participants will 

need to implement software necessary 

to comply with the Clearing 

Requirement. 

The Commission is finalizing the 

compliance schedule for the Clearing 

Requirement as proposed, except for the 

changes described above for ERISA 

plans and Third-Party Subaccounts. 

The Commission believes that the 90-, 

180-, and 270-day implementation 

periods will give market participants 

sufficient time to comply with the 

Clearing Requirement. The Commission 

agrees with commenters such as Citadel 

and Better Markets that the move to 

required clearing has been proceeding 

for two years under the Dodd-Frank Act. 

This period should have allowed parties 

to contemplate and design 

implementation plans and to identify 

the resources needed to execute those 

plans. With the Commission’s decision 

to focus on those swaps that are 

currently cleared when considering its 

initial Clearing Requirement 

determinations, market participants will 

be working with clearing offerings that 

are seasoned and established, justifying 

the timeframes provided for in the 

compliance schedule. For these reasons, 

the Commission also declines to change 

the concurrent nature of the compliance 

schedule. 

Given the final rules for the 

definitions of swap dealers, and the 

threshold used in terms of annual 

notional volume of swaps for such swap 

dealers, the Commission does not 

believe it necessary to further 

distinguish between larger swap dealers 

and smaller ones for purposes of the 

implementation periods related to 

Clearing Requirements.20 Similarly, the 

Commission does not believe it 

practicable to make distinctions 

between entities covered by section 4(k) 

of the Bank Holding Company Act for 

the purpose of establishing a 180-day 


tkelley on DSK3SPTVN1PROD with RULES
44448 Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 

21 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Pub. L. No. 111–203, 124 Stat. 1376 

(2010). 

22See http://www.lchclearnet.com/swaps/ 

volumes/. 

23See http://www.cmegroup.com/trading/ 

interest-rates/cleared-otc/index.html#data and 

http://www.trioptima.com/repository/historicalreports.html. 

24See Tabb Group, ‘‘Technology and Financial 

Reform: Data, Derivatives and Decision Making.’’ 

25Section 2(h)(2) of the CEA charges the 

Commission with responsibility for determining 

whether a swap is required to be cleared (a Clearing 

Requirement determination). 

26When a bilateral swap is moved into clearing, 

the clearinghouse becomes the counterparty to each 

of the original participants in the swap. This 

standardizes counterparty risk for the original swap 

participants in that they each bear the same risk 

attributable to facing the clearinghouse as 

counterparty. In addition, clearing mitigates 

counterparty risk to the extent that the 

clearinghouse is a more creditworthy counterparty 

relative to those that each participant in the trade 

might have otherwise faced. This is because a 

clearinghouse benefits from netting with 

counterparties and may compel counterparties to 

post additional initial margin as collateral or force 

them to reduce their outstanding positions when 

markets move against them. Clearinghouses have 

demonstrated resilience in the face of past market 

stress. Most recently, they remained financially 

sound and effectively settled positions in the midst 

of turbulent events in 2007–2008 that threatened 

the financial health and stability of many other 

types of entities. 

27See 76 FR 58186. 

28The schedule contained in the NPRM, like the 

one contained in this adopting release, can be used 

at the option of the Commission when issuing 

Clearing Requirement determinations. 

29ACLI provides an estimate for one member’s 

information technology and legal costs to comply 

with all Title VII requirements. The estimate does 

not include any calculations and does not separate 

out any costs they believe are directly attributable 

to this rule. 

implementation period as compared to 

a 270-day period. 

In response to CDE, the Commission 

also notes that certain swaps would not 

be subject to the Clearing Requirement 

under section 2(h)(7) of the CEA when 

one of the counterparties to a swap (i) 

is not a financial entity, (ii) is using the 

swap to hedge or mitigate commercial 

risk, and (iii) notifies the Commission 

how it generally meets its financial 

obligations associated with entering into 

a non-cleared swap. If a market 

participant can claim an exemption, the 

Clearing Requirement will not be 

applicable. In all other cases, the 

implementation schedule for a Clearing 

Requirement would provide for up to 

180 or 270 days for such market 

participants. 

In response to concerns that state 

regulatory obligations for insurance 

companies might create obstacles to 

compliance with implementation 

schedules as suggested by ACLI, the 

Commission observes that those 

insurers would have a minimum of six 

months to work with their state 

regulators to address the matter. If no 

solution could be found within that 

time period, an affected insurer would 

be able to petition the Commission for 

specific relief. 

The Commission also has taken 

affirmative steps to ensure that external 

providers of services to derivative 

market participants, such as derivatives 

software providers, have been included 

in the dialogue concerning 

implementation scheduling. At the May 

2011 Implementation Roundtable, these 

vendors voiced their opinions with 

respect to how an implementation 

schedule could provide sufficient time 

for market participants relying on ‘‘offthe-shelf’’ derivatives tracking software 

to deploy such software such that they 

could comply with the Clearing 

Requirement. The Commission will 

continue to develop its understanding of 

technology issues and will solicit 

comment on this issue in forthcoming 

proposed Clearing Requirement 

determinations. 

III. Cost-Benefit Considerations 

A. Pre-Dodd-Frank Context 

Prior to the enactment of the DoddFrank Act,21 swaps were not subject to 

required clearing. However, the limited 

market data that is available suggests 

that over-the-counter (OTC) swap 

markets have been migrating into 

clearing over the last few years in 

response to natural market incentives as 

well as in anticipation of the DoddFrank Act’s clearing requirement. 

LCH.Clearnet data, for example, shows 

that the outstanding volume of interest 

rate swaps cleared by LCH has grown 

steadily since at least November 2007, 

as has the monthly registration of new 

trade sides. Together, those facts 

indicate increased demand for LCH 

clearing services related to interest rate 

swaps, a portion of which preceded the 

Dodd-Frank Act.22 Data available 

through CME and TriOptima indicate 

similar patterns of growing demand for 

interest rate swap clearing services, 

though their publicly available data 

does not provide a picture of demand 

prior to the passage of the Dodd-Frank 

Act in July 2010.23 The trend toward 

increased clearing of swaps is likely to 

continue as the Commission begins 

determining that certain swaps are 

required to be cleared (Clearing 

Requirement determination). In fact, the 

Tabb Group estimates that 60–80% of 

the swaps market measured by notional 

amount will be cleared within five years 

of the time that the Dodd-Frank Act is 

implemented.24

B. Dodd-Frank Act Section 723(a)(3) 

In the wake of the financial crisis of 

2008, Congress determined, among 

other things, that swaps shall be cleared 

upon Commission determination. 

Specifically, section 723(a)(3) of the 

Dodd-Frank Act amended section 

2(h)(1)(A) of the CEA to make it 

‘‘unlawful for any person to engage in 

a swap unless that person submits such 

swap for clearing to a derivatives 

clearing organization that is registered 

under this Act or a derivatives clearing 

organization that is exempt from 

registration under this Act if the swap 

is required to be cleared.’’ 25 The 

statutory swap clearing requirement is 

designed to standardize and reduce 

counterparty risk associated with swaps, 

and, in turn, mitigate the potential 

systemic impact of such risks and 

reduce the likelihood for swaps to cause 

or exacerbate instability in the financial 

system.26 It reflects a fundamental 

premise of the Dodd-Frank Act: The use 

of properly functioning central clearing 

can reduce systemic risk. 

C. Final Rule 

The rule contained in this adopting 

release addresses one aspect of required 

swap clearing under section 2(h) of the 

CEA: Implementation scheduling 

following a Commission determination 

that a class of swaps is required to be 

cleared. In other words, is immediate 

clearing required or is implementation 

subject to some delay. On September 20, 

2011, the Commission published a 

NPRM.27 The Commission proposed a 

phased-in compliance schedule for 

swaps subject to Clearing Requirement 

determinations that distinguishes 

among Category 1 Entities, Category 2 

Entities, and all other entities (referred 

to for purposes of this section III as 

‘‘Category 3 Entities’’); those entities, 

respectively, would have 90 days, 180 

days, and 270 days, from the date of the 

Clearing Requirement determination to 

comply with the Clearing 

Requirement.28 The NPRM also 

requested comment with respect to the 

costs and benefits of the proposed 

schedule, including, specifically, data, 

assumptions, calculations, or other 

information to quantify its costs and 

benefits, as well as alternatives to it. The 

Commission received 26 comment 

letters in response, none of which 

provided quantitative analysis regarding 

the costs or benefits of the proposed 

compliance schedule.29

These comments touch upon a variety 

of issues, and include a number that 

supported the Commission’s approach 

as proposed. Others note certain areas of 

concern about costs or benefits under 


tkelley on DSK3SPTVN1PROD with RULES
Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 44449 

30An ‘‘Active Fund’’ is any private fund as 

defined in section 202(a) of the Investment Advisers 

Act of 1940, that is not a third-party subaccount and 

that executes 200 or more swaps per month. The 

Commission does not intend to use the designation 

for any purpose beyond this rule. 

31 7 U.S.C. 19(a). 32See letter from CIEBA. 

the rule as proposed, and either 

expressly propose alternatives or raise 

issues that have caused the Commission 

to consider alternatives to it. Among 

other things, commenters responded to 

the phased approach, the entities 

included in Category 1, Category 2, and 

Category 3, the amount of time that the 

schedule provides for entities in each 

category, and the optionality of the 

schedule. 

In the absence of this rule, market 

participants would be required to 

comply with the Clearing Requirement 

immediately upon issuance of a 

Clearing Requirement determination by 

the Commission. Pursuant to the rule, 

however, when the Commission deems 

it appropriate, market participants will 

be provided additional time as 

prescribed in the rule’s schedule to 

comply with Clearing Requirement 

determinations. Category 1 entities, 

which include, among others, SDs, 

MSPs, and Active Funds,30 will have 90 

days from the date that a Clearing 

Requirement determination is published 

in the Federal Register to comply. 

Category 2 Entities, which include 

commodity pools; private funds as 

defined by the Investment Advisers Act 

of 1940, other than Active Funds; and 

banks; but not Third-Party Subaccounts, 

will have 180 days to comply with a 

new Clearing Requirement 

determination. Category 3 Entities are 

those with Third-Party Subaccounts, as 

well as any other entity not eligible to 

claim an exception under section 2(h)(7) 

of the CEA, including ERISA plans, and 

they will have 270 days to comply with 

a Clearing Requirement determination 

once it is published in the Federal 

Register. 

The discussion that follows considers 

the costs and benefits of, and 

alternatives to, the rule in this adopting 

release. 

D. Statutory Mandate To Consider the 

Costs and Benefits of the Commission’s 

Action: CEA Section 15(a) 

Section 15(a) of the CEA 31 requires 

the Commission to consider the costs 

and benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission considers the costs and 

benefits resulting from its discretionary 

determinations with respect to the 

section 15(a) factors. 

In this rulemaking the Commission is 

not imposing clearing requirements, but 

is exercising its discretion to stagger 

required clearing implementation 

according to a particular schedule and 

subject to the conditions specified in 

these rules. For purposes of this 

analysis, the Commission considers the 

costs and benefits attributable to its 

choices in this rulemaking—e.g., to 

stagger the implementation of clearing 

requirements and to do so in the manner 

prescribed—against those that would 

arise absent this Commission action— 

i.e., if implementation of the DoddFrank Act’s Clearing Requirement for 

those swaps that the Commission 

separately determines to be subject to 

clearing was not staggered according to 

the rule’s schedule. 

For reasons discussed in more detail 

below, the cost and benefits associated 

with requiring clearing immediately 

upon the Clearing Requirement 

determination for a swap class, or after 

some longer versus shorter period of 

delay, are not susceptible to meaningful 

quantification. As described above, 

these are not the costs and benefits of 

implementing Clearing Requirement 

determinations, but rather the costs and 

benefits of implementing them more 

slowly than would be required in the 

absence of this rule. The Commission is 

not aware of any analog to either an 

immediate or delayed requirement to 

establish the capability to clear that 

would produce data that the 

Commission could use to estimate the 

difference in costs and benefits between 

the two. Moreover, any data that might 

be gleaned from the experiences of an 

individual market participant 

establishing a relationship with a 

futures commission merchant (FCM) 

during normal market conditions would 

not reflect the influence of a number of 

effects that are likely to result from the 

simultaneous implementation of many 

market participants in a series of three 

waves. This coordinated movement 

creates both costs and benefits that 

cannot be quantified using data drawn 

from current market conditions. 

Notwithstanding these limitations, the 

Commission identifies and considers 

the costs and benefits of this rule in 

qualitative terms. 

E. Costs and Benefits of This Rule 

Determining whether to implement 

required clearing immediately upon 

Commission determination or after 

some period of delay necessarily 

involves cost and benefit tradeoffs. On 

the one hand, delaying required clearing 

implementation also delays the benefits 

of clearing of certain swaps, including 

reduced counterparty risk and increased 

stability in the financial system. These 

benefits are substantial, and any delay 

in their realization represents a cost to 

the market and the public. On the other 

hand, requiring implementation 

immediately or within a very 

compressed timeframe creates certain 

costs for industry participants. Reducing 

these costs—enumerated below—by 

extending the implementation schedule 

represents a benefit. 

First, to meet pressing timelines, some 

firms will need to contract additional 

staff or hire vendors to handle some 

necessary tasks or projects. Additional 

staff hired or vendors contracted in 

order to meet more pressing timelines 

represent an additional cost for market 

participants. Moreover, a tightly 

compressed timeframe raises the 

likelihood that more firms will be 

competing to procure services at the 

same time; this could put firms that 

conduct fewer swaps at a competitive 

disadvantage in obtaining those 

services, making it more difficult for 

them to meet required timelines.32 In 

addition, it could enable service 

providers to command a pricing 

premium when compared to times of 

‘‘normal’’ or lesser competition for 

similar services. That premium 

represents an additional cost when 

compared to a longer implementation 

timeline. 

Second, if entities are not able to 

comply with Clearing Requirement 

determinations by the required date, 

they may avoid transacting swaps that 

are required to be cleared until such a 

time as they are able to comply. In this 

event, liquidity that otherwise would 

result from those foregone swaps would 

be reduced, making the swaps more 

expensive for market participants taking 

the other side. Moreover, firms 

compelled to withdraw from the market 

pending implementation of required 

clearing measures will either leave 

certain positions un-hedged— 

potentially increasing the firm’s own 

default risk, and therefore the risk to 

their counterparties and the public. 

Alternatively, firms compelled to 

withdraw from the market for a period 

of time could attempt to approximate 


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44450 Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 

33See e.g., ACLI letter. 

34OCC data demonstrates that among insured 

U.S. commercial banks, ‘‘the five banks with the 

most derivatives activity hold 96 percent of all 

derivatives, while the largest 25 banks account for 

nearly 100% of all contracts.’’ The report is limited 

to insured U.S. commercial banks, and also 

includes derivatives that are not swaps. However, 

swap contracts are included among the derivatives 

in the report, constituting approximately 63 percent 

of the total notional value of all derivatives. These 

statistics suggest that a relatively small number of 

banks hold the majority of swap positions that 

could create or contribute to distress in the 

financial system. Data is insufficient, however, to 

generalize the conclusions to non-banking 

institutions. See ‘‘OCC’s Quarterly Report on Bank 

Trading and Derivatives Activities: Fourth Quarter 

2011’’ at 11. http://www.occ.treas.gov/topics/ 

capital-markets/financial-markets/trading/ 

derivatives/dq411.pdf. 

35For example, CME and ICE both began clearing 

credit default swaps (CDS) in 2009. As of March 

2012, ICE had cleared more than $11 trillion 

notional in CDS, and had 26 clearing members in 

CDS. CME began clearing interest rate swaps in 

2010 and currently has open interest of $210 billion 

notional and 15 clearing members in interest rate 

swaps. Moreover, by March of 2010, 26 of the 

largest market makers were clearing interest rate 

derivatives. At that time, ISDA asserted that ‘‘In 

excess of 90% of new dealer-to-dealer volume in 

Eligible Trades of Interest Rate Derivative products, 

and total dealer-to-dealer volume in Eligible Trades 

of Credit Derivative products is now cleared 

through CCPs.’’ See http://www.newyorkfed.org/ 

newsevents/news/markets/2010/100301_letter.pdf. 

36The Commission understands approximately 

2.5 months is sufficient for some market 

participants to enter into a clearing arrangement 

with an FCM for purposes of clearing swaps. See 

External Meeting with Blackrock, 4/2/2012. http:// 

www.cftc.gov/LawRegulation/DoddFrankAct/ 

ExternalMeetings/dfmeeting_040212_1463. 

their foregone swap hedges using other, 

likely more expensive, instruments. 

And to the extent the withdrawing 

entities are market makers, they will 

forsake the revenue potential that 

otherwise would exist for the period of 

their market absence. 

Third, firms may have to implement 

technological solutions, sign contracts, 

and establish new operational 

procedures before industry standards 

have emerged that address new 

problems effectively. To the extent that 

this occurs, it is likely to create costs. 

Firms may have to incur additional 

costs later to modify their technology 

platforms and operational procedures 

further, and to renegotiate contracts— 

direct costs that a more protracted 

implementation schedule would have 

avoided.33 Moreover, costs created by 

the adoption of standards that fail to 

address certain problems, or attributable 

to undesired competitive dynamics 

resulting from such standards, may be 

longstanding. 

Given the factors identified above, 

this rulemaking aims to strike the 

optimal cost-balance tradeoff amidst the 

competing concerns. Shorter timelines 

will tend to push greater numbers of 

swaps into clearing more quickly, 

reducing the counterparty and systemic 

exposures in ways that were intended 

by the Dodd-Frank Act—a benefit. But, 

shorter timelines also increase the costs 

as discussed above. Longer timelines 

have the opposite effect, decreasing the 

costs described above, but increasing 

the amount of time during which 

counterparty and systemic exposures 

that would otherwise be mitigated by 

required clearing persist. 

In theory, the optimal tradeoff 

between the two is the point at which 

the marginal cost of an additional oneday delay in implementation equals the 

marginal benefits of the same 

incremental delay. But it is not possible, 

at this stage, to determine the marginal 

costs or benefits of each day of delay. To 

estimate such values reliably requires 

data that does not yet exist—i.e., data 

gleaned in the midst of the transition 

process. Therefore, neither the 

Commission nor commenters are able to 

assert conclusively that any particular 

schedule is more or less advantageous 

relative to all others that the 

Commission might have considered. 

Thus, in the face of these practical 

limitations, the Commission has relied 

on qualitative considerations, informed 

by commenters, to guide the necessary 

tradeoff determinations. 

The Commission, informed by its 

consideration of comments and 

alternatives, discussed in the sections 

above and below, believes that the 

approach contained in this adopting 

release is reasonable and appropriate in 

light of the tradeoffs described above. 

The schedule established here gives the 

Commission the opportunity to provide 

additional time to entities in ways that 

generally align with: (1) Their resources 

and expertise, and therefore their ability 

to comply more quickly; and (2) their 

level of activity in the swap markets, 

and therefore the possible impact of 

their swap activities on the stability of 

the financial system. Entities with the 

most expertise in, and systems capable 

to transact, swaps also are likely to be 

those whose swaps represent a 

significant portion of all transactions in 

the swap markets. They are more likely 

to be able to comply quickly, and the 

benefits of requiring them to do so are 

greater than would be the case for less 

active entities. On the other hand, 

entities with less system capability and 

in-house swap expertise may need more 

time to comply with Clearing 

Requirement determinations, but it is 

also likely that their activities represent 

a smaller proportion of the overall 

market, and therefore are less likely to 

create or exacerbate shocks to the 

financial system.34 The Commission 

believes that Category 1 encompasses 

entities likely possessing more 

advanced systems and expertise, and 

whose swap activities constitute a 

significant portion of overall swap 

market transactions, while Categories 2 

and 3 encompass those likely to have 

relatively less developed infrastructure 

and whose swap activities constitute a 

less significant proportion of the market. 

The Commission notes that clearing of 

certain swaps, and in particular interest 

rate and credit default swaps, has been 

occurring for some time; by implication, 

this indicates that the requisite 

technology, contractual terms, and 

operational standards among 

clearinghouses, clearing members, and 

some clients exist.35 The Commission 

also notes that it is likely that the degree 

to which firms have already 

implemented such technology, 

contracts, and operational patterns 

varies considerably, particularly among 

potential customers of FCMs, and that 

the legal, technological, and operational 

changes that are necessary for less 

frequent swap market participants may 

be more substantial. However, given the 

availability of FCMs (through which 

market participants may clear swaps) as 

well as the technology and contractual 

standards necessary to clear swaps, the 

Commission believes that a number of 

firms can reduce the costs associated 

with meeting compliance timelines by 

forming necessary FCM relationships 

and contracts, and implementing the 

necessary technology, before the 

Commission begins issuing Clearing 

Requirement determinations.36

Nonetheless, the Commission 

considered these concerns, among other 

issues, when determining to grant 

Category 2 and Category 3 Entities an 

extended 180 and 270 days, 

respectively, rather than requiring them 

to comply at the same time as Category 

1 Entities. 

Moreover, use of the schedule 

contained in this release is at the 

Commission’s discretion; in situations 

where the Commission determines that 

the benefits of delayed implementation 

do not justify the additional costs of 

such a delay, the Commission may 

require immediate compliance with 

Clearing Requirement determinations. 

Therefore, in situations where the 

Commission determines that a swap 

must be cleared, and further believes 

that clearing the swap will not 

necessitate significant changes to market 

participants’ technology, legal 

arrangements, or operational patterns, 

the Commission is likely to determine 

that immediate compliance is 


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Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 44451 

37Other commenters raise issues beyond the 

scope of this rule—i.e., implementation timing of 

required clearing—that, consequently, are beyond, 

and not appropriate for Commission consideration 

in, this rulemaking. Specifically, some commenters 

request that the Commission establish a 

comprehensive schedule for implementation of all 

rules and requirements pursuant to the Dodd-Frank 

Act. (See Barnard, MFA.) Others request a 

comprehensive schedule of clearing requirement 

determinations (See, e.g., CDEU), an issue already 

addressed by the Dodd-Frank Act and the rule 

regarding the Process for Review of Swaps for 

Mandatory Clearing. See section 2(h)(2)(B)(ii) of the 

CEA; 76 FR 44473. 

38See letters from Encana, Vanguard, ICI, FSR, 

MFA, FIA/ISDA/SIFMA, AII, MarkitSERV, and 

AIMA. 

39See MFA letter. 

40See letters from AIMA and MFA. 

41See AIMA letter. 

42See letters from Barnard and AIMA. 

43See letters from AII and CDEU. 

warranted. In these cases, the benefits of 

required clearing will be realized 

immediately. 

The discretionary nature of the 

schedule contained in the adopting 

release, however, may create some 

uncertainty for market participants, and 

consequently may create some costs as 

market participants take steps to protect 

themselves from the impact of such 

uncertainty. For example, if a market 

participant believes that the 

Commission may issue a determination 

that a particular swap must be cleared, 

but is not certain whether clearing will 

be required immediately or according to 

the schedule contained in this release, 

that entity may begin developing the 

capacity to clear such a swap prior to a 

determination by the Commission in 

order to reduce the risk that it would be 

forced to stop trading the swap while it 

comes into compliance. If that 

participant’s belief that the Commission 

will require the swap to be cleared is 

incorrect, the participant will have 

unnecessarily borne the cost of 

preparing for such a possibility. The 

Commission considered this cost, but 

believes that the notice and comment 

approach that the Commission will use 

when issuing Clearing Requirement 

determinations mitigates it. Each 

proposed Clearing Requirement 

determination will be published in the 

Federal Register and will be available 

for public comment for a period of at 

least 30 days; the Commission 

anticipates clarifying in each proposed 

Clearing Requirement determination 

whether compliance will be required 

immediately upon the final 

determination or according to the 

schedule contained in this rule. This 

approach will provide market 

participants with notice regarding the 

expected timeline for compliance, 

which will mitigate costs associated 

with uncertainty about compliance 

timelines. 

F. Consideration of Comments and the 

Costs and Benefits of Alternatives 

Commenters propose or otherwise 

highlight points that suggest alternatives 

with respect to various aspects of the 

NPRM.37 These aspects, as categorized 

for discussion below, are: (1) Phased 

approach; (2) entity categorization; (3) 

schedule increments; and (4) schedule 

discretion. 

Phased Approach 

A number of commenters express 

support generally for additional time to 

comply with Clearing Requirement 

determinations and for a phased 

approach that distinguishes between 

various types of entities.38 Commenters 

note that the additional clarity provided 

by the schedule will encourage industry 

participants to commit resources to 

overcoming structural and economic 

barriers that prevent widespread 

clearing.39 Some commenters, however, 

maintain that the phased approach used 

to implement clearing requirement 

determinations should not be applied to 

exchange trade requirements.40 The 

AIMA believes that effective required 

clearing will enable execution of swaps 

on SEFs and DCMs and that linking the 

trading and clearing compliance 

schedules could delay the transition 

into central clearing. In response to 

these comments, the Commission has 

decided to limit the scope of this rule 

to Clearing Requirement determinations, 

to retain the phased approach to 

required clearing, and to address 

implementation of trade execution in a 

separate rule. 

Some commenters note that a phased 

approach could complicate 

implementation for large investor 

advisor firms that may have multiple 

funds in separate categories. 

Specifically, AII expresses concern that 

it may be difficult for institutional 

advisers to execute block trades for 

multiple clients during the 

implementation period because they 

will have to consider whether each 

client must comply with the Clearing 

Requirement. Nevertheless, AII 

recommends retaining the phased 

approach with at least 18 months for 

entities to comply. The Commission 

recognizes that such complexities exist 

and could introduce certain costs for 

large investor adviser firms. However, it 

is not clear that delaying the 

implementation period would alleviate 

this concern, although prolonging the 

implementation period likely would 

exacerbate the issue by extending the 

time during which such concerns are 

relevant. Moreover, the Commission 

notes that the benefits of required 

clearing are substantial and that further 

delays create costs borne by market 

participants and the public. In these 

circumstances, the Commission 

considers the latter consideration most 

compelling and, accordingly, has 

determined not to delay implementation 

beyond what is set forth in the schedule 

in the adopting release. 

Finally, relative to the alternative of 

immediate implementation following a 

Commission Clearing Requirement 

determination—the result in the absence 

of this rule—the Commission believes 

that the phased approach reflected in 

this adopting release is superior. The 

immediate implementation alternative 

would not mitigate the costs, 

enumerated above, to market 

participants and the public. In contrast, 

while delaying implementation also 

entails a different set of costs, also 

discussed above, the Commission has 

carefully tailored the rule’s phased 

approach to contain and dampen them. 

Entity Categorization 

Commenters generally agree that some 

buy-side representation in Category 1 is 

valuable in order to ensure that buy-side 

interests are represented as 

technological and legal standards begin 

to form,41 though commenters express 

varied views about whether Active 

Funds should play that role, and what 

entities should be included in that 

group. Some commenters state their 

belief that transaction volume is an 

appropriate proxy for a firm’s level of 

expertise in conducting swaps and, 

therefore, is a useful criterion for 

identifying the buy-side entities that are 

best equipped to make the transition as 

part of Category 1.42 Some express 

concern, however, that as defined in the 

NPRM, the term ‘‘Active Fund’’ could 

be over-inclusive and recommend 

raising the threshold number of swaps 

or excluding swaps that are hedges or 

have a notional value below $10 

million.43

The Commission’s intent in selecting 

Active Funds to participate in Category 

1 is to identify those market participants 

that are larger and have significant 

experience in the swap markets. To 

ensure that the rule effectively selects 

for these entities, and in response to 

commenters, the Commission has raised 

the threshold number of swaps from a 

trailing average of 20 swaps per month 

over the previous twelve months, to a 

trailing average of 200 swaps per month 

over the previous twelve months. The 

Commission, however, believes that 


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44See ACLI letter. 

45See MFA letter. 

46See e.g., letters from ICI and AII. 

47See CIEBA letter. 

48See AIMA letter. 

49See e.g., letters from Better Markets and MFA. 

MFA qualifies its support, stating that certain 

additional rules should be adopted prior to the 

schedule becoming effective, and also requests 

changes to the entities included in each category, 

but still generally supports the 90-, 180-, and 270- 

day implementation schedule. 

50See e.g., letters from AII, CIEBA, ICI, FIA/ISDA/ 

SIFMA, and FSR. 

further criteria restricting the swaps that 

are included against that count would 

create incremental administrative and 

operational costs that do not justify the 

resulting benefit, and therefore has not 

placed further restrictions on the types 

of swaps that count against the 

threshold. However, per commenters’ 

request for clarification, the 

Commission is clarifying that the 

average monthly threshold of swaps 

applies to new swaps that the entity 

enters into, and it does not apply to 

novations, amendments, or partial tearups. 

ACLI maintains that there is diversity 

among buy-side participants in their use 

of swaps, and expresses concern that 

Active Funds may not be able to 

effectively represent diverse buy-side 

interests, and those of insurance 

companies in particular. ACLI, however, 

does not describe or quantify specific 

costs that it believes would result from 

this circumstance.44 The Commission 

acknowledges that buy-side market 

participants are diverse and may have 

specific needs reflecting concerns or 

interests unique to individual industries 

or even individual entities. However, 

the Commission also notes that the fact 

of certain differences among firms does 

not exclude the possibility of remaining 

similarities. Further, it believes that 

realizing the benefits provided by some 

buy-side representation in Category 1 is 

preferable to a scenario in which these 

benefits are foregone by removing 

Active Funds from Category 1 for 

required clearing implementation. 

Moreover, in the absence of any input 

as to how dissimilarities may 

specifically impact the compliance 

implementation process, the apparent 

solution to ACLI’s concern would be to 

include insurance companies in 

Category 1 to assure representation of 

their interests earlier in the 

implementation process. While any 

Category 2 Entity or any other entity 

may elect to comply sooner than the 

schedule requires (and are encouraged 

by the Commission to do so), the 

Commission finds no basis to believe 

that the benefits of requiring all 

insurance companies to participate in 

Category 1 warrant the additional costs 

that such an approach would create for 

them. 

MFA expresses concern that questions 

related to the term ‘‘Active Fund’’ could 

create an additional burden for fund 

operations and Commission staff, and 

proposed that all private funds be 

placed in Category 2 in order to 

eliminate this burden.45 MFA, however, 

does not specify what these questions 

are, nor the cost to funds associated 

with addressing them. In the absence of 

more specific information about the 

nature of the potential questions and 

their associated costs, the Commission 

has insufficient basis to conclude that 

costs to clarify Active Fund issues— 

either for fund operators or itself—are 

likely to be significant. Accordingly, it 

believes that the benefits of early-stage, 

buy-side representation warrant 

retention of the Category 1 Active-Fund 

component. 

Some commenters express concern 

about the definition of the term ThirdParty Subaccounts. They maintain that 

the Third-Party Subaccount category 

should include any managed accounts, 

regardless of the level of authority 

granted in the advisory agreement to 

enter into trading agreements, on 

grounds that the operational and 

contractual challenges for moving swaps 

related to these accounts into clearing 

will be much the same regardless of 

whether the accounts’ investment 

management agreements have ‘‘specific 

approval’’ requirements.46 Similarly, 

some commenters advocate in favor of 

including all ERISA plans in Category 3 

given their expectations that (1) 

Category 2 entities will bear more ‘‘startup’’ costs related to required clearing 

than those in Category 3, and (2) putting 

some ERISA plans in Category 2 and 

others in Category 3 will make overlays 

more difficult and costly.47 Conversely, 

AIMA specifically states that making all 

funds Category 3 Entities is not a 

suitable approach because it would 

eliminate buy-side representation 

during the early stages of 

implementation, and, consequently, 

urges the Commission not to adopt this 

approach.48

Furthermore, AIMA and FSR asserted 

that some Third-Party Subaccounts may 

be ‘‘private funds’’ as defined in the 

Investment Advisers Act of 1940 that 

would otherwise qualify as Active 

Funds; AIMA expresses concern that 

allowing such funds 270 days to comply 

with clearing requirements could 

provide them a competitive advantage 

relative to other Active Funds that are 

not Third-Party Subaccounts for the 

period of time between the compliance 

dates for Categories 1 and 3. To level 

this playing field, AIMA proposes 

placing all Active Funds in Category 1, 

regardless of whether the funds also 

meet the criteria for a Third-Party 

Subaccount. In support of this 

proposition, AIMA opines that large 

institutional managers of large numbers 

of Third-Party Subaccounts are likely to 

have sufficient resources to make the 

transition within the 90 days required of 

Category 1 Entities. 

The Commission recognizes that some 

managed funds that do not require third 

party sign-off for clearing agreements, 

nevertheless, may choose to involve 

their clients in negotiation of relevant 

documents, and that some costs may 

result from placing some managed funds 

and ERISA plans in Category 2 and 

others in Category 3. After considering 

the alternatives posed by commenters, 

the Commission has modified the 

definition of Third-Party Subaccount to 

include managed accounts for which the 

investment manager is responsible for 

clearing documentation, regardless of 

whether the investment manager has 

explicit execution authority. In 

addition, the Commission has 

determined not to include ERISA plans 

in Category 2. The Commission has 

made these changes despite the fact that 

commenters do not attempt to quantify 

the costs associated with these 

provisions, nor do they recognize that 

such costs must be considered against 

the costs of further delaying required 

clearing implementation by a number of 

managed funds and ERISA plans. A 

fundamental premise of the Dodd-Frank 

Act is that central clearing minimizes 

risk to counterparties and the financial 

system as a whole; therefore, further 

delaying implementation of one or more 

groups of market participants creates 

costs associated with prolonged 

exposure of the financial system to a 

greater number of un-cleared swaps. 

Nonetheless, the Commission believes it 

appropriate to permit certain market 

participants an additional 90 days to 

come into compliance with the clearing 

requirement based on the comments 

received. 

Schedule Increments 

Some commenters express the 

opinion that 90, 180, and 270 days is 

sufficient for Category 1, 2, and 3 

Entities, respectively, to comply with 

Clearing Requirement determinations.49

Several other commenters, however, 

expressed concern that the additional 

time provided in this rule may not be 

sufficient for some entities to comply.50

In that vein, commenters state that the 


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51See e.g., ACLI letter. 

52See letters from ACLI, AII, and CIEBA. 

53See letters from ACLI and ICI. 

54See letters from ACLI, CDEU, CIEBA, COPE, 

and EEI. COPE and EEI specifically requested that 

the Commission determine whether ‘‘off the shelf’’ 

software is available to meet the needs of entities 

that do not yet have necessary technology. Further 

conversation clarified that both were concerned 

about technologies that extend beyond those 

directly related to Clearing Requirements 

established by the Act. 

55See letters from Barnard and MFA. 

56See letters from Barnard and MFA. 

57See letters from FHLB and ICI. 

schedules may not be sufficient for 

contract negotiations to be completed,51

that pressing timelines could undermine 

the ability of some entities to negotiate 

effectively,52 and that rapid compliance 

may lead to the creation of industry 

standards that are not fair or prudent.53

Some commenters also express concern 

that entities in Categories 2 and 3 may 

not be able to find vendors able to 

provide sufficient support to meet the 

deadlines effectively.54

It is impossible to quantify the costs 

and benefits of one particular schedule 

phase-in increment relative to another— 

e.g., 90 days to comply versus 110—and 

the permutations of such an exercise 

would be endless, even if possible. 

Similarly, as discussed above, whether 

the schedule included in this adopting 

release mitigates costs to a greater 

degree than other increments the 

Commission might have adopted as an 

alternative to immediate 

implementation of required clearing (the 

result in the absence of this rule) is also 

a question that cannot be resolved with 

precision. In light of these limitations, 

however, the Commission has drawn 

upon its historical experience 

monitoring clearing, as well as its 

consideration of the qualitative feedback 

offered by market participants, in 

determining to incorporate the 90-, 

180-, and 270-day benchmark features 

within the schedule adopted in this 

release. In so doing, the Commission 

believes that it has selected a reasonable 

schedule that is appropriate and wellsuited to mitigate compliance pressures 

for market participants, and fairly 

accommodate the various competing 

interests involved. 

As is stated above, the Commission 

recognizes that extending the 

compliance schedule for one or more 

entities will reduce compliance costs for 

market participants in a number of 

different ways, but will also increase the 

amount of time during which market 

participants and the public do not 

benefit from the protections provided by 

mandatory clearing. 

Scheduling Discretion 

Some commenters support the 

Commission’s retention of discretion to 

override the schedule in this release to 

require immediate clearing when it 

believes that the benefits do not justify 

the associated costs.55 These 

commenters note that over time market 

participants will gain experience to 

enable swifter compliance with later 

Clearing Requirement determinations, 

and maintain that, over time, the 

compliance schedules will not be 

warranted for Clearing Requirement 

determinations for new types, groups, or 

categories of swaps within an asset class 

that are already subject to a prior 

Clearing Requirement.56 Other 

commenters, however, support 

application of the schedule to all 

Clearing Requirement determinations in 

order to reduce uncertainty and 

facilitate orderly transitions to 

compliance.57

As discussed below, the Commission 

believes that the challenges of 

compliance are likely to vary depending 

on whether previous Clearing 

Requirement determinations have been 

made for other swaps in the same class, 

how long previous Clearing 

Requirement determinations for swaps 

in that class have been in place, the 

similarities between the swaps 

addressed by a determination and swaps 

subject to previous determinations, and 

a number of other factors. Therefore, the 

Commission believes that the tradeoff 

between the costs and benefits of more 

rapid compliance will vary as well. 

Where Clearing Requirement 

determinations pertain to swaps that 

have important points of similarity with 

swaps already required to be cleared, it 

is likely that the costs associated with 

more rapid compliance will be 

significantly less, and therefore the 

balance will shift in favor of a shorter 

compliance deadline than would be 

allowed under the schedule contained 

in this rule. Also, by including the 

applicable compliance schedule within 

its public notifications of a proposed 

Clearing Requirement determination, 

the Commission will mitigate 

uncertainty costs that could result. 

G. Consideration of Section 15(a) 

Factors 

(1) Protection of Market Participants and 

the Public 

Category 1 includes, among others, 

SDs as well as MSPs and Active Funds. 

If SDs were not able to comply 

immediately with a Clearing 

Requirement determination, and were 

not given additional time to comply, 

they could choose to withdraw from the 

market as they work toward compliance. 

Such withdrawal would create lost 

opportunities for them as they fail to 

capture business that they would have 

otherwise conducted during that period. 

If MSPs or Active Funds choose to 

withdraw from the market while they 

work to come into compliance, it could 

become more costly for them to either 

effectively create or hedge certain 

exposures, which could also prompt 

them to leave certain risks un-hedged 

that they would otherwise mitigate 

through the use of swaps. By giving 

Category 1 Entities an additional 90 

days to comply with Clearing 

Requirement determinations, the 

schedule contained in this adopting 

release reduces the likelihood of these 

entities withdrawing from the swap 

markets while they work toward 

compliance; this, in turn, reduces the 

probability that these Category 1 Entities 

will bear the potential costs of unhedged risk exposure. 

Moreover, the Commission believes 

that SDs are an important source of 

liquidity for swap market participants. If 

SDs withdraw from the market while 

they work toward compliance, it could 

negatively impact swap liquidity, 

increasing costs for market participants 

forced to hedge certain risks through 

less efficient means (or not at all) for a 

period of time. The costs of not hedging 

certain risks would be borne not only by 

the firms that choose such an approach, 

but by the public in the form of 

increased counterparty risk throughout 

the financial system. Again, by 

providing additional time for SDs to 

comply with Clearing Requirement 

determinations, the schedule in the 

adopting release facilitates an orderly 

transition and reduces the likelihood 

that the costs associated with SDs 

withdrawing from the market for a 

period of time would materialize. The 

Commission considered this benefit in 

light of the cost associated with delayed 

compliance among Category 1 Entities 

and believes that an appropriate balance 

has been struck. 

The Commission also anticipates that 

the staggered compliance schedule 

contained in this rule will, to some 

extent, enable Category 2 and 3 Entities 

to adopt technological, legal, and 

operational standards developed by 

Category 1 Entities. To the extent that 

this occurs, it will reduce the number of 

entities that are working in parallel to 

develop solutions to the same problems 

by allowing Category 2 and 3 Entities 

some time to wait for Category 1 Entities 

and vendors to develop viable solutions 

to technological, legal, and operational 

challenges. Some of those solutions are 

likely to be proprietary, while others 


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44454 Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 

58As indicated in the NPRM, to the extent that 

Category 1 Entities bear a larger portion of the 

industry wide ‘‘start-up’’ or development costs, the 

Commission believes this is appropriate since they 

are likely to be among the most active participants 

in these markets. 

59As stated in the NPRM, Category 2 and 3 

Entities that want to come into compliance sooner 

than the 180- and 270-day deadlines are allowed, 

and encouraged, to do so. 60See ICI letter. 

will likely relate to non-proprietary 

standards that must be shared in order 

to be effective. Both types of advances 

can reduce costs for Category 2 and 3 

Entities. In the case of non-proprietary 

standards, Category 2 and 3 entities will 

benefit from the opportunity to adopt 

them without having to invest in their 

development. In the case of proprietary 

solutions, some of them are likely to be 

owned by vendors marketing them to 

multiple market participants, thereby 

spreading the development costs among 

their clients. Each of these 

consequences is likely to reduce overall 

development costs for the industry, and 

development costs for Category 2 and 3 

Entities, in particular.58

In weighing the tradeoff between 

shorter versus longer compliance 

timelines, the Commission believes 

Category 2 Entities are likely to be less 

well-resourced and less active in these 

markets. Therefore the dynamic 

between more or less rapid compliance 

tips in favor of providing additional 

time for these entities. As stated above, 

by providing 180 days, it becomes more 

likely that Category 2 Entities will be 

able to draw from lessons learned and 

standards established by Category 1 

Entities. It also increases the likelihood 

that where Category 2 Entities will 

depend on vendors for help developing 

and implementing necessary 

technology, legal agreements, and 

operational patterns, they will not have 

to compete as directly with Category 1 

Entities for those resources. 

The Commission believes that entities 

with Third-Party Subaccounts have an 

additional challenge of transitioning 

hundreds (or in some cases, thousands) 

of subaccounts into compliance with 

Clearing Requirement determinations, 

which may require formalizing new 

agreements with each of their 

customers, and educating their 

customers about how the Clearing 

Requirement will impact costs and 

operations. In the Commission’s view, 

this additional challenge justifies 

additional time for compliance beyond 

what is allowed for Category 2 

Entities.59

As described above, the Commission 

recognizes that delaying 

implementation creates some additional 

costs in the form of delayed protections 

that central clearing of swaps would 

otherwise provide—standardized and 

reduced counterparty risk for swaps that 

are required to be cleared, and 

associated reductions in the overall 

level of systemic risk. However, the 

Commission believes that this approach 

appropriately balances the tradeoff by 

requiring firms that are likely to be the 

most active in these markets to comply 

first and allowing additional time for 

those whose positions are less likely to 

pose significant risk to the financial 

system as a whole. 

(2) Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

As suggested above, Category 1 

Entities are likely to establish 

technological, legal, and operational 

standards that will influence or be 

adopted by Category 2 and 3 Entities. 

This will (1) serve to reduce 

development costs that Category 2 and 

3 Entities otherwise would face, (2) 

focus responsibility for shaping new 

platforms and standards on those firms 

that possess greater cleared swap 

experience, and (3) support the 

likelihood that new platforms and 

standards will reflect current best 

practices. Each of these elements 

promotes the efficiency and integrity of 

the markets. Moreover, by reducing the 

number of entities necessarily working 

in parallel to develop such standards, 

and allowing Category 2 and 3 Entities 

to learn from and build on the solutions 

developed by Category 1 Entities, the 

phased schedule contained in this 

adopting release holds the potential to 

foster compatibility and 

interoperability, which reduces the cost 

and complexity of interconnectedness. 

The phased schedule as adopted also 

will promote an implementation plan in 

which similar entities (i.e., those that 

usually compete with one another) 

generally have the same compliance 

timelines, thereby protecting 

competition during the transition 

period. One commenter states, ‘‘A 

phased approach to compliance will 

allow the Commission to balance its 

goal of obtaining adequate 

representation at each stage of the 

regulatory roll-out with the goal of 

avoiding anti-competitive concerns.’’ 60

That said, however, the Commission 

also has to balance the goal of 

maintaining a level playing field with 

other priorities. In particular, the 

Commission deems it important to 

ensure representation of both buy and 

sell side firms in the earliest stages of 

compliance. Moreover, the Commission 

believes that, in certain circumstances, 

variance in compliance burden among 

competitors warrants placing them in 

different implementation categories. 

Some competitive consequences may 

result from the need to balance these 

various priorities. The Commission 

believes, however, that it has built 

sufficient flexibility into the phased 

schedule to mitigate such consequences; 

specifically, the schedule preserves 

entities’ ability to respond to 

competitive incentives to move into 

clearing voluntarily prior to the date 

required by the compliance schedule. 

The Commission believes that providing 

flexibility to allow expression of 

competitive market incentives is 

preferable to the alternative of imposing 

a more compressed compliance 

schedule for purposes of maintaining a 

level playing field. As discussed above, 

a shorter schedule could also increase 

the likelihood that industry standards 

established during the implementation 

period could create and perpetuate 

undesirable competitive dynamics. In 

sum, the Commission anticipates that 

any temporary impacts on competitive 

dynamics created by the phased 

implementation approach it is adopting 

are likely to be less costly than an 

approach that increases the likelihood 

of sustained competitive disparities, and 

therefore has chosen not to shorten the 

compliance schedule as a remedy to 

address the risk of competitive 

advantages that may be conferred on 

market participants that have later 

compliance dates. 

As discussed above, for the 90-, 

180-, and 270-day periods that Clearing 

Requirements are delayed, the markets 

are exposed to the risks that the Clearing 

Requirements would mitigate. However, 

the Commission has considered this 

cost for the limited delay durations 

prescribed in light of the benefits— 

reduced implementation costs, greater 

degrees of compatibility and 

interoperability, and lessened risk of 

market disturbances from the 

withdrawal of entities that are not able 

to comply immediately—and considers 

the tradeoff reflected in the rules 

warranted. 

(3) Price Discovery 

Neither the Commission nor 

commenters have identified 

consequences for price discovery that 

are expected to result from this rule. 

(4) Sound Risk Management Practices 

An orderly transition for swaps 

subject to a Clearing Requirement 

determination promotes sounder risk 

management practices, particularly 

during the transition period. As 

mentioned above, in the absence of the 


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Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 44455 

61 5 U.S.C. 601 et seq. 

62 76 FR 58192–58193 (Sept. 20, 2011). 

63See 66 FR 20740, 20743 (Apr. 25, 2001). 

64Small Business Administration, Table of Small 

Business Size Standards, Nov. 5, 2010. 

65See Joint Associations’ comment letter, at 2. 

The letter also suggests that NRECA members are 

not financial entities. See id., at note 5, and at 5 

(the associations’ members ‘‘are not financial 

companies’’). 

66 44 U.S.C. 3507(d). 

67 76 FR 58186, 58193 (Sept. 20, 2011). 

schedule provided in this rule, some 

entities might exit swap markets while 

taking steps to come into compliance. 

This result could reduce liquidity, 

particularly if the withdrawing entities 

are SDs. Reduced liquidity likely would 

increase the cost of using swaps to 

manage risk by increasing spreads, and 

make it more difficult for entities to 

enter and exit positions in a timely 

manner. It could also prompt some 

entities to maintain exposures that they 

would otherwise use swaps to mitigate, 

which would elevate the risk profile of 

those entities and the level of risk that 

their counterparties bear as a 

consequence. By providing a timetable 

for orderly transition, this rule 

encourages continued participation in 

the swap markets and use of swaps for 

risk mitigation purposes during the 

transition. 

Clearing Requirement delay does 

prolong existing costs associated with 

not having counterparty credit risk 

monitored and managed effectively by a 

DCO. More prompt implementation of 

Clearing Requirements would have the 

benefit of preventing losses from 

accumulating over time through the 

settlement of variation margin between 

a DCO’s clearing members each day. 

The settlement of variation margin each 

day (and in some cases, multiple times 

per day) reduces the size of exposures 

a clearinghouse faces should one of its 

counterparties default, and the 

mechanisms that a clearinghouse has to 

ensure its own solvency reduce the 

probability that it would default on 

obligations to clearing members. 

Moreover, more prompt implementation 

also promotes the use of initial margin 

as a performance bond against potential 

future losses such that if a party fails to 

meet its obligation to pay variation 

margin, resulting in a default, the DCO 

may use the defaulting party’s initial 

margin to cover most or all of any loss 

based on the need to replace the open 

position. The Commission believes, 

however, that (1) it has tailored the rule 

to limit the degree, and thereby these 

costs attributable to, clearing 

implementation delay and (2) the 

benefits afforded by the schedule’s 

operation when the Commission elects 

to use it warrant the costs of the tailored 

implementation delay. 

(5) Other Public Interest Considerations 

The schedule allows market 

participants to comply with the 

requirements of the Dodd-Frank Act and 

provides a sound basis for achieving the 

overarching Dodd-Frank Act goals of 

reducing counterparty risk and 

promoting stability of the financial 

system. 

IV. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires that agencies consider whether 

the rules they propose will have a 

significant economic impact on a 

substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact.61 As stated in the NPRM, the 

subject of this rulemaking provides a 

compliance schedule for a new statutory 

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

CEA, and does not itself impose 

significant new regulatory 

requirements.62 Accordingly, the 

Chairman, on behalf of the Commission, 

certified pursuant to 5 U.S.C. 605(b) that 

the proposed rule would not have a 

significant economic impact on a 

substantial number of small entities. 

The Commission then invited public 

comment on this determination. 

FSR comments that the NPRM failed 

to evaluate the impact of the proposed 

compliance schedule for the Clearing 

Requirement on a substantial number of 

small entities. FSR argued that small 

entities may have to bear a more 

significant burden than larger entities in 

establishing clearing arrangements with 

FCMs because larger entities will be 

able to enter into such arrangements 

first. 

In response, the Commission points 

out that the compliance schedule for the 

Clearing Requirement will affect only 

eligible contract participants (ECPs). 

Pursuant to section 2(e) of the CEA, only 

ECPs may enter into swaps, unless the 

swap is listed on a DCM. The Clearing 

Requirement will affect only ECPs 

because all persons that are not ECPs are 

required to execute their swaps on a 

DCM, and all contracts executed on a 

DCM must be cleared by a DCO, as 

required by statute and regulation; not 

by operation of any Clearing 

Requirement. 

The Commission has previously 

determined that ECPs are not small 

entities for purposes of the RFA.63

However, in their comment letter, the 

Joint Associations assert that certain 

members of the National Rural Electric 

Cooperative Association (NRECA) may 

both be ECPs under the CEA and small 

businesses under the RFA. These 

members of NRECA, as the Commission 

understands, have been determined to 

be small entities by the Small Business 

Administration (SBA) because they are 

‘‘primarily engaged in the generation, 

transmission, and/or distribution of 

electric energy for sale and [their] total 

electric output for the preceding fiscal 

year did not exceed 4 million megawatt 

hours.’’ 64 Although the Joint 

Associations do not provide details on 

whether or how the NRECA members 

that have been determined to be small 

entities use the types of swaps that will 

be subject to the Clearing Requirement, 

the Joint Associations do state that 

NRECA members ‘‘engage in swaps to 

hedge commercial risk.’’ 65 Because the 

NRECA members that have been 

determined to be small entities would 

be using swaps to hedge commercial 

risk, the Commission expects that they 

would be able to use the end-user 

exception from the Clearing 

Requirement and therefore would not be 

affected to any significant extent by the 

Clearing Requirement. 

Thus, because nearly all of the ECPs 

that may be subject to the Clearing 

Requirement are not small entities, and 

because the few ECPs that have been 

determined by the SBA to be small 

entities are unlikely to be subject to the 

Clearing Requirement, the Chairman, on 

behalf of the Commission, hereby 

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

the rule herein creating the compliance 

schedule for the Clearing Requirement 

will not have a significant economic 

impact on a substantial number of small 

entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act 

(PRA) 66 imposes certain requirements 

on federal agencies (including the 

Commission) in connection with 

conducting or sponsoring any collection 

of information as defined by the PRA. 

As stated in the NPRM, this rulemaking 

will not require a new collection of 

information from any persons or 

entities.67

V. List of Subjects 

List of Subjects in 17 CFR Part 50 

Business and industry, Clearing, 

Swaps. 

In consideration of the foregoing, and 

pursuant to the authority in the 

Commodity Exchange Act, as amended, 

and in particular section 2(h) of the Act, 

the Commission hereby adopts an 

amendment to Chapter I of Title 17 of 

the Code of Federal Regulation by 

adding a new part 50 as follows: 


tkelley on DSK3SPTVN1PROD with RULES
44456 Federal Register / Vol. 77, No. 146 / Monday, July 30, 2012 / Rules and Regulations 

PART 50—CLEARING REQUIREMENT 

Authority: 7 U.S.C. 2 as amended by Pub. 

L. 111–203, 124 Stat. 1376. 

§ 50.25 Clearing requirement compliance 

schedule. 

(a) Definitions. For the purposes of 

this paragraph: 

Active Fund means any private fund 

as defined in section 202(a) of the 

Investment Advisers Act of 1940, that is 

not a third-party subaccount and that 

executes 200 or more swaps per month 

based on a monthly average over the 12 

months preceding the Commission 

issuing a clearing requirement 

determination under section 2(h)(2) of 

the Act. 

Category 1 Entity means a swap 

dealer, a security-based swap dealer; a 

major swap participant; a major 

security-based swap participant; or an 

active fund. 

Category 2 Entity means a 

commodity pool; a private fund as 

defined in section 202(a) of the 

Investment Advisers Act of 1940 other 

than an active fund; or a person 

predominantly engaged in activities that 

are in the business of banking, or in 

activities that are financial in nature as 

defined in section 4(k) of the Bank 

Holding Company Act of 1956, provided 

that, in each case, the entity is not a 

third-party subaccount. 

Third-party Subaccount means an 

account that is managed by an 

investment manager that is independent 

of and unaffiliated with the account’s 

beneficial owner or sponsor, and is 

responsible for the documentation 

necessary for the account’s beneficial 

owner to clear swaps. 

(b) Upon issuing a clearing 

requirement determination under 

section 2(h)(2) of the Act, the 

Commission may determine, based on 

the group, category, type, or class of 

swaps subject to such determination, 

that the following schedule for 

compliance with the requirements of 

section 2(h)(1)(A) of the Act shall apply: 

(1) A swap between a Category 1 

Entity and another Category 1 Entity, or 

any other entity that desires to clear the 

transaction, must comply with the 

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

Act no later than ninety (90) days from 

the date of publication of such clearing 

requirement determination in the 

Federal Register. 

(2) A swap between a Category 2 

Entity and a Category 1 Entity, another 

Category 2 Entity, or any other entity 

that desires to clear the transaction, 

must comply with the requirements of 

section 2(h)(1)(A) of the Act no later 

than one hundred and eighty (180) days 

from the date of publication of such 

clearing requirement determination in 

the Federal Register. 

(3) All other swaps for which neither 

of the parties to the swap is eligible to 

claim the exception from the clearing 

requirement set forth in section 2(h)(7) 

of the Act and § 39.6, must comply with 

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

the Act no later than two hundred and 

seventy (270) days from the date of 

publication of such clearing 

requirement determination in the 

Federal Register. 

(c) Nothing in this rule shall be 

construed to prohibit any person from 

voluntarily complying with the 

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

Act sooner than the implementation 

schedule provided under paragraph (b). 

Issued in Washington, DC, on July 24, 

2012, by the Commission. 

Sauntia Warfield, 

Assistant Secretary of the Commission. 

Appendices to Swap Transaction 

Compliance and Implementation 

Schedule: Clearing Requirement under 

Section 2(h) of the CEA—Commission 

Voting Summary and Statements of 

Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Sommers, Chilton, O’Malia 

and Wetjen voted in the affirmative; no 

Commissioner voted in the negative. 

Appendix 1—Statement of Chairman 

Gary Gensler 

I support the final rule to establish a 

schedule to phase in compliance with the 

clearing requirement provisions in the DoddFrank Wall Street Reform and Consumer 

Protection Act. 

The rule gives market participants an 

adequate amount of time to comply and 

helps facilitate an orderly transition to the 

new clearing requirements for the swaps 

market. The rule provides greater clarity to 

market participants regarding the timeframe 

for bringing their swaps into compliance 

with the clearing requirement. 

[FR Doc. 2012–18383 Filed 7–27–12; 8:45 am] 

BILLING CODE 6351–01–P 

DEPARTMENT OF JUSTICE 

Drug Enforcement Administration 

21 CFR Part 1300 

[Docket No. DEA–341F] 

RIN 1117–AB31 

Classification of Two Steroids, 

Prostanozol and Methasterone, as 

Schedule III Anabolic Steroids Under 

the Controlled Substances Act 

AGENCY: Drug Enforcement 

Administration (DEA), Department of 

Justice. 

ACTION: Final rule. 

SUMMARY: With the issuance of this 

Final Rule, the Administrator of the 

DEA classifies the following two 

steroids as ‘‘anabolic steroids’’ under 

the Controlled Substances Act (CSA): 

prostanozol (17b-hydroxy-5aandrostano[3,2-c]pyrazole) and 

methasterone (2a,17a-dimethyl-5aandrostan-17b-ol-3-one). These steroids 

and their salts, esters, and ethers are 

Schedule III controlled substances 

subject to the regulatory control 

provisions of the CSA. 

DATES: Effective Date: August 29, 2012. 

FOR FURTHER INFORMATION CONTACT: 

Alan G. Santos, Associate Deputy 

Assistant Administrator, Office of 

Diversion Control, Drug Enforcement 

Administration; Mailing Address: 8701 

Morrissette Drive, Springfield, Virginia 

22152; Telephone: (202) 307–7165. 

SUPPLEMENTARY INFORMATION: 

Legal Authority 

The DEA implements and enforces 

Titles II and III of the Comprehensive 

Drug Abuse Prevention and Control Act 

of 1970, often referred to as the 

Controlled Substances Act and the 

Controlled Substances Import and 

Export Act (21 U.S.C. 801–971), as 

amended (hereinafter, ‘‘CSA’’). The 

implementing regulations for these 

statutes are found in Title 21 of the 

Code of Federal Regulations (CFR), parts 

1300 to 1321. Under the CSA, controlled 

substances are classified in one of five 

schedules based upon their potential for 

abuse, their currently accepted medical 

use, and the degree of dependence the 

substance may cause. 21 U.S.C. 812. The 

initial schedules of controlled 

substances by statute are found at 21 

U.S.C. 812(c) and the current list of 

scheduled substances is published at 21 

CFR Part 1308. 

On November 29, 1990, the President 

signed into law the Anabolic Steroids 

Control Act of 1990 (Title XIX of Pub. 

L. 101–647), which became effective 


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