Vol. 78 Thursday, 

No. 163 August 22, 2013 

Part III 

Commodity Futures Trading Commission 

17 CFR Parts 4 and 50 

Clearing Exemption for Certain Swaps Entered Into by Cooperatives; 

Harmonization of Compliance Obligations for Registered Investment 

Companies Required To Register as Commodity Pool Operators; Final 

Rules 


tkelley on DSK3SPTVN1PROD with RULES2
52286 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

1See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). 

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

2(h)(1)(A). 

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

2(h)(7)(A). 

4 77 FR 74284 (Dec. 13, 2012). The Commission 

re-codified the end-user exception regulations as 

§ 50.50 so that market participants are able to locate 

all rules related to the clearing requirement in one 

part of the Code of Federal Regulations. Because of 

this re-codification, all citations thereto in this final 

release will be to the sections as renumbered. 

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

6See, e.g., comments received on the end-user 

exception NPRM from: Agricultural Leaders of 

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

Allegheny Electric Cooperative, Inc. (AEC), Garkane 

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

Farmer Cooperatives, Dairy Farmers of America, 

and National Rural Utilities Cooperative Finance 

Corporation (CFC). Comments received on the enduser exception NPRM can be found on the 

Commission’s Web site at http://comments.cftc.gov/ 

PublicComments/CommentList.aspx?id=937. 

7Other reasons given for providing an exemption 

from clearing to cooperatives, including risk 

considerations, are discussed below. 

8 In addition to the comments received on the 

end-user exception NPRM, the Commission notes 

that several Senators and members of the House of 

Representatives have expressed similar support in 

committee hearings for ensuring that the 

implementation of the Dodd-Frank Act does not 

change the way financial cooperatives operate in 

relation to their members. See, e.g., Oversight 

Hearing: Implementation of Title VII of the Wall St. 

Reform and Consumer Prot. Act Before the S. 

Comm. on Agric., 112th Cong. 18 (2011) (statement 

of Sen. Debbie Stabenow, Chairwoman, S. Comm. 

on Agric.) (‘‘I just want to make sure that . . . 

you’re saying or that you’re going to guarantee that 

the relationship between farmers and co-ops will be 

preserved and that farmers will continue to have 

affordable access to risk management tools.’’); One 

Year Later—The Wall St. Reform and Consumer 

Prot. Act: Hearing Before the S. Comm. on Agric., 

112th Cong. 14 (statement of Sen. Amy Klobuchar, 

Member, S. Comm. on Agric.) (‘‘I hope there is a 

way to uniquely define farmer co-ops so they can 

continue to do the kinds of things that they do.’’); 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 50 

RIN 3038–AD47 

Clearing Exemption for Certain Swaps 

Entered Into by Cooperatives 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘CFTC’’ or 

‘‘Commission’’) is adopting final 

regulations pursuant to its authority 

under section 4(c) of the Commodity 

Exchange Act (‘‘CEA’’) allowing 

cooperatives meeting certain conditions 

to elect not to submit for clearing certain 

swaps that such cooperatives would 

otherwise be required to submit for 

clearing in accordance with section 

2(h)(1) of the CEA. 

DATES: Effective September 23, 2013. 

FOR FURTHER INFORMATION CONTACT: 

Brian O’Keefe, Deputy Director, 202– 

418–5658, bokeefe@cftc.gov, Division of 

Clearing and Risk, or Erik F. Remmler, 

Deputy Director, 202–418–7630, 

eremmler@cftc.gov, Division of Swap 

Dealer and Intermediary Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

I. Background 

The CEA, as amended by Title VII of 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (the ‘‘DoddFrank Act’’),1 establishes a 

comprehensive new regulatory 

framework for swaps. The CEA requires 

a swap: (1) To be submitted for clearing 

through a derivatives clearing 

organization (‘‘DCO’’) if the Commission 

has determined that the swap is 

required to be cleared, unless an 

exception or exemption to the clearing 

requirement applies; (2) to be reported 

to a swap data repository (‘‘SDR’’) or the 

Commission; and (3) if such swap is 

subject to a clearing requirement, to be 

executed on a designated contract 

market (‘‘DCM’’) or swap execution 

facility (‘‘SEF’’), unless no DCM or SEF 

has made the swap available to trade. 

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

establishes a clearing requirement for 

swaps, providing that ‘‘[i]t shall be 

unlawful for any person to engage in a 

swap unless that person submits such 

swap for clearing to a [DCO] that is 

registered under [the CEA] or a [DCO] 

that is exempt from registration under 

[the CEA] if the swap is required to be 

cleared.’’ 2 However, section 2(h)(7)(A) 

of the CEA provides that the clearing 

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

not apply to a swap if one of the 

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

financial entity; (ii) is using swaps to 

hedge or mitigate commercial risk; and 

(iii) notifies the Commission, in a 

manner set forth by the Commission, 

how it generally meets its financial 

obligations associated with entering into 

non-cleared swaps’’ (referred to 

hereinafter as the ‘‘end-user 

exception’’).3 The Commission has 

adopted § 39.6 (now recodified as 

§ 50.50 4) to implement certain 

provisions of section 2(h)(7). 

Accordingly, any swap that is required 

to be cleared by the Commission 

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

must be submitted to a DCO for clearing 

by the counterparties unless the 

conditions of § 50.50 are satisfied or 

another exemption adopted by the 

Commission applies. 

Congress adopted the end-user 

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

to permit certain non-financial entities 

to continue using non-cleared swaps to 

hedge or mitigate risks associated with 

their underlying businesses, such as 

manufacturing, energy exploration, 

farming, transportation, or other 

commercial activities. Additionally, in 

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

Commission was directed to ‘‘consider 

whether to exempt [from the definition 

of ‘financial entity’] small banks, 

savings associations, farm credit system 

institutions, and credit unions, 

including: 

(I) Depository institutions with total 

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

(II) farm credit system institutions 

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

less; or 

(III) credit unions with total assets of 

$10,000,000,000 or less.’’ 

In § 50.50(d), the Commission 

identifies which financial entities are 

small financial institutions and 

establishes an exemption from the 

definition of ‘‘financial entity’’ for these 

small financial institutions pursuant to 

section 2(h)(7)(C)(ii) (the ‘‘small 

financial institution exemption’’). The 

small financial institution exemption 

largely adopts the language of section 

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

exemption from the definition of 

‘‘financial entity’’ for the types of 

section 2(h)(7)(C)(ii) institutions having 

total assets of $10 billion or less. 

On December 23, 2010, the 

Commission published for public 

comment a notice of proposed 

rulemaking (‘‘end-user exception 

NPRM’’) to implement the end-user 

exception.5 Several parties that 

commented on the end-user exception 

NPRM recommended that the 

Commission extend relief from clearing 

to cooperatives.6 These commenters 

primarily reasoned 7 that the member 

ownership nature of cooperatives and 

the fact that cooperatives act in the 

interests of members that are nonfinancial entities or cooperatives whose 

members are non-financial entities, 

justified allowing the cooperatives to 

also elect the end-user exception. In 

effect, they proposed that because a 

cooperative acts in the interests of its 

members when facing the larger 

financial markets, the end-user 

exception that would be available to a 

cooperative’s members should also be 

available to the cooperative. 

Accordingly, commenters asserted, if 

the members themselves could elect the 

end-user exception, then the 

Commission should permit the 

cooperatives to do so as well.8


tkelley on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52287 

Derivatives Reform: the View from Main St.: 

Hearing Before the H. Comm. on Agric., 112th Cong. 

12 (2011) (statement of Rep. Timothy Johnson, 

Member, H. Comm. on Agric.) (‘‘I’m also concerned, 

real concerned, representing an area, as a lot of us 

do, where rural electric cooperatives, agricultural 

cooperatives, and all that are an essential part of our 

being, critical, positive entities that really do a 

whole lot for the infrastructure of this country. . . . 

And I’m very concerned that we’re treating, in 

many ways, and you are, those cooperatives in a 

way almost identical to Goldman Sachs, and I think 

that’s—frankly, I think that fall[s] of its own 

weight.’’); The Commodity Futures Trading 

Comm’n 2012 Agenda: Hearing Before the H. 

Comm. on Agric., 112th Cong. 13 (2012) (statement 

of Rep. Rick Crawford, Member, H. Comm. on 

Agric.) (‘‘[Agricultural cooperatives provide] swaps 

to their members and then enter into [another swap 

to offset that risk]. This is critical to their ability to 

continue [to provide] hedging tools to member[s] of 

their coops. . . . ’’). 

9See, e.g., comments received on the end-user 

exception NPRM from: FCC, CFC, AEC, ALM, and 

GEC. 10For ease of reference, the Commission is recodifying proposed § 39.6(f) as § 50.51 so that 

market participants are able to locate all rules 

related to the clearing requirement in one part of 

the Code of Federal Regulations. 

11 7 U.S.C. 6(c)(1). 

12 77 FR 41940 (July 17, 2012). 

13For example, the CFC was formed as a 

nonprofit corporation under the District of 

Columbia Cooperative Association Act of 1940 to 

arrange financing for its members and their patrons 

and for the ‘‘primary and mutual benefit of the 

patrons of the Association and their patrons, as 

ultimate consumers.’’ CFC Articles of Incorporation 

and Bylaws, Art. I, (last amended Mar. 1, 2005), 

available at https://www.nrucfc.coop/content/dam/

cfc_assets/public_tier/publicDocs/governance/

CFCbylaws_3_11.pdf. 

14All comments received in response to the 

cooperative exemption NPRM can be viewed on the 

Commission’s Web site at http://comments.cftc.gov/ 

PublicComments/CommentList.aspx?id=1237. 15See, e.g., comments received on the end-user 

exception NPRM from FCC, CFC, AEC, ALM, and 

GEC. 16See FCA, 2011 Annual Report on the Farm 

Credit System, at 11, available at http://

Continued 

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

does not differentiate cooperatives from 

other types of entities and therefore, 

cooperatives that are ‘‘financial 

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

of the CEA, are unable to elect the enduser exception unless they qualify for 

the small financial institution 

exemption. Some commenters 

recommended including cooperatives 

that are ‘‘financial entities’’ with total 

assets in excess of $10 billion in the 

small financial institution exemption.9

However, as explained in greater detail 

in the final release for § 50.50, section 

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

asset size and not on the structure of the 

financial entity. Accordingly, only 

cooperatives that are financial entities 

with total assets of $10 billion or less 

can qualify as small financial 

institutions under the small financial 

institution exemption. 

Notwithstanding the foregoing, the 

Commission recognized that the 

member-owner structure of cooperatives 

and the merits of effectively allowing 

cooperatives to also use the end-user 

exception when acting in the interests of 

their members, warranted consideration. 

Accordingly, the Commission is using 

the authority provided in section 4(c) of 

the CEA to finalize § 50.51 (proposed as 

§ 39.6(f) 10), to permit cooperatives that 

meet certain qualifications to elect not 

to clear certain swaps that are otherwise 

required to be cleared pursuant to 

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

(hereinafter referred to as the 

‘‘cooperative exemption’’). Under 

section 4(c) of the CEA, the Commission 

can subject such exemptive relief to 

appropriate terms and conditions.11

On July 17, 2012, the Commission 

published for public comment a notice 

of proposed rulemaking (‘‘NPRM’’) 

proposing the cooperative exemption as 

§ 39.6(f) (now § 50.51).12 The 

Commission explained that cooperatives 

have a unique legal structure that 

differentiates them from other legal 

business structures in terms of how they 

are operated and who benefits from 

their activities. In a cooperative, the 

members of the cooperative are the 

principal customers of the cooperative 

and are also the owners of the 

cooperative. Accordingly, the 

cooperatives exist to serve their 

member-owners and do not act for their 

own profit.13 The member-owners of the 

cooperative collectively have full 

control over the governance of the 

cooperative. In a real sense, a 

cooperative is not separable from its 

member-owners. The cooperative exists 

to act in the mutual interests of its 

member-owners in the marketplace. 

As described in greater detail below 

in section II, some cooperatives provide 

financial services to their members 

including lending and providing swaps, 

and the cooperatives sometimes hedge 

or mitigate risks associated with those 

lending activities with other financial 

entities such as swap dealers (‘‘SDs’’). 

The memberships of some of these 

cooperatives consist of entities that can 

each elect the end-user exception when 

entering into a swap. However, the enduser exception is unavailable to some of 

those cooperatives because they fall 

within the definition of ‘‘financial 

entity’’ and have assets in excess of $10 

billion. Accordingly, if the cooperative 

members continue to enter into loans 

and swaps with their cooperative, they 

would not receive the full benefits of the 

end-user exception because the 

cooperative would have to clear its 

swaps even though it is entering into the 

swaps to offset the risks associated with 

financial activities with its members or 

to hedge risks associated with wholesale 

borrowing activities, the proceeds of 

which are used to fund member loans. 

In effect, absent an exception from the 

clearing requirement for a cooperative 

that is providing certain swap services 

to its members, the cooperative 

structure would be unable—solely 

because the cooperative is large and has 

substantial assets—to achieve the 

intended benefits for its members who 

can elect the end-user exception. In 

light of the foregoing, the Commission is 

exercising its authority under section 

4(c) of the CEA to establish the 

cooperative exemption. 

The Commission received 

approximately 25 comment letters and 

Commission staff participated in 

approximately two ex parte meetings 

concerning the cooperative exemption 

NPRM.14 The Commission considered 

these comments in formulating the final 

regulations, as discussed below. 

II. Financial Entity Cooperatives 

In the NPRM, the Commission 

described the structure of cooperatives 

that provide financial services to their 

members to provide context for the 

underlying rationale for the proposed 

cooperative exemption. The description 

provided in the NPRM is summarized 

below to facilitate an understanding of 

the comments received and the 

Commission’s responses thereto. 

Cooperatives that are ‘‘financial 

entities,’’ as defined in section 

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

as collective asset and liability managers 

for their members. In this role, the 

cooperatives, in effect, face the financial 

markets as intermediaries for their 

members. These cooperatives sometimes 

enter into swaps with members and 

with non-member counterparties, 

typically SDs or other financial entities, 

to hedge the risks associated with the 

swaps or loans they execute with their 

members, or to hedge risks associated 

with their wholesale borrowing 

activities, the proceeds of which are 

used to fund member loans. If these 

financial entity cooperatives have total 

assets in excess of $10 billion, then the 

cooperatives do not qualify for the small 

financial institution exemption and thus 

cannot elect the end-user exception. 

Some cooperatives with more than 

$10 billion in total assets have members 

that are non-financial entities, small 

financial institutions, or other 

cooperatives whose members consist of 

such entities.15 For example, there are 

four Farm Credit System (‘‘FCS’’) banks 

chartered under Federal law, each of 

which has total assets in excess of $10 

billion.16 The FCS banks are 


tkelley on DSK3SPTVN1PROD with RULES2
52288 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

www.fca.gov/Download/AnnualReports/

2011AnnualReport.pdf. 

17See 12 U.S.C. 2124(c) (providing that ‘‘[v]oting 

stock may be issued or transferred to and held only 

by . . . cooperative associations eligible to borrow 

from the banks.’’). 

18See id. at 2241. 

19 Id. at 2128(a). 

20See id. at 2075. 

21See section IV. 

22 Id. 

23See Allegheny Electric Cooperative, Inc., Coast 

Electric Power Association, Choptank Electric 

Cooperative, Claiborne Electric Cooperative, Inc., 

Deaf Smith Electric Cooperative Inc., Dixie Electric 

Cooperative, First Electric Cooperative Inc., 

Garkane Energy, Hoosier Energy Rural Electric 

Cooperative, Inc., Mountain View Electric 

Association, Inc., Pioneer Rural Electric 

Cooperative, Inc., Sullivan County Rural Electric 

Cooperative, Inc., Sumter Electric Cooperative, Inc., 

and Sunflower Electric Power Corporation. 

24The comment letter from the CFC incorporates, 

as an attachment, the signatures of approximately 

500 individuals associated with nonprofit rural 

electric cooperatives supporting the cooperative 

exemption. 

cooperatives primarily owned by their 

cooperative associations.17 The FCS 

banks are regulated and prudentially 

supervised by the Farm Credit 

Administration (‘‘FCA’’), an 

independent agency of the Federal 

government.18 The Farm Credit Act 

authorizes the banks ‘‘to make loans and 

commitments to eligible cooperative 

associations.’’ 19 The FCS association 

members are, in turn, cooperatives 

authorized to make loans to farmers and 

ranchers, rural residents, and persons 

furnishing farm-related services.20 In 

effect, FCS bank cooperatives primarily 

make loans to FCS association 

cooperatives, which lend to farmers and 

ranchers, rural residents, and persons 

furnishing farm-related services, and 

these borrowers are member-owners of 

the FCS associations, which are 

member-owners of the FCS banks. In 

addition to the example of the FCS 

banks, other cooperatives formed under 

federal and state laws also have a 

similar entity structure in that they are 

owned and governed by their members 

and they exist to serve those members. 

The cooperative exemption, in effect, 

provides the end-user exception created 

in section 2(h)(7) of the CEA to financial 

entity cooperatives when acting in the 

interests of their members and in 

connection with loans to members. The 

exemption benefits the members that 

qualify for the end-user exception (or 

members that are cooperatives whose 

own members qualify for the end-user 

exception) because they own and 

control the cooperatives, which exist for 

the mutual benefit of its members. As 

described in greater detail below,21 in 

the laws that establish financial 

cooperatives as legal entities distinct 

from other business structures, Congress 

and state legislatures made a policy 

determination to facilitate the formation 

of cooperatives in order to provide the 

cooperative members with the unique 

benefits of accessing markets on a 

cooperative basis. In this way, financial 

cooperatives were created to serve as an 

alternative source of capital for their 

members. Some of the laws establishing 

cooperatives acknowledge that 

cooperatives will compete with other 

market participants and may have 

certain benefits or advantages that are 

acceptable for promoting the benefits 

that members achieve through their 

cooperatives.22 Because the 

cooperatives are established to serve 

their members and the net earnings they 

generate through their activities are 

returned to those members, the benefits 

of the cooperative exemption ultimately 

inure to the members of the cooperative. 

In the context of required clearing and 

the end-user exception, the cooperative 

exemption furthers the purpose for 

which financial cooperatives were 

established, i.e., to act for the mutual 

benefit of their members. 

III. Comments on the Proposed 

Cooperative Exemption Rule 

A. Introduction 

In proposing an exemption for certain 

swaps entered into by certain 

cooperatives that are financial entities, 

the Commission acknowledged in the 

NPRM that central clearing of swaps is 

a primary focus of Title VII of the DoddFrank Act. Central clearing mitigates 

financial system risks that could result 

from swaps and any exemption from 

central clearing should be narrowly 

drawn to minimize the impact on the 

risk mitigation benefits of clearing and 

should also be in line with the end-user 

exception requirements of section 

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

Commission sought to narrowly tailor 

the cooperative exemption by limiting 

the types of entities that could elect the 

cooperative exemption and the types of 

swaps for which the exemption could be 

elected. 

The Commission received a number 

of comment letters both supporting and 

opposing the proposed cooperative 

exemption. Fourteen rural electric 

cooperatives (‘‘Rural Electric 

Cooperatives’’) 23 and their trade 

association, the National Rural Electric 

Cooperative Association (‘‘NRECA’’) 

submitted substantially similar 

comment letters supporting the 

rulemaking. The FCC, the National 

Rural Utilities Cooperative Finance 

Corporation (‘‘CFC’’),24 the Credit Union 

National Association (‘‘CUNA’’), the 

American Farm Bureau Federation 

(‘‘AFBF’’), Chris Barnard (‘‘Mr. 

Barnard’’), and the National Council of 

Farmer Cooperatives (‘‘NCFC’’) similarly 

supported the proposed cooperative 

exemption. Eleven of the twelve Federal 

Home Loan Banks (‘‘FHL Banks’’) 

submitted a comment letter supporting 

the concept of a cooperative exemption 

generally, but requested certain changes 

to the rule as described below. 

The American Bankers Association 

(‘‘ABA’’), Lake City Bank, and the 

Independent Community Bankers of 

America (‘‘ICBA’’) submitted comments 

opposing the cooperative exemption on 

several grounds. All three opposed the 

rule on the grounds that it provides 

cooperatives with advantages at the 

expense of certain banks. The ABA and 

ICBA generally objected to the rule 

because they believe the reasoning 

behind the proposed rule was faulty and 

that the rule making did not comply 

with the requirements of section 4(c) of 

the CEA and the Administrative 

Procedure Act (‘‘APA’’). They also 

commented on the efficacy of the costbenefit analysis in the NPRM. 

The following discussion first 

addresses comments on each paragraph 

of the proposed rule followed by a 

discussion of the comments addressing 

compliance of the proposed rule with 

the legal parameters applicable to the 

rulemaking under section 4(c) of the 

CEA. 

B. Regulation 39.6(f)(1) (now § 50.51(a)): 

Definition of Exempt Cooperative 

The end-user exception is generally 

available to entities, including 

cooperatives, that are not ‘‘financial 

entities,’’ as defined in section 

2(h)(7)(C)(i) of the CEA, and entities that 

would be financial entities, including 

cooperatives, but for the fact that they 

meet the requirements of the small 

financial institution exemption in 

§ 50.50(d). The proposed cooperative 

exemption would add an exemption 

from required clearing for cooperatives 

that do not fall into these two categories 

if they meet the definition of ‘‘exempt 

cooperative.’’ Proposed § 39.6(f)(1) (now 

§ 50.51(a)) defines ‘‘exempt 

cooperative’’ to mean a cooperative that 

is a ‘‘financial entity’’ solely as defined 

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

for which each member of the 

cooperative is either (1) a non-financial 

entity, (2) a financial institution to 

which the small financial institution 

exemption applies, or (3) itself a 

cooperative each of whose members fall 

into either of the first two categories. 

The Commission received a number 

of comment letters in support of the 

Commission’s rationale provided in the 


tkelley on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52289 

25The FCC cited Section 1.1(a) of the Farm Credit 

Act (12 U.S.C. 2001) (‘‘farmer-owned cooperative 

Farm Credit System’’) and Section 1.1(b) thereof (‘‘It 

is the objective of this chapter to continue to 

encourage farmer- and rancher-borrowers 

participation in the management, control, and 

ownership of a permanent system of credit for 

agriculture which will be responsive to the credit 

needs of all types of agricultural producers having 

a basis for credit, and to modernize and improve the 

authorizations and means for furnishing such credit 

and credit for housing in rural areas made available 

through the institutions constituting the Farm 

Credit System as herein provided.’’). 

26 12 U.S.C. 2072. 

27 12 U.S.C. 2154a(c)(1)(D)(i). 

28 12 CFR 611.350. 

29For example, in 2011, FCS institutions 

distributed about $903 million in cash patronage 

and $243 million in stock patronage to the 

approximately 489,000 system shareholders. Farm 

Credit Admin., 2011 Annual Report on the Farm 

Credit System, 18 (2011); Press Release, Fed. Farm 

Credit Banks Funding Corp., Farm Credit System 

Reports Net Income of $3.940 Billion for 2011, 5 

(Feb. 17, 2012), available at https://

www.farmcreditfunding.com/farmcredit/serve/

public/pressre/finin/report.pdf?assetId=198426. 

NPRM for the proposed definition of 

exempt cooperative. The Rural Electric 

Cooperatives and NRECA agreed with 

the Commission’s proposed definition 

of ‘‘exempt cooperative’’ and the 

Commission’s reasons for establishing 

the exemption. The Rural Electric 

Cooperatives commented that the 

exempt cooperative definition is 

appropriate because members of exempt 

cooperatives would be eligible for the 

end-user exception if entering into 

swaps on their own. In their view, 

effectively extending the end-user 

exception available to the members of 

an exempt cooperative to the exempt 

cooperative itself is appropriate because 

the members act in the financial markets 

through the cooperatives that they own. 

The FCC, the CFC, CUNA, Mr. 

Barnard, and the NCFC similarly 

supported the Commission’s definition 

of exempt cooperative. Like the Rural 

Electric Cooperatives, the FCC suggested 

that the ‘‘unique structure of 

cooperatives and their relationship to 

their member-owners’’ warrants the 

cooperative exemption. The CFC and 

Mr. Barnard supported the ‘‘passthrough concept’’ embodied in the 

cooperative exemption. The FHL Banks 

commented that the unique ownership 

structure of cooperatives and the fact 

that cooperatives act on behalf of 

‘‘members that are non-financial 

institutions or small financial 

institutions’’ justify the Commission 

issuing the cooperative exemption. 

The ABA and the ICBA submitted 

comments opposing the definition of 

exempt cooperative because they 

believe there is no policy justification 

for the exemption and that the 

Commission’s reasons for the exemption 

are not analytically appropriate. They 

commented that cooperatives do not 

play a unique role and are not 

themselves unique. The ABA suggested 

the Commission ignored the ‘‘fact that 

banks perform the same functions for 

customers that cooperatives perform for 

their members.’’ Similarly, the ICBA 

commented that the Commission has 

not described how exempt cooperatives 

differ from commercial banks. 

According to ICBA, ‘‘community banks 

play the same role on behalf of their 

customers’’ that cooperatives play when 

facing the larger financial markets on 

behalf of their members. Both the ABA 

and the ICBA also noted that banks 

enter into swaps to hedge risks. The 

ABA noted that almost one-third of all 

the loans made by the FCS did not 

involve individual farmers or ranchers. 

According to the ICBA, smaller 

‘‘community’’ banks should be given the 

‘‘same exemption as any financial 

cooperative of the same or larger size.’’ 

The ICBA and the ABA requested that 

‘‘smaller’’ banks, with assets above the 

$10 billion threshold in the end-user 

exception, be exempted from mandatory 

clearing along with cooperatives. 

In response, the Commission does not 

disagree with these comments to the 

extent that banks often provide the same 

services to their customers that exempt 

cooperatives provide to their members. 

However, the nature of the services 

provided by cooperatives to their 

members is not the rationale for the 

cooperative exemption. The 

Commission’s rationale is based in large 

part on the relationship between a 

cooperative and its members, which is 

different from the relationship between 

banks and their customers. The 

cooperative exemption in effect 

provides the end-user exception created 

in section 2(h)(7) of the CEA to entities 

whose members themselves qualify for 

the end-user exception, but would 

otherwise not be able to realize the full 

effects of the exception when those 

members act in the financial markets 

through their member-owned exempt 

cooperatives that do not qualify for the 

small financial institution exemption. 

The rule benefits the members who 

qualify for the end-user exception 

through the cooperatives that they own 

and control and exist for their mutual 

benefit. Because the cooperatives are 

established to serve their members and 

the net earnings they generate through 

their activities are returned to those 

members, the benefits of the cooperative 

exemption ultimately inure to the 

members of the cooperative. 

The Commission notes that the 

definition of ‘‘exempt cooperative’’ is 

narrowly tailored so that only a 

cooperative for which each of its 

members individually, or if it has 

members that are cooperatives, each of 

the members of those cooperatives 

individually, would qualify for the enduser exception would qualify for the 

cooperative exemption. Furthermore, 

§ 39.6(f)(2) (now § 50.51(b)) provides 

that the exemption is only available for 

swaps executed in connection with 

originating member loans and swaps 

that hedge or mitigate risk related to 

loans to members or arising from certain 

swaps with members. As such, under 

the final rule, an exempt cooperative 

shall not elect the exemption for swaps 

related to non-member activity of the 

cooperative. 

Exempt cooperatives are distinct from 

banks not because of the services they 

offer, but because they exist to serve 

their members’ interests and act as 

intermediaries for their members in the 

marketplace. The member-owners 

generally are the customers of the 

cooperatives and the Commission 

drafted the proposed rule to be available 

only to the extent the cooperative 

exemption is used in connection with 

member-related activities. Cooperatives 

are owned by their members and as 

such, their governing bodies generally 

consist of members. Their net earnings 

are returned to their members either 

through rebates or distributions, often 

referred to as ‘‘patronage,’’ or are 

retained by the cooperatives as capital 

to be used to provide services to 

members. For example, the FCC noted 

in its comments that FCS cooperatives 

were established by federal law to 

operate for the benefit of farmerowners.25 The FCC further noted that by 

law, each cooperative association in the 

FCS has a board of directors comprised 

of voting members of the association, 

and as required by law, at least one 

‘‘outside’’ director.26 Furthermore, 

voting stock may only be held by 

farmers, ranchers, producers of aquatic 

products, and cooperative associations 

eligible to borrow from FCS 

institutions.27 Each owner of association 

voting stock is entitled to one vote in 

the affairs of the association, regardless 

of the amount of the stock held.28 FCS 

additionally commented that each year 

FCS cooperatives pay patronage to their 

members, both in cash and allocated 

equity.29 Furthermore, unlike for-profit 

entities that generally pay out dividends 

based on the amount of stock purchased 

by each investor, as discussed in greater 

detail below, cooperatives generally pay 

out or allocate earnings to the memberowners based on the amount of business 


tkelley on DSK3SPTVN1PROD with RULES2
52290 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

30See 18 a.m. Jur. 2d Cooperative Associations 

§ 19 (2012) (‘‘Ordinarily, the profits of a cooperative 

association are distributed to its members in the 

form of patronage refunds or dividends in amounts 

determined by the use made of the association 

facilities by the patrons, and statutes frequently so 

provide.’’). 

31See, e.g., 18B Am. Jur. 2d Corporations 1460 

(2012). 

32 ‘‘It is declared to be the policy of the Congress 

. . . that the farmer-owned cooperative [FCS] be 

designed to accomplish the objective of improving 

the income and well-being of American farmers and 

ranchers by furnishing sound, adequate, and 

constructive credit and closely related services to 

them, their cooperatives, and to selected farmrelated businesses necessary for efficient farm 

operations.’’ 12 U.S.C. 2001(a). 

33For a discussion of the related ‘‘fair 

competition’’ provision in section 4(c), see section 

IV herein. 

undertaken by each member with the 

cooperative.30

On the other hand, banks generally 

are for-profit, publicly or privately held 

corporations whose investor-owners are 

not required to be the users of the bank’s 

services, and often are not. The 

governing bodies of banks, like other 

for-profit entities, are typically elected 

by the shareholders whose voting power 

is determined by the amount of common 

stock each investor owns. A board of 

directors of a corporation has a legal 

duty to the corporation and the 

shareholders and, accordingly, must 

consider shareholder value in its 

actions.31 As such, unlike the memberfocused purposes of exempt 

cooperatives, a primary purpose of 

banks is to generate value for their 

owners, who generally are not their 

customers. The mission of a cooperative 

is to act in the interests of its members, 

while the goal of a for-profit business, 

whatever its size, is to benefit the 

owners of that business, which are not 

necessarily its customers. Unlike a 

cooperative, which is an extension of its 

members as a business matter, a bank is 

not an extension of its customers. 

Accordingly, the Commission believes 

the rationale for extending the end-user 

exception to cooperatives does not 

apply to banks in the same way. 

The ICBA further questioned whether 

‘‘members’’ are any different from 

‘‘customers,’’ because, in the case of the 

FCS, borrowers can be considered 

owners or members even if they do not 

put their own capital into the 

organization. For example, according to 

the ICBA, an FCS borrower can become 

a member by paying an additional 

$1,000 on a loan or one percent of the 

loan value, whichever is less. 

The FCC commented that the Farm 

Credit Act and related regulations 

prescribe minimum stock purchase 

requirements for FCS borrowers and 

also require that FCS institutions meet 

minimum capital standards well in 

excess of the amount of purchased 

stock, citing 12 U.S.C. 2151. The FCC 

noted that as of December 31, 2011, 

combined FCS association capital was 

over $24 billion dollars, or 19% of 

outstanding loans. Furthermore, the FCS 

noted that ‘‘[v]irtually all that capital is 

the result of income earned and 

retained.’’ 

The Commission believes that the 

comments of the ICBA and FCC on this 

issue further demonstrate the 

uniqueness of the member-owner 

relationship between exempt 

cooperatives and their members and 

how the cooperatives are, in effect, 

extensions of their members acting in 

the interests of their members in a way 

that is not the case for the relationship 

between other types of financial 

institutions and their customers. The 

earnings retained by FCS cooperatives 

would otherwise be paid out to 

members pro rata based on the amount 

of borrowing from the cooperatives. As 

such, a cooperative member has a 

vested, pro rata interest in its 

cooperative based on the amount of 

business the member does with the 

cooperative. While a for-profit entity 

such as a bank also may retain capital, 

the capital, if paid out to the owners, 

would be paid to the equity investors, 

not the customers of the entity and not 

based on the amount of business the 

customers do with the entity. 

The ICBA and the ABA further 

commented that some of the entities 

that the cooperatives are ‘‘standing in 

the marketplace on behalf of’’ are 

sophisticated entities and are capable of 

entering into the swap marketplace on 

their own and do not need a cooperative 

to face the market. The ICBA also 

commented that all of the component 

entities of cooperatives would have ‘‘no 

trouble arranging financing from private 

sector sources.’’ 

The Commission did not assert in the 

NPRM that the members of cooperatives 

could only access financial markets 

through the cooperatives or that sole 

access through cooperatives was a 

reason for the proposed rule. Rather, the 

Commission recognized that certain 

entities for which the end-user 

exception is available have traditionally 

accessed the markets through financial 

cooperatives that they own and which 

exist for their benefit. For example, this 

relationship is well established and is 

codified into the federal law that created 

the FCS.32 If the cooperative exemption 

were not adopted by the Commission, 

these entities would not be able to both 

continue to use their cooperatives and 

receive the full benefit of the end-user 

exception created in the Dodd-Frank 

Act. 

The ICBA questioned the 

Commission’s statement in the preamble 

to the proposed cooperative exemption 

that ‘‘cooperatives exist to serve their 

member-owners and do not act for their 

own profit.’’ The ICBA commented that 

the FCS, credit unions and other 

cooperatives ‘‘pay their executives 

millions of dollars each year.’’ 

The ICBA, Lake City Bank, and ABA 

also noted that the FCS and credit 

unions and other cooperatives that 

would be able to use the cooperative 

exemption already enjoy a number of 

significant advantages, such as low-cost 

funding, tax exemptions, and, in some 

cases, government sponsored enterprise 

(‘‘GSE’’) status. They expressed concern 

that providing credit unions, FCS 

cooperatives, and other cooperatives 

with an exemption from mandatory 

clearing would ‘‘exacerbate their 

competitive advantage over banks.’’ 

Furthermore, the ICBA stated that ‘‘FCS 

lenders have in recent years positioned 

themselves to act almost identically to 

banks through deposit taking 

arrangements, credit card offerings, 

check writing capabilities and outright 

illegitimate activities granted by their 

permissive regulator.’’ 

The Commission is not responsible 

for the creation, administration, or 

implementation of those legal 

characteristics of cooperatives referred 

to in the comments as being 

‘‘competitive advantages.’’ These 

characteristics, by and large, flow from 

policies enacted by Congress or state 

legislatures. Further, the Commission is 

not the regulator responsible for the 

laws and regulations referred to by 

commenters that govern cooperatives. 

The Commission has determined 

without regard to such other asserted 

benefits for cooperatives, to offer an 

elective clearing exemption to entities 

qualifying as exempt cooperatives to 

extend the full benefits of the end-user 

exception established in the Dodd-Frank 

Act to entities that would qualify for 

that exception, but which choose to act 

through their cooperatives in the 

financial marketplace.33

Comments regarding the 

compensation of executives are outside 

the scope of this rulemaking. The 

rationale for the cooperative exemption 

is based on the member-owner structure 

of cooperatives, not on how much 

executives are paid or whether that pay 

is fair. The Commission defers to the 

regulators who enforce those regulations 


tkelley on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52291 

34The Commission believes, however, that 

because exempt cooperatives serve their members 

and are controlled by their members, it can be 

expected that cooperatives will focus their swap 

activity on member loan-related activities. 

35See FASB ASC 905–10–05. 

36The distribution or allocation of patronage 

earnings to the members based on the amount of 

business they do with the cooperative is a guiding 

principle of cooperatives and is a necessary element 

for a cooperative to claim a deduction for taxation 

purposes under federal law. See Donald A. 

Frederick, Income Tax Treatment of Cooperatives: 

Background, Cooperative Information Report 44, 

Part 1, 2005 Ed. (April 2005) at 50, citing, Puget 

Sound Plywood, Inc. v. Commissioner, 44 T.C. 305, 

308 (1965). 

for issues related to executive 

compensation. 

With respect to swaps, the ICBA 

noted that cooperatives and community 

banks both enter into swaps to hedge 

the interest rate risk of loans to their 

customers or members. The ICBA 

suggested that swaps hedging the 

underlying risks of loans to customers 

pose the same lower risk to the financial 

system that the FCC claims regarding 

swaps hedging the risks of loans to its 

cooperative members. 

The Commission notes that it is not 

relying on the assertion by the FCC that 

swaps related to hedging loans to 

cooperative members may be less risky 

than other types of swaps that financial 

entities may undertake as a primary 

reason for distinguishing exempt 

cooperatives from other types of lending 

entities.34 As explained in the NPRM, 

the potential lower risk of such swaps 

is, however, one of the reasons why the 

Commission is restricting the 

cooperative exemption to swaps related 

to member loans. 

The National Association of Federal 

Credit Unions requested that the 

Commission specify that the cooperative 

exemption applies to ‘‘all credit 

unions.’’ The Commission clarifies that 

the exemption applies to all 

cooperatives, including credit unions 

that meet the definition of ‘‘exempt 

cooperative’’ in the final rule. The 

Commission does not have enough 

information to determine whether ‘‘all 

credit unions’’ are eligible for the 

exemption. Whether any particular 

credit union meets the definition of an 

exempt cooperative will depend on the 

relevant facts and circumstances for that 

credit union. 

The FHL Banks stated that they would 

not qualify as exempt cooperatives 

because each FHL Bank has one or more 

members that are financial institutions 

that do not qualify for the small 

financial institution exemption. The 

FHL Banks commented that the 

cooperative exemption, as proposed, 

would ‘‘unfairly and arbitrarily’’ 

penalize members of a cooperative that 

would qualify as small financial 

institutions under the end-user 

exception if the cooperative also has one 

or more large financial institutions as 

members. The FHL Banks stated that 

this would result in the inconsistent 

treatment of two similarly situated 

entities. The FHL Banks also point to 

the joint final rule on the definition of 

the term ‘‘swap dealer,’’ where the 

Securities and Exchange Commission 

along with the Commission excluded all 

swaps between a cooperative and its 

members from the analysis of whether 

that cooperative is an SD. This 

regulatory treatment, according to the 

FHL Banks, would be ‘‘consistent’’ with 

the Commission allowing the FHL 

Banks to elect the cooperative 

exemption in certain circumstances. 

The FHL Banks requested that the 

Commission remove the limitation that 

bars a cooperative from being an 

‘‘exempt cooperative’’ if it has one or 

more members that are financial entities 

that are not themselves cooperatives 

with members that qualify for the enduser exception. Instead, the FHL Banks 

suggested that the Commission allow 

cooperatives to enter into swaps that 

hedge or mitigate commercial risk 

related to loans to ‘‘qualified members’’ 

or arising from swaps entered into with 

‘‘qualified members’’ that are eligible for 

the end-user exception. The FHL Banks 

proposed the term ‘‘qualified member’’ 

to mean a member of an exempt 

cooperative that is (1) not a financial 

entity, (2) a financial entity that is 

exempt from the definition of financial 

entity under the small financial 

institution exemption in § 50.50(d), or 

(3) a cooperative, each member of which 

is not a financial entity or is exempt 

from mandatory clearing because it 

qualifies for the small financial 

institution exemption. The FHL Banks 

commented that their proposed 

approach is consistent with the DoddFrank Act’s objective of mandating that 

swaps entered into in connection with 

or for large financial institutions be 

cleared, without penalizing small 

financial institutions. According to the 

FHL Banks, their proposed revisions to 

the cooperative exemption would allow 

FHL Banks to qualify as an ‘‘exempt 

cooperative,’’ in appropriate situations. 

The FHL Banks also stated that this 

revised cooperative exemption would 

apply to less than 10% of the 

outstanding notional amount of the FHL 

Banks’ swaps. The ICBA, like the FHL 

Banks, suggested that the Commission 

revise the definition of exempt 

cooperative to not exclude the FHL 

Banks ‘‘to the extent that they engage in 

swaps for the benefit of their members 

who individually qualify as small 

financial institutions.’’ 

In response to the FHL Banks’ and the 

ICBA’s comments regarding 

cooperatives that are ineligible for the 

cooperative exemption because they 

have one or more financial entity 

members, the Commission declines to 

extend the exemption beyond the 

parameters as proposed. The 

Commission disagrees with the FHL 

Banks’ assertion that the cooperative 

exemption is arbitrary or unfair to 

financial institutions that qualify for the 

small financial institution exemption. 

Under § 39.6(f)(1)(iii)(A) (now 

§ 50.51(a)(3)(i)) of the proposed rule, 

small financial institutions that meet the 

definition thereof in § 50.50(d) can be 

members of exempt cooperatives. These 

members can include banks, savings 

associations, FCS institutions, or credit 

unions, so long as each of them qualifies 

as a small financial institution under 

§ 50.50(d) (i.e. the institution has total 

assets of $10 billion or less). They 

would be treated in the same way as all 

other entities that may qualify for the 

end-user exception, and therefore can be 

members of exempt cooperatives as 

defined. 

Furthermore, as the Commission 

acknowledged above and in the NPRM, 

it is concerned that exemptions from the 

clearing requirement could detract from 

the systemic risk reducing benefits of 

clearing. This is particularly a concern 

if the exemption could be elected for 

swaps that relate to risks of entities that 

Congress clearly intended to be subject 

to the clearing requirement—financial 

entities as defined in section 2(h)(7)(C) 

of the CEA that are not expressly 

exempted from that definition. As such, 

the Commission narrowed the 

cooperative exemption to apply solely 

to a cooperative whose members (or if 

it has members that are cooperatives, 

the members of those cooperatives) 

could themselves elect the end-user 

exception. 

The importance of a narrow 

cooperative exemption is apparent 

when considering the possible effect of 

broadening the exemption in the 

manner requested by the FHL Banks and 

ICBA. A fundamental characteristic of 

cooperatives is that they distribute or 

allocate the patronage earnings of the 

cooperative, i.e., the excess of a 

cooperative’s revenues over its costs 

arising from transactions done with or 

for its members,35 to each member based 

on the amount of patronage by the 

member, i.e., proportionally based on 

the amount of business each member 

does with the cooperative.36

Accordingly, even if a cooperative with 

financial entity members only elected 


tkelley on DSK3SPTVN1PROD with RULES2
52292 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

37FHL Banks, Combined Financial Report for the 

Year Ended December 31, 2011 (issued March 29, 

2012) at 43, available at http://www.fhlb-of.com/

ofweb_userWeb/resources/11yrend.pdf. 

38 Id. at 44–45. The Commission arrived at the 

$222.6 billion amount by adding together the loan 

values of the 60 individual members listed in the 

Combined Financial Report of the FHL Banks. 

39The Commission estimated this number by 

reviewing publically available information related 

to the assets of each of the 60 members, such as 

members’ annual 10–K financial reports filed with 

the SEC (available on the SEC’s Web site and posted 

on the members’ Web sites), other annual financial 

reports and information, such as press releases 

posted on members’ Web sites, and reports 

published by the Federal Reserve and Federal 

Deposit Insurance Corporation. As an example, the 

Commission reviewed the Federal Reserve’s 

Statistical Release for Large Banks, which provided 

information regarding the total assets held by 27 of 

the 60 members. See Federal Reserve, Statistical 

Release for Large Banks, available at http://

www.federalreserve.gov/releases/lbr/current/

default.htm. 

40The FHL Banks Combined Financial Report for 

the Year Ended December 31, 2011, does not break 

down lending amount for every member. The 49 

members used in the Commission’s calculations do 

not include all members of the FHL Banks with 

assets greater than $10 billion. Accordingly, while 

the total percentage of lending to financial entities 

with total assets greater than $10 billion cannot be 

calculated based on the information available in the 

financial report, it is likely significantly higher than 

the 53% calculated for the 49 members with over 

$10 billion in total assets for which lending 

information is available. 

41The ICBA did not specifically define the term 

‘‘community banks’’ other than by reference to the 

$50 billion maximum asset level. 

42The phrase ‘‘in connection with originating a 

loan’’ is similarly used in the definition of swap 

dealer in § 1.3(ggg) of the Commission’s 

Regulations. See 77 FR 30596, 30744 (May 23, 

2012). That meaning is incorporated in the final 

rule. 

the cooperative exemption for swaps 

related to loans to members that qualify 

for the end-user exception, a portion of 

the financial benefits from those swaps 

in the form of higher net income may 

shift from the qualifying small members 

to the larger members as part of the full 

member pro rata patronage distribution 

or allocation. Furthermore, the risks of 

such swaps because they are noncleared could also negatively impact the 

large financial institution members to 

the extent that the net income of the 

cooperative is negatively impacted. 

As an example, consider the relative 

amounts of lending by the FHL Banks to 

those of their largest members that do 

not qualify for the end-user exception as 

compared to the FHL Banks’ lending to 

their other members. The 12 FHL Banks 

had 7,774 members as of the end of 

2011.37 Each of the 12 FHL Banks 

reported the amount of lending business 

they did with their five largest members 

in the 2011 Combined Financial Report 

for the FHL Banks. In 2011, $222.6 

billion of the $403.3 billion lent by the 

FHL Banks to their members was lent to 

the largest five members of each of the 

12 FHL Banks.38 Of those 60 large 

members, approximately 49 had total 

assets in excess of $10 billion.39 The 

amount loaned to those 49 members was 

about $212.7 billion, or 53% of the 

dollar amount lent by the FHL Banks. 

Furthermore, those 49 members do not 

include all members of the FHL Banks 

with assets greater than $10 billion. 

Accordingly, the Commission estimates 

the percentage of lending by the FHL 

Banks to members that cannot qualify 

for the end-user exception was higher 

than 53% of total lending in 2011.40 If 

the FHL Banks were able to use the 

cooperative exemption, under the 

cooperative structure in which 

patronage benefits are allocated pro rata 

based on the amount of business each 

member does with the cooperative, a 

significant portion of the benefits and 

risks from the election of the exemption 

could spread to the large financial entity 

members. This would also be the case 

even if the exemption were only 

available to swaps related to small 

financial institutions because the 

distribution of patronage to the 

members is based to a large degree on 

the amount of borrowing by each 

member. 

Similarly, the Commission is 

concerned that allowing cooperatives 

with members that do not qualify for the 

end-user exception to elect the 

cooperative exemption could open up 

avenues for abuse of the exemption and 

evasion of clearing. For example, larger 

financial entities could form 

cooperatives capitalized by the large 

financial entities, but which also 

include small affiliates or trading 

partners of the larger financial entities 

that would qualify as small financial 

institutions. They could then use these 

cooperatives to shift their borrowing 

and swap needs between the large and 

small entities to be able to take 

advantage of the cooperative exception 

in ways that benefit the larger 

institutions. The Commission considers 

these risks of abuse of the exemption 

and evasion of the clearing requirement 

warrant limiting the definition of 

exempt cooperative as written. The 

Commission notes that small financial 

institutions can elect the end-user 

exception themselves. 

The ICBA noted that the Dodd-Frank 

Act’s requirement that the Commission 

consider exempting small financial 

institutions is not necessarily limited to 

institutions with less than $10 billion in 

total assets. The ICBA commented that 

there are 36 ‘‘community banks’’ 41 with 

assets over $10 billion, and within the 

category of ‘‘community banks,’’ the 

asset sizes of those banks range from 

$10.5 billion to $50 billion. The ICBA 

suggested that the asset size test in the 

end-user exception be increased up to 

$50 billion or that community banks be 

given a ‘‘ride along’’ provision so that 

community banks that do not qualify for 

the end-user exception could elect the 

same exemption as cooperatives. 

With these comments, the ICBA is 

effectively asking the Commission to 

reopen and revise the end-user 

exception rule as applied to financial 

institutions generally. The Commission 

set forth the reasons for the $10 billion 

total asset limit for small financial 

institutions in the end-user exception 

rulemaking and believes that those 

reasons remain appropriate. This 

rulemaking addresses the specific issue 

of whether an exemption from clearing 

should be granted to certain 

cooperatives—including the issue of 

whether there are relevant differences 

between the covered cooperatives and 

private banks—and is not intended as a 

vehicle for reopening the end-user 

exception regulations. 

C. Regulation 39.6(f)(2) (now § 50.51(b)): 

Swaps to Which the Cooperative 

Exemption Applies 

Proposed § 39.6(f)(2) (now 50.51(b)) 

limits application of the cooperative 

exemption to swaps entered into with 

members of the exempt cooperative in 

connection with originating loans 42 for 

members or swaps entered into by 

exempt cooperatives that hedge or 

mitigate risks related to loans to 

members or arising from member loanrelated swaps. This provision assures 

that the cooperative exemption is used 

only for swaps related to member 

lending activities. Since the definition 

of an exempt cooperative requires that 

all members be entities who can elect 

the end-user exception or cooperatives 

all of whose members can, this 

condition assures that the exemption 

will benefit entities who could 

themselves elect the end-user exception 

and can be used for swaps that hedge or 

mitigate risk in connection with 

member loans and swaps as would be 

required by section 2(h)(7)(A)(ii) of the 

CEA. 

The primary rationale for the 

cooperative exemption is based on the 

unique relationship between 

cooperatives and their member-owners. 

Expanding this exemption to include 

swaps related to non-member activities 

would extend the exemption beyond its 

intended purpose. Furthermore, 

allowing cooperatives to enter into noncleared swaps with non-member 

borrowers, or swaps that serve purposes 

other than hedging member loans or 


tkelley on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52293 

swaps, would give the cooperatives, 

which are large financial entities, an 

exception from regulatory requirements 

that would not be provided to other 

market participants engaging in such 

similar business with respect to nonmembers that is not justified by their 

cooperative structure or the provisions 

of the Dodd-Frank Act. 

The CFC commented that it agrees 

with the types of swaps eligible for the 

cooperative exemption described by the 

Commission in the preamble of the 

NPRM. The CFC stated that the use of 

the phrase ‘‘related to’’ in the rule text 

is consistent with the ‘‘pass-through 

concept’’ that underlies the cooperative 

exemption. The FCC suggested that the 

Commission provide additional clarity 

on the ‘‘related to’’ standard. The FCC 

commented that the ‘‘related to’’ 

standard should be broad enough to 

cover swaps that hedge or mitigate risk 

related to ‘‘interest rate, liquidity, and 

balance sheet risks’’ associated with a 

cooperative’s lending business. The FCC 

pointed to the statement in the preamble 

to the proposed rule that explained that 

the ‘‘related to’’ test involves hedging or 

mitigating risks ‘‘associated with’’ 

member loans. The FCC supported this 

interpretation. The FCC requested that 

the Commission clarify that certain 

types of transactions would be covered 

by the cooperative exemption. 

Specifically, the FCC suggested that the 

following swaps should be covered by 

the cooperative exemption: (1) Swaps 

managing interest rate, liquidity, and 

balance sheet risk, (2) swaps qualifying 

as GAAP hedges of bonds and floating 

rate notes, and (3) swaps hedging FCS 

banks’ liquidity reserves that are 

required by the FCA. 

The AFBF also requested that the 

Commission clarify that swaps 

mitigating or hedging balance sheet, 

interest rate, and liquidity risks 

associated with their cooperative 

lending business are eligible for the 

cooperative exemption. 

The Commission’s rationale for the 

cooperative exemption is based on the 

unique relationship between a 

cooperative and its members. The 

primary purpose for the cooperative 

exemption is to, in effect, provide the 

full benefits of the end-user exception 

created in section 2(h)(7) of the CEA to 

entities that qualify for the end-user 

exception, but otherwise do not receive 

the full benefits of the exception if they 

use their cooperatives as their 

intermediary in the markets as they 

have traditionally done. Thus, the 

Commission will interpret this 

exemption to ensure that the exemption 

is only used for swaps that are 

undertaken to directly further the 

interests of the members who are 

themselves eligible for the end-user 

exception. Accordingly, the 

Commission declines to expand the 

types of transactions eligible for the 

exemption beyond those swaps that are 

entered into in connection with 

originating a loan or loans for a member, 

or swaps that hedge or mitigate 

commercial risk related to loans with 

members, or hedge or mitigate the 

commercial risk associated with a swap 

between an exempt cooperative and its 

members in connection with originating 

loans to members. 

With respect to the comments of the 

AFBF and the FCC regarding swaps that 

hedge balance sheet, interest rate, and 

liquidity risks associated with their 

cooperative lending business, the 

Commission reiterates that only those 

swaps relating to member loans are 

eligible for the exemption, not swaps 

related to a cooperative’s entire lending 

business to the extent that lending 

business includes loans to nonmembers. Accordingly, the exemption 

may be used for swaps that hedge 

balance sheet, interest rate, and 

liquidity risks, but only limited to the 

extent those risks are related to loans 

made by the cooperative to its members. 

The Commission is concerned that 

without this limitation, cooperatives 

could use this exemption for risks 

related to non-member-based activities, 

which would be inconsistent with the 

general rationale for the exemption and 

could result in a competitive benefit to 

eligible cooperatives that is also 

inconsistent with the Commission’s 

rationale for the exemption. 

As the text of § 39.6(f)(2)(i) (now 

§ 50.51(b)(1)) provides, the phrase 

‘‘swap is entered into with a member of 

the exempt cooperative in connection 

with originating a loan or loans for the 

member’’ should be read consistent with 

17 CFR 1.3(ggg)(5). Among other things, 

17 CFR 1.3(ggg)(5) provides that an 

acceptable swap includes a swap with 

members for which the rate, asset, 

liability or other notional item 

underlying such swap is, or is directly 

related to, a financial term of such loan, 

which includes, without limitation, the 

loan’s duration, rate of interest, the 

currency or currencies in which it is 

made and its principal amount; or the 

swap is required, as a condition of the 

loan under the exempt cooperative’s 

loan underwriting criteria, to be in place 

in order to hedge price risks incidental 

to the borrower’s business and arising 

from potential changes in the price of a 

commodity (other than an excluded 

commodity). 

Section 39.6(f)(2)(ii) (now 

§ 50.51(b)(2)) also includes in the 

cooperative exemption swaps that hedge 

or mitigate risk related to loans to 

members or arising from a swap or 

swaps with members entered into 

pursuant to § 39.6(f)(2)(i) (now 

§ 50.51(b)(1)). This provision includes 

swaps that the exempt cooperatives may 

enter into with non-members to hedge 

or mitigate the risks incurred by the 

cooperatives related to their member 

lending activities. Such swaps can 

include swaps entered into with nonmember parties (e.g., SDs) to hedge or 

mitigate risks such as interest rate risk 

related to funding loans to fund member 

loans, or liquidity or balance sheet risks, 

so long as those liquidity and balance 

sheet risks arise from activities related 

to member loans. 

As discussed above in this section, 

the risks must be related to member 

loans only. For example, the 

Commission understands that 

cooperatives sometimes issue bonds or 

enter into wholesale funding 

transactions to fund member and nonmember loans. The cooperative 

exemption would permit an exemption 

for swaps, such as interest rate swaps or 

interest rate caps, used to hedge those 

funding transactions, but only to the 

extent that the interest rate swaps or 

interest rate caps relate to memberassociated loans. Only swaps hedging or 

mitigating risk arising from the portion 

of the bonds or wholesale funding 

proceeds that is related to, or is 

expected to be related to, direct loans to 

members are eligible for the exemption. 

Practically speaking, this means that for 

a cooperative borrowing on a wholesale 

basis for both member and non-memberassociated loans, the aggregate notional 

amount of any non-cleared swaps 

hedging the wholesale funding loans 

must not exceed the aggregate principal 

value of the wholesale funding loans 

less the aggregate principal amount lent 

or expected to be lent to non-members. 

Cooperatives would need to adjust that 

aggregate notional amount by 

termination or other means as soon as 

practicable if that aggregate amount is 

exceeded during the life of any such 

swaps. 

As another example, eligible 

cooperatives may want to hedge interest 

rate risk associated with a portfolio of 

loans to multiple borrowers with one or 

more swaps. If the loan portfolio being 

hedged consists solely of loans to 

members, then the cooperative 

exemption would be available for those 

hedging swaps if the requirements of 

§ 39.6(f) (now § 50.51) are met. 

However, if the cooperative has nonmember loans in the loan portfolio 

being hedged, then the swap may be 

hedging risk that is not related to 


tkelley on DSK3SPTVN1PROD with RULES2
52294 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

43 77 FR 42572 (July 19, 2012). 44 77 FR at 42565–70. 

member loans and, if so, the exemption 

would not be available for that swap. In 

order to be able to elect the exemption 

for swaps that hedge a portfolio of 

member loans and non-member loans, 

the aggregate notional amount of any 

such swaps must not exceed the 

aggregate principal amount of the 

member loans in the portfolio. 

Cooperatives would need to adjust that 

notional amount by termination or other 

means, such as clearing certain swaps, 

as soon as practicable if that amount is 

exceeded during the life of any such 

swap. The same limitation applies to 

balance sheet risks. The exemption may 

be elected for swaps hedging balance 

sheet risks only to the extent they arise 

from member loan related activity. For 

example, balance sheet risks could be 

hedged with swaps for which the 

cooperative exemption may be available 

to the extent that the aggregate notional 

amount of such swaps does not exceed 

the aggregate principal amount of 

member loans. 

With respect to FCC’s comments 

relating to ‘‘liquidity reserves’’ required 

by the FCA, the Commission believes 

the same general approach described 

above should apply. That is, swaps 

hedging risks related to liquidity 

reserves may be eligible for the 

exemption only to the extent that such 

reserves being hedged are related to 

member loans. For example, if a 

cooperative makes loans to both 

members and non-members and hedges 

risks related to liquidity reserves for the 

combined loan portfolio, the 

cooperative would be permitted to elect 

the exemption for the hedging swaps to 

the extent that the aggregate notional 

amount of the swaps does not exceed an 

amount equal to the total liquidity 

reserves multiplied by the proportion of 

the member loans principal amount to 

the total principal amount of member 

loans and non-member loans in the 

cooperative’s combined loan portfolio. 

The CFC commented that the 

Commission should modify the 

language of section 39.6(f)(2)(ii) (now 

§ 50.51(b)(2)), which is a cross-reference 

to the definition of hedging or 

mitigating commercial risk for the 

purposes of the end-user exception, to 

replace the term ‘‘commercial 

enterprise’’ with the term ‘‘exempt 

cooperative.’’ 

The requested change is not 

necessary. As explained in the final 

release for the end-user exception,43 the 

use of the term ‘‘commercial enterprise’’ 

is intended to refer to the underlying 

activity to which the risk being hedged 

or mitigated relates in the context of the 

entity’s normal business activities, not 

simply the type of entity claiming the 

exemption. For example, in the context 

of the cooperative exemption, it would 

include the risks undertaken by a 

cooperative in the normal course of 

business of providing loans to members. 

D. Regulation 39.6(f)(3) (now § 50.51(c)): 

Reporting 

The Commission believes it is 

appropriate to impose certain reporting 

requirements on any entities that may 

be exempted from the clearing 

requirement by this regulation. The 

reporting requirements in the final rule 

are effectively identical to the reporting 

requirements for the end-user exception. 

For purposes of regulatory consistency, 

§ 39.6(f)(3) (now § 50.51(c)) incorporates 

the provisions of § 50.50(b) with only 

those changes needed to apply the 

reporting provisions in the specific 

context of the cooperative exemption. 

Regulation 50.50(b) requires one of the 

counterparties (the ‘‘reporting 

counterparty’’) to provide, or cause to be 

provided, to a registered SDR, or if no 

registered SDR is available, to the 

Commission, information about how the 

counterparty electing the exception 

generally expects to meet its financial 

obligations associated with non-cleared 

swaps. In addition, § 50.50(b) requires 

reporting of certain information that the 

Commission will use to monitor 

compliance with, and prevent abuse of, 

the exception. The reporting 

counterparty would be required to 

provide the information at the time the 

electing counterparty elects the 

cooperative exemption. 

The CUNA requested that the 

Commission minimize the compliance 

burdens on cooperatives that elect to 

use the cooperative exemption, 

including the notification requirement. 

The ICBA requested that the 

Commission modify the reporting 

requirement when the cooperative 

exemption is elected. The ICBA 

commented that the aggregate reporting 

requirements of § 50.50(b) do not allow 

the Commission to ‘‘monitor actual risks 

or swaps usage.’’ The ICBA stated that 

it was concerned that FCS members 

actively seek to lend to a number of 

entities that are not owners of the FCS. 

Because of this, the Commission, 

according to the ICBA, would not have 

a way of verifying that the swaps for 

which an FCS bank elected this 

exemption are actually eligible for the 

cooperative exemption. Neither the 

ICBA nor the CUNA proposed any 

specific changes to the rule text in 

connection with their comments. 

The Commission has determined not 

to change the reporting requirements 

proposed in § 39.6(f)(3) (now § 50.51(c)) 

and to keep them consistent with the 

reporting requirements of the end-user 

exception. The Commission discussed 

at length in the final release of the enduser exception how the reporting 

requirements for entities electing the 

clearing requirement exception are 

simplified through a check-the-box 

approach and can be reported along 

with the other reporting required for all 

swaps under the Commission’s part 45 

regulations.44 The Commission believes 

that the reporting requirements will 

provide the Commission with sufficient 

information, along with the other 

information to be reported for all swaps 

and information publicly reported by 

cooperatives, to detect evasion of 

required clearing or abuse of the 

exemption. For example, every swap 

executed by a cooperative, as is the case 

with all swaps, must be reported to an 

SDR or to the Commission and the 

parties to that swap will be identified. 

Accordingly, the Commission will be 

able to review and analyze the economic 

and other details of all swaps entered 

into by each cooperative. As such, the 

Commission is able to monitor actual 

swap usage by cooperatives. The swap 

reporting requirements are not intended 

to monitor the risk levels of individual 

cooperatives. Monitoring the 

accumulated risk undertaken by 

financial cooperatives is generally the 

purview of their supervisory regulators. 

Based on a review of publicly 

available information and discussions 

with the regulators of financial 

cooperatives, the Commission believes 

that a large majority of lending by these 

cooperatives is to their members. As 

such, at present there do not appear to 

be substantial incentives for 

cooperatives to abuse the exemption 

with respect to swaps that are not 

member related. Notwithstanding the 

foregoing, the limitations on using the 

exemption for non-member related 

activities is clearly established in the 

final rule and the Commission is 

confident that the tools available to the 

Commission for addressing abuse or 

evasion of the cooperative exemption 

are sufficient without changing the 

reporting requirements as proposed. 

E. Other Comments on the Proposed 

Rule 

The ABA and the ICBA commented 

that the FCS, as a GSE, presents a 

significant risk for the U.S. taxpayer. 

The ICBA stated that the FCS was 

‘‘bailed out’’ by the government during 

the farm credit crisis in the 1980s. The 

ABA and the ICBA noted that the FCS, 


tkelley on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52295 

45See 12 U.S.C. 2241 (establishing the FCA); 12 

U.S.C. 2252 (enumerating the powers of the FCA 

including the power to ensure the safety and 

soundness of FCS institutions). 

46The Financial Stability Oversight Council does 

not have the authority to determine that the FCS be 

supervised by the Board of Governors of the Federal 

Reserve System as a ‘‘nonbank financial company’’ 

pursuant to section 113 of the Dodd-Frank Act. The 

definition of ‘‘nonbank financial company’’ 

includes a ‘‘U.S. nonbank financial company’’ and 

a ‘‘U.S. nonbank financial company’’ specifically 

excludes a ‘‘Farm Credit System institution 

chartered and subject to the provisions of the Farm 

Credit Act of 1971.’’ 12 U.S.C. 5311(a)(4); section 

102(a)(4)(B) of the Dodd-Frank Act. 

47See Conference Report, H.R. Report 102–978 at 

8 (Oct. 2, 1992) (‘‘The goal of providing the 

Commission with broad exemptive powers . . . is 

to give the Commission a means of providing 

certainty and stability to existing and emerging 

markets so that financial innovation and market 

development can proceed in an effective and 

competitive manner.’’). 

48 Id. at 78. 

49 Id. 

50Cf., CEA section 4(c)(2)(A), 7 U.S.C. 6(c)(2)(A) 

(expressly requiring a determination that an 

exemption from CEA section 4(a), 7 U.S.C. 6, under 

CEA section 4(c)(1), 7 U.S.C. 6(c)(1), be consistent 

with the public interest and the purposes of the 

CEA, one of which is ‘‘to promote . . . fair 

competition . . . among . . . market participants’’). 

if viewed as a single financial 

institution because of the mutual 

support provisions for the FCS 

institutions, has assets worth more than 

$230 billion. According to the ICBA, the 

FCS may be systemically important 

under the Dodd-Frank Act because it 

has assets in excess of $50 billion. The 

ICBA also suggested that the 

Commission should not provide any 

exemptions for any institution with over 

$50 billion in assets because institutions 

over $50 billion are considered to be 

potentially systemically important 

under the Dodd-Frank Act. 

In contrast, the FCC commented that 

the FCS banks have strong protections 

in place for counterparty default, 

including, for example, collateral 

posting agreements, which are overseen 

by the FCA. According to the FCC, these 

protections have been effective 

throughout the recent financial crisis. 

Accordingly, the FCC suggested that the 

FCS poses no systemic risk to the U.S. 

financial system. 

The fact that Congress designated the 

FCS as a GSE does not by itself imply 

the existence of a sufficiently higher 

level of risk to justify rejecting the 

limited exemption from clearing 

provided to cooperatives. The 

Commission notes that the FCS is 

supervised by the FCA, an independent 

Federal agency charged with overseeing 

the safety and soundness of the FCS.45

The Commission acknowledged in the 

NPRM that the proposed exemption 

would be available to cooperatives with 

total assets in excess of $50 billion. 

However, the Commission believes that 

the exemption, as narrowly drafted, is 

appropriate given the benefits conferred 

by it to the entities Congress designated 

for the end-user exception who are 

members of exempt cooperatives. 

Regarding the possible designation of 

the FCS as systemically important, the 

Commission notes that Congress 

excluded the possibility of the FCS from 

being designated as systemically 

important by the Financial Stability 

Oversight Council.46

The CFC requested that the 

Commission, when coordinating with 

the other prudential regulators working 

to finalize the margin rules for noncleared swaps, ensure that the final 

margin requirements for non-cleared 

swaps are consistent with the final 

cooperative exemption. In effect, the 

CFC requested that the final margin 

rules for non-cleared swaps not require 

margin for swaps eligible for the 

cooperative exemption. 

The Commission intends to continue 

to work with the other prudential 

regulators to ensure that the cooperative 

exemption, along with other clearing 

exceptions or exemptions, are taken into 

consideration when finalizing the 

margin rules for non-cleared swaps. 

The ICBA suggested that the 

Commission should review the 

exemption ‘‘every three years to see if 

the exemption is warranted on an 

ongoing basis’’ because cooperatives 

will have had time to ‘‘adjust to the 

evolving swaps markets and clearing 

systems.’’ 

The Commission declines to include 

an explicit sunset or study provision in 

the final rule. As the Commission’s 

swap regulations are new and the 

market is evolving in response, the 

Commission anticipates evaluating its 

swap-related regulations on an asneeded basis and will modify them as 

appropriate. 

The ABA requested that the 

Commission extend the comment period 

for this rule because of the ‘‘impending 

regulatory deadlines, complexity, and 

economic consequences’’ of the 

cooperative exemption. 

The Commission declines to extend 

the comment period because the public 

was given an opportunity to, and did, 

participate in the rulemaking process. 

IV. Section 4(c) of the Commodity 

Exchange Act 

Section 4(c)(1) of the CEA states that 

‘‘[i]n order to promote responsible 

economic or financial innovation and 

fair competition’’ the CFTC may exempt 

any agreement, contract, or transaction 

subject to section 4(a) from the 

requirements of that section or any other 

section of the CEA. Section 4(c) 

authorizes the Commission to grant 

exemptive relief to foster the 

development or continuance of market 

practices that contribute to market 

innovation and competition.47 Congress, 

in adding section 4(c) to the CEA, 

intended that the Commission, ‘‘in 

considering fair competition, will 

implement this provision in a fair and 

even-handed manner.’’ 48 At the same 

time, Congress expected that, in doing 

so, the Commission ‘‘will apply 

consistent standards based on the 

underlying facts and circumstances of 

the transaction and markets being 

considered, and may make distinctions 

between exchanges and other markets 

taking into account the particular facts 

and circumstances involved, consistent 

with the public interest and the 

purposes of the Act, where such 

distinctions are not arbitrary and 

capricious.’’ 49 While this language 

refers specifically to distinctions 

between exchanges and other markets, it 

implies that Congress more generally 

expected the Commission, in applying 

section 4(c)(1), to draw distinctions 

among different market participants 

where circumstances justify it.50 As 

discussed in detail elsewhere herein, 

cooperatives are unique in their 

organizational form, in the way that 

they act in the interests of their 

members, and in the well-established 

public policies that support the ability 

of cooperative members to make use of 

their cooperatives for purposes of 

accessing markets. These unique 

characteristics justify an exemption 

specifically tailored to enable nonfinancial entity end users that are 

members of cooperatives to realize the 

full benefits of the end-user exception 

when they access markets through their 

cooperatives. 

The end-user exception provided in 

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

available to an entity that is a ‘‘financial 

entity,’’ as defined in section 

2(h)(7)(C)(i), unless the entity is exempt 

from the definition because it is a small 

financial institution based on total 

assets, as provided in section 

2(h)(7)(C)(ii) of the CEA and § 50.50(d), 

or it meets one of the narrowly drawn 

exemptions provided in section 2(h)(7) 

or the Commission regulations. Section 

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

consideration for cooperatives that meet 

the definition of ‘‘financial entity’’ and, 

therefore, the asset size limit applies to 

them. 

As described in the NPRM and above, 

cooperatives whose member-owners 

consist exclusively of persons or entities 


tkelley on DSK3SPTVN1PROD with RULES2
52296 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

51See Conference Report, H.R. Report 102–978 at 

8 (October 2, 1992). 

52See The Federal Farm Loan Act, Public Law 

64–158, 39 Stat. 360 (1916) (repealed 1923) (a 

predecessor to the Farm Credit Act). 

53See, e.g., the mission statement of the Farm 

Credit Bank of Texas: ‘‘Other lenders may lend to 

agriculture and rural America only when it is 

profitable to do so, but at Farm Credit, financing 

rural America is all we do. When Congress created 

the Farm Credit System in 1916, it gave the System 

a mission to be a competitive, reliable source of 

funds for eligible borrowers in agriculture and rural 

America. Because we specialize in these areas, we 

have expertise that is unparalleled among other 

lenders.’’ http://www.farmcreditbank.com/farmcredit-advantage.aspx; See also CoBank 2011 

Annual Report, 31 (‘‘We are a mission-based lender 

with authority to make loans and provide related 

financial services to eligible borrowers in the 

agribusiness and rural utility industries, and to 

certain related entities, as defined by the Farm 

Credit Act. . . . We are cooperatively owned by our 

U.S. customers.’’). 

54To receive treatment as cooperatives under the 

Internal Revenue Code, an entity must be 

‘‘operating on a cooperative basis.’’ 26 U.S.C. 

1381(a). The United States Tax Court has held that 

one of the guiding principles for determining 

whether an entity is operating on a cooperative 

basis is if it is democratically controlled by the 

members. Puget Sound Plywood, Inc. v. 

Commissioner, 44 T.C. 305, 308 (1965). 

55See, e.g., 12 U.S.C. 2072, 92 (requiring boards 

for production credit associations and federal land 

bank associations be selected from its voting 

members); 12 CFR 701 app. A (bylaws for national 

credit unions requiring board members be members 

of the credit union); Kan. Stat. Ann. § 17–1510 

(West) (requiring board members to be selected 

from the membership); Va. Code Ann. § 13.1–324 

(West) (requiring the board, except for the public 

director, consist of members). 

56See, e.g., the initial statement of Congress in the 

Farm Credit System Act, which authorizes the Farm 

Credit System that the FCS cooperatives are a part 

of: ‘‘It is the objective of this chapter to continue 

to encourage farmer- and rancher-borrowers 

participation in the management, control, and 

ownership of a permanent system of credit for 

agriculture which will be responsive to the credit 

needs of all types of agricultural producers having 

a basis for credit, and to modernize and improve the 

authorizations and means for furnishing such credit 

and credit for housing in rural areas made available 

through the institutions constituting the Farm 

Credit System as herein provided.’’ 12 U.S.C. 2001. 

that could elect the end-user exception 

provide important financial services to 

their members. These cooperatives are, 

in many respects, an extension of their 

member-owners and are not separable 

from their members in any real sense 

because their mission is to act in the 

interests of the members. However, 

some of those cooperatives meet the 

definition of ‘‘financial entity’’ and have 

total assets in excess of $10 billion, and 

therefore the end-user exception is 

unavailable to them. By extension, the 

full benefits of the end-user exemption 

would be unavailable to their members 

accessing financial services through 

their cooperatives. Accordingly, absent 

this exemption, cooperative members 

would lose the ability to use their 

cooperative for financial services and at 

the same time, realize the full benefits 

of end-user exception. Without the 

cooperative exemption, when a 

cooperative engages in financial activity 

that could benefit from the end-user 

exception and that activity is in the 

interest of the cooperative’s members, 

the members would not realize the full 

benefits of the end-user exception 

because the cooperative cannot elect the 

exception. Although the members of a 

cooperative may seek out financial 

services from other market participants, 

some of which may be able to elect the 

end-user exception, such members 

would not be able to realize the same 

benefits as if they had acted through the 

cooperative. As previously explained, 

such other market participants were not 

established solely to serve the interests 

of its customers, and thus do not 

provide the same benefits to its 

customers as the cooperative structure 

provides to its members, even for 

similar services. Absent this exception, 

the members of the cooperative would 

no longer be able to fully realize the 

benefits for which the cooperatives were 

established of being the members’ 

intermediary in the financial markets 

acting in the mutual interests of the 

members. In light of this, the 

Commission determined to exercise its 

authority under section 4(c) of the CEA 

to propose § 39.6(f) (now § 50.51) and 

establish the cooperative exemption. 

As noted above, section 4(c) of the 

CEA authorizes the Commission to 

provide exemptions to classes of 

persons ‘‘to promote responsible 

economic or financial innovation and 

fair competition.’’ Many of the 

comments focused on this provision. 

For example, the ICBA commented that 

the cooperative exemption does not 

promote financial innovation. 

According to the ICBA, the 

Commission’s estimate that the 

cooperative exemption would affect 500 

or less swaps a year shows that there is 

no financial innovation by the exempt 

cooperatives. The ICBA also commented 

that the Commission has not shown 

financial innovation because the 

proposal excludes the FHL Banks, 

which, according to the ICBA would 

potentially provide just as much, ‘‘if not 

more,’’ financial innovation than an 

exemption for the FCS and credit 

unions. In essence, the ICBA stated that 

the cooperative exemption does not 

promote financial innovation because it 

is narrowly tailored and affects only a 

small number of swaps and institutions. 

In contrast, the FCC commented that 

‘‘[t]o provide tailored financing 

products for farmers and farm-related 

businesses, FCS institutions rely on the 

safe use of derivatives to manage 

interest rate, liquidity, and balance 

sheet risk, primarily in the form of 

interest rate swaps.’’ 

As discussed above in this section IV, 

Congress contemplated that section 4(c) 

of the CEA would provide the 

Commission with the ‘‘means of 

providing certainty and stability to 

existing and emerging markets so that 

financial innovation and market 

development can proceed in an effective 

and competitive manner.’’ 51 Financial 

cooperatives have existed for over 100 

years and were given separate legal 

status by Congress as far back as 1916.52

Without these cooperatives, members 

have less choice in where they can 

borrow capital and hedge risks related 

to those borrowing activities. Swaps are 

a fairly recent innovation in the 

financial markets that has become an 

integral part of borrowing and lending. 

The cooperative form has enabled 

members to manage their borrowing 

activities and to use swaps to hedge 

risks in connection therewith at a lower 

cost. By pooling member capital in 

financial cooperatives, members are in 

effect aggregating their resources to 

allow them not only to gain a lower cost 

of funding, but also to be able to hire 

experienced executives who, as 

employees of the cooperative, are 

charged with managing the financial 

activities of the cooperative and 

advising the board of directors of the 

cooperative for the benefit of the 

member-owners, who often have 

specific, shared purposes that are the 

mission focus of the cooperative.53

Further, because the cooperative 

members elect the board members of the 

cooperative on a democratic, one 

member, one vote, basis,54 and often 

most, if not all, board members are 

cooperative members,55 the 

membership, through the governing 

board, has a unique opportunity to 

better understand the benefits and risks 

of swaps used in connection with their 

financial activities and as a group 

control the thoughtful application 

thereof in a responsible manner and for 

their mutual benefit. The mutual benefit 

of pooling resources and acting 

cooperatively is one of the principal 

policy reasons for the establishment of 

cooperative structures.56 These are 

benefits that the cooperative memberowners would not have as customers of 

other financial institutions that they do 

not own or control and that are not 

established with the mission of 

providing financing and financial 

services to a particular type of customer 

and for their benefit. 

In addition, section 4(c) of the CEA 

does not specify that the financial 


tkelley on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52297 

57As an example of these legislative policy 

determinations, the Federal Credit Union Act states: 

The Congress finds the following: 

(1) The American credit union movement began 

as a cooperative effort to serve the productive and 

provident credit needs of individuals of modest 

means. 

(2) Credit unions continue to fulfill this public 

purpose, and current members and membership 

groups should not face divestiture from the 

financial services institution of their choice as a 

result of recent court action. 

(3) To promote thrift and credit extension, a 

meaningful affinity and bond among members, 

manifested by a commonality of routine interaction, 

shared and related work experiences, interests, or 

activities, or the maintenance of an otherwise well 

understood sense of cohesion or identity is essential 

to the fulfillment of the public mission of credit 

unions. 

(4) Credit unions, unlike many other participants 

in the financial services market, are exempt from 

Federal and most State taxes because they are 

member-owned, democratically operated, not-forprofit organizations generally managed by volunteer 

boards of directors and because they have the 

specified mission of meeting the credit and savings 

needs of consumers, especially persons of modest 

means. 

(5) Improved credit union safety and soundness 

provisions will enhance the public benefit that 

citizens receive from these cooperative financial 

services institutions. 

12 U.S.C. 1751. State cooperative laws also 

acknowledge the different status cooperatives are 

being provided within the competitive landscape. 

See N.Y. Coop. Corp. Law, which states that: ‘‘[a] 

cooperative corporation shall be classed as a nonprofit corporation, since its primary object is not to 

make profits for itself as such, or to pay dividends 

on invested capital, but to provide service and 

means whereby its members may have the 

economic advantage of cooperative action, 

including a reasonable and fair return for their 

product and service.’’ N.Y. Coop. Corp. Law 3 

(McKinney) (emphasis added); see also Ky. Rev. 

Stat. Ann. § 272.1001(2) (West 2012). 

58For example, with respect to the FCS, the Farm 

Credit Act of 1971 provides, ‘‘It is declared to be 

the policy of the Congress, recognizing that a 

prosperous, productive agriculture is essential to a 

free nation and recognizing the growing need for 

credit in rural areas, that the farmer-owned 

cooperative Farm Credit System be designed to 

accomplish the objective of improving the income 

and well-being of American farmers and ranchers 

by furnishing sound, adequate, and constructive 

credit and closely related services to them, their 

cooperatives, and to selected farm-related 

businesses necessary for efficient farm operations.’’ 

12 U.S.C. 2001. 

innovation realized must be of a certain 

size. Innovation often begins on a small 

scale before becoming widely accepted 

and implemented, if successful. 

Regarding whether the FHL Banks 

should be included because the 

exemption would also provide 

innovation through the FHL Banks, as 

described in detail above in section III.B 

of this final release, the Commission 

determined to carefully narrow the 

cooperatives that can elect the 

exemption to those whose members 

consist exclusively of entities that (or 

other cooperatives whose members) do 

qualify for the end-user exception on 

their own, given the clear Congressional 

intent in section 2(h)(7) of the CEA to 

exclude financial entities (the definition 

of which excludes small financial 

institutions) from the end-user 

exception to the clearing requirement. 

Given that FHL Banks are not made up 

exclusively of non-financial entities or 

small financial institutions, the 

cooperative exemption would not be 

available to them. 

The ABA and ICBA also commented 

that the cooperative exemption does not 

qualify under section 4(c) and is 

discriminatory because it would give 

cooperatives a competitive advantage 

over banks and therefore it does not 

promote ‘‘fair competition.’’ They also 

commented that cooperatives compete 

with banks for the same business 

opportunities, and as GSEs and taxexempt entities, cooperatives can offer 

more competitive pricing than 

traditional banks. Lake City Bank 

commented that it has difficulty 

competing with the FCS and credit 

unions for business due to the GSE 

status of the FCS, the large amount of 

assets the FCS maintains, and the 

favorable tax status afforded to the FCS 

and credit unions. 

In contrast, the FCC commented that 

the cooperative exemption preserves a 

‘‘level field for FCS institutions and 

commercial banks’’ that qualify for the 

end-user exception because FCS 

associations that otherwise would 

qualify as small financial institutions 

and compete with qualifying banks 

hedge risk at the level of the FCS bank 

cooperatives in which they are 

members. In effect, the FCC asserts that 

the FCS associations would be unable to 

use the end-user exception because the 

cooperative structure of the FCS system 

means that the associations act through 

the FCS bank cooperatives (all of which 

have total assets over $10 billion) for 

their hedging activities and not directly. 

As discussed previously, the essential 

function of cooperatives is to enable 

their members to access markets 

through a commonly-owned 

intermediary. The memberships of the 

cooperatives that would qualify for the 

cooperative exemption consist of 

entities that can elect the end-user 

exception if acting on their own or other 

cooperatives the members of which can 

elect the end-user exception. However, 

these cooperatives meet the definition of 

‘‘financial entity’’ and are too large to 

qualify for the small financial 

institution exemption, which, in turn, 

renders the end-user exception 

unavailable to the cooperatives. 

Accordingly, if the cooperative members 

wish to access the markets through their 

financial cooperative, which has been 

established for that same purpose, they 

would not receive the full benefits of the 

end-user exception because the 

cooperative would have to clear its 

swaps even though it is acting in the 

interests of its members in the markets. 

On the other hand, the members could 

enter into loans and swaps with other 

financial entities that can elect the enduser exception. In effect, the cooperative 

structure, which is intended to give the 

members the benefit of size by allowing 

them to pool their resources and act 

together for their mutual benefit, instead 

would frustrate their ability to realize 

the full benefits of the end-user 

exception when acting through their 

cooperatives. As such, the cooperative 

exemption seeks to preserve the benefits 

available to the members of cooperatives 

as intended under the cooperative legal 

structure. 

The Commission’s recognition that 

the cooperatives provide a means for its 

members to access the financial markets 

in a variety of ways is consistent with 

the intent of Congress and state 

legislatures in the laws establishing 

cooperative legal structures. As 

described below, some of these laws 

acknowledge that cooperatives may 

have certain benefits or advantages that 

other entities do not have, but that any 

such advantages are acceptable for 

promoting the benefits of cooperatives 

because ultimately the benefits inure to 

the members of the cooperatives. The 

cooperative exemption is being adopted 

by the Commission in the context of the 

foregoing policy determinations.57

Importantly, the Commission notes 

that the swaps that are the subject of the 

exemption are limited to those swaps 

related to member loans. Accordingly, 

the exemption applies only to the swaps 

related to lending services that financial 

cooperatives have been established to 

provide, and traditionally do provide, to 

their owner-members.58

The ABA and ICBA also cited to 

‘‘preferred tax and funding advantages 

as [GSEs]’’ for FCS banks and the taxexempt status that qualifying 

cooperatives have under Subchapter T 

of the Federal Internal Revenue Code 

(‘‘Tax Code’’) as existing advantages 

cooperatives have over banks. On the 

other hand, financial cooperatives, such 

as the FCS and credit unions, are subject 

to other legal restrictions and regulated 

by their own regulators, who may 

impose restrictions that put them at a 

competitive disadvantage when 

compared to banks. For example, federal 

statutes and regulations applicable to 

FCS cooperatives restrict lending 

services to particular classes of 

borrowers, prohibit them from taking 

deposits (which limits their funding 

sources as compared to banks), and 


tkelley on DSK3SPTVN1PROD with RULES2
52298 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

59 7 U.S.C. 6(c)(2)(B)(i). 

60 7 U.S.C. 2(e). 

61Compare CEA section 4(c)(3)(F) identifying the 

applicable type of appropriate person (a 

‘‘corporation, partnership, proprietorship, 

organization, trust, or other business entity with a 

net worth exceeding $1,000,000 or total assets 

exceeding $5,000,000 . . .’’ and section 1a(18)(A)(v) 

that identifies a comparable type of ECP (a 

‘‘corporation, partnership, proprietorship, 

organization, trust, or other entity’’ with a net worth 

exceeding $1,000,000 (and that enters into an 

agreement, contract or transaction for certain risk 

management purposes) or total assets exceeding 

$10,000,000). 

62Although § 39.6(f) (now § 50.51) is an 

exemption from the clearing requirement of section 

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

sets forth a standard for entering into a swap, 

section 4(c)(2)(B)(i) requires that any agreement, 

contract or transaction that is the subject of a CEA 

section 4(c)(1) exemption be ‘‘entered into’’ solely 

between appropriate persons. Therefore, focusing 

on section 2(e), which is an execution standard 

rather than a clearing standard, is appropriate, 

particularly given that if it is unlawful to enter into 

a swap in the first instance, the clearing 

requirement is moot. 

63See 5 U.S.C. 706(2)(A). 

64 77 FR 41942 and 41943, and section III.B 

above. 

65 77 FR 41942 and 41943, and section III.C 

above. 

limit other services that they can 

provide to members. Similarly, the Tax 

Code, U.S. Tax Court rulings, and other 

guidance from the Internal Revenue 

Service impose limits on the business 

structure of cooperatives that seek 

cooperative tax treatment under the Tax 

Code that may impact their 

competitiveness. Also, cooperatives 

generally cannot raise equity capital 

from independent, non-customer 

investors. While the Commission’s role 

is not to determine the relative overall 

competitive advantages or 

disadvantages that cooperatives or other 

financial institutions may have, the 

Commission believes that any limited 

advantage the cooperative exemption 

may provide to exempt cooperatives is 

likely to be small when viewed in the 

context of the complete competitive 

landscape in which financial 

cooperatives and banks operate. 

Given that § 39.6(f) (now § 50.51) and 

its attendant terms and conditions 

would (1) promote economic and 

financial innovation for the benefit of 

the members of exempt cooperatives, (2) 

foster the ability of cooperative 

members to access the financial markets 

through their cooperatives and (3) 

further Congressional intent by 

providing a limited exemption from 

clearing that effectively extends the enduser exception to cooperatives that have 

end users for members, the Commission 

concludes that the adoption of § 39.6(f) 

(now § 50.51) and its attendant terms 

and conditions would promote 

responsible economic and financial 

innovation and fair competition in 

accordance with section 4(c) of the CEA. 

The Commission also concludes that 

the cooperative exemption will be 

limited to entities that fall within the 

term ‘‘appropriate person,’’ as required 

by section 4(c)(2)(B)(i) of the CEA.59

Section 2(e) of the CEA renders it 

‘‘unlawful for any person, other than an 

[eligible contract participant (‘‘ECP’’)], 

to enter into a swap unless the swap is 

entered into on, or subject to the rules 

of, a board of trade designated as a 

contract market.’’ 60 Since the 

cooperative exemption can only be 

elected for swaps that are executed 

bilaterally and not on a board of trade 

or contract market, both the exempt 

cooperatives and their respective 

counterparties to such swaps must be 

ECPs. Given that the criteria for the ECP 

definition covering business 

organizations generally is more 

restrictive than the comparable criteria 

for the appropriate person definition in 

section 4(c)(3),61 the Commission finds 

that the class of persons relying on 

§ 50.51(a) will be limited to appropriate 

persons for purposes of CEA section 

4(c)(2)(B)(i).62

Furthermore, the Commission 

concludes that the cooperative 

exemption will not have a material 

adverse effect on the ability of the 

Commission or any contract market or 

derivatives transaction execution 

facility to discharge their respective 

regulatory duties under the CEA as 

provided in section 4(c)(2)(B)(ii) of the 

CEA. The cooperative exemption 

effectively extends the end-user 

exception established in section 2(h)(7) 

of the CEA to cooperatives acting for 

non-financial entities. Section 39.6(f)(3) 

(now § 50.51(c)) has the same reporting 

requirement that the end-user exception 

has with the only difference being that 

the reporting party must report that the 

cooperative exemption has been elected 

for the swap being reported instead of 

the end-user exception. In this way, the 

Commission will be able to track the 

swaps for which the cooperative 

exemption is being elected and who is 

electing the exemption thereby allowing 

the Commission to oversee the use of 

the cooperative exemption in the same 

manner as the end-user exception. 

Regarding contract markets and 

derivatives transaction execution 

facilities, the cooperative exemption 

does not modify their regulatory duties 

under the CEA. Accordingly, those 

entities will not have any increase or 

reduction in their regulatory duties with 

regard to the exempted swaps. 

V. Administrative Procedure Act 

Related Comments 

The ABA and the ICBA submitted a 

number of comments asserting that the 

rule is discriminatory or violates the 

arbitrary and capricious standard in the 

APA.63 The ABA commented that the 

Commission did not provide a 

reasonable explanation for why 

cooperatives with over $10 billion in 

total assets were given an exemption 

while banks with total assets over $10 

billion were not. According to the ABA, 

the Commission did not take into 

account the Congressional intent not to 

exempt banks and cooperatives with 

total assets above $10 billion from 

mandatory clearing. 

The Commission disagrees with the 

commenters’ assertion that the 

Commission did not provide a 

reasonable explanation for the rule or 

that it does not fulfill Congressional 

intent. As discussed throughout the 

NPRM and as reiterated in this final 

release in response to specific 

comments, the cooperative exemption 

fulfills Congressional intent as 

expressed in section 2(h)(7) of the CEA 

by providing the full benefits of the enduser exception to the end-user members 

of cooperatives who act in the markets 

through their cooperatives. The 

limitation on the definition of ‘‘exempt 

cooperative’’ to those cooperatives 

whose members consist exclusively of 

entities and persons who may elect the 

end-user exception and other 

cooperatives whose members meet that 

requirement makes that readily apparent 

and is explained in detail in the 

NPRM.64 Furthermore, the Commission 

considered both this element of 

Congressional intent and Congress’ clear 

mandate that the Commission require 

that certain swaps entered into by 

financial institutions be cleared by 

carefully and purposefully limiting the 

types of swaps for which the 

cooperative exemption is available.65

The Commission’s reasoning behind the 

cooperative exemption based on the 

unique member-owner structure of 

cooperatives and the nature of 

cooperatives as entities whose primary 

purpose is to act in the interests of their 

member-owners in the financial 

marketplace is thoroughly discussed 

throughout the NPRM and reiterated in 

this final release. Commenters’ 

assertions that the cooperative 

exemption rule is inconsistent with 

Congressional intent or is arbitrary and 

capricious are therefore without merit. 


tkelley on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52299 

66See section 2(h)(2) of the CEA, 7 U.S.C. 2(h)(2). 

67When a bilateral swap is moved into clearing, 

the DCO becomes the counterparty to each of the 

original participants in the swap. This standardizes 

counterparty risk for the original swap participants 

in that they each bear the same risk attributable to 

facing the DCO as counterparty. In addition, DCOs 

exist for the primary purpose of managing credit 

exposure from the swaps being cleared and 

therefore DCOs are effective at mitigating 

counterparty risk through the use of risk 

management frameworks. These frameworks model 

risk and collect defined levels of initial and 

variation margin from the counterparties that are 

adjusted for changing market conditions and use 

guarantee funds and other risk management tools 

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

member default, all other counterparties remain 

whole. DCOs have demonstrated resilience in the 

face of past market stress. Most recently, they 

remained financially sound and effectively settled 

positions in the midst of turbulent events in 2007– 

2008 that threatened the financial health and 

stability of many other types of entities and the 

financial system as a whole. These, and other 

benefits of clearing, are explained more fully at: 77 

FR 74284. 

68See section 2(h)(7)(C)(ii) of the CEA. 

69See 75 FR 80747. 

70Other reasons given for providing an 

exemption from clearing for cooperatives are 

discussed above in this final rule. 

71Exempt cooperatives can be financial entities 

that do not qualify for the small financial institution 

exemption because their assets exceed $10 billion. 

As provided in § 39.6(f)(2) (now § 50.51(b)) of the 

rule, an exempt cooperative would not be required 

to clear swaps with members in connection with 

originating member loans, or swaps used by the 

exempt cooperative to hedge or mitigate 

commercial risk arising in connection with such 

swaps with members or loans to members. 

VI. Consideration of Costs and Benefits 

A. Background 

In the wake of the financial crisis of 

2008, Congress adopted the Dodd-Frank 

Act, which, among other things, 

requires the Commission to determine 

whether a particular swap, or group, 

category, type or class of swaps, shall be 

required to be cleared.66 Specifically, 

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

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

to make it ‘‘unlawful for any person to 

engage in a swap unless that person 

submits such swap for clearing to a 

[DCO] that is registered under the CEA 

or a [DCO] that is exempt from 

registration under [the CEA] if the swap 

is required to be cleared.’’ This clearing 

requirement is designed to reduce 

counterparty risk associated with swaps 

and, in turn, mitigate the potential 

systemic impact of such risk and reduce 

the likelihood for swaps to cause or 

exacerbate instability in the financial 

system.67

Notwithstanding the benefits of 

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

provides the end-user exception if one 

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

financial entity; (ii) is using swaps to 

hedge or mitigate commercial risk; and 

(iii) notifies the Commission, in a 

manner set forth by the Commission, 

how it generally meets its financial 

obligations associated with entering into 

non-cleared swaps.’’ Section 

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

Commission to consider making the 

end-user exception available to small 

banks, savings associations, credit 

unions, and farm credit institutions, 

including those institutions with total 

assets of $10 billion or less, through an 

exemption from the definition of 

‘‘financial entity.’’ 68 In § 39.6(d) (now 

§ 50.50(d)), the Commission established 

the small financial institution 

exemption from the definition of 

‘‘financial entity’’ for these institutions. 

The small financial institution 

exemption largely adopted the language 

of section 2(h)(7)(C)(ii) providing for an 

exemption for the institutions identified 

in section 2(h)(7)(C)(ii) that have total 

assets of $10 billion or less. 

On December 23, 2010, the 

Commission published for public 

comment an NPRM for § 39.6 (now 

§ 50.50) proposing the end-user 

exception.69 As discussed in section I 

hereof, several parties that commented 

on the end-user exception NPRM 

recommended that the Commission 

provide extend the end-user exception 

to cooperatives. These commenters 

reasoned 70 that the member ownership 

structure of cooperatives and the fact 

that they act in the interests of members 

that are non-financial entities justified 

an extension of the end-user exception 

to the cooperatives. In effect, the 

commenters posited that because a 

cooperative effectively acts as an 

intermediary for its members when 

facing the larger financial markets with 

its interests being effectively the same as 

its members’ interests, the end-user 

exception that would be available to a 

cooperative’s members should also be 

available to the cooperative. If the 

members themselves could elect the 

end-user exception, then, according to 

the commenters, the Commission 

should permit the cooperatives to do so 

as well. 

The Commission is adopting the 

cooperative exemption herein as 

described in this release. Through 

§ 39.6(f) (now § 50.51), the Commission 

uses the authority provided in section 

4(c) of the CEA to permit ‘‘exempt 

cooperatives,’’ as defined in § 39.6(f)(1) 

(now § 50.51(a)) to elect not to clear 

certain swaps that are otherwise 

required to be cleared pursuant to 

section 2(h)(1)(A) of the CEA. In effect, 

the cooperative exemption makes 

available to exempt cooperatives the 

end-user exception that is available to 

their members, as described in greater 

detail above.71 It is the costs and 

benefits of this exemption that the 

Commission considered in the 

discussion that follows. 

B. Statutory Requirement To Consider 

the Costs and Benefits of the 

Commission’s Action: CEA Section 15(a) 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of the 

following five broad areas of market and 

public concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. 

Accordingly, the Commission considers 

the costs and benefits resulting from its 

own discretionary determinations with 

respect to the section 15(a) factors. 

Absent this rulemaking, all 

cooperatives that are financial entities 

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

CEA and which are not otherwise 

exempt from that definition would be 

subject to the clearing requirement 

under section 2(h)(7)(A)(i) of the CEA. 

Thus, the scenario against which this 

rulemaking’s costs and benefits are 

considered is cooperatives within the 

definition of financial entity in Section 

2(h)(7)(C)(i) with assets exceeding $10 

billion, which remain subject to the 

clearing requirement of section 

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

Commission considers the rulemaking’s 

costs and benefits relative to alternatives 

considered by the Commission. 

As discussed in more detail below, 

the Commission is able to estimate 

certain reporting costs. The dollar 

estimates are offered as ranges with 

upper and lower bounds, which is 

necessary to accommodate the 

uncertainty that surrounds them. The 

discussion below considers the rule’s 

costs and benefits as well as alternatives 

to the rule. The discussion concludes 

with a consideration of the rule’s costs 

and benefits in light of the five factors 

specified in section 15(a) of the CEA. 

C. Costs and Benefits of the Final Rule 

1. Costs and Benefits to Electing 

Cooperatives and Their Members 

Providing an exemption from required 

clearing to cooperatives that meet the 

criteria described in the final rule will 

benefit them and their members in that 

they will not have to bear the costs of 


tkelley on DSK3SPTVN1PROD with RULES2
52300 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

72For example, not including customer-specific 

and volume discounts, the transaction fees for 

interest rate swaps at CME range from $1 to $24 per 

million notional amount and the maintenance fees 

are $2 per year per million notional amount for 

open positions. LCH transaction fees for interest 

rate swaps range from $1 to $20 per million 

notional amount, and the maintenance fee ranges 

from $5 to $20 per swap per month, depending on 

the number of outstanding swap positions that an 

entity has with the DCO. See LCH pricing for 

clearing services related to OTC interest rate swaps 

at: http://www.lchclearnet.com/swaps/swapclear_

for_clearing_members/fees.asp. 

73The CUNA stated that the exemption ‘‘would 

help minimize the additional costs and fees 

associated with mandatory clearing.’’ 

74The Commission notes that regulations 

addressing margin and capital requirements for 

non-cleared swaps have not yet been finalized. 

Accordingly, the Commission cannot determine, 

quantify, or estimate what margin, if any, may be 

required for the swaps exempted from clearing 

under the cooperative exemption. 

75The third set of information comprises data that 

is likely to remain relatively constant and therefore, 

does not require swap-by-swap reporting and can be 

reported less frequently. 

76A review of information provided for five 

cooperatives that likely would be exempt 

cooperatives showed a range of swap usage from 

none to as many as approximately 200 swaps a year 

with most entering into less than 50 swaps a year. 

Using the high end of reported swaps for the five 

cooperatives for which information was available, 

an estimate of 50 swaps per year was calculated. 

The Commission believes this estimate is high 

because some of the reported swaps may not meet 

the requirements of the final rule and, based on 

discussions with other regulators, several 

cooperatives for which detailed information was 

not available to the Commission likely undertake 

little, if any, swap activity. However, for purposes 

of the cost calculations, the Commission assumes 

clearing that they would otherwise 

incur. Without the cooperative 

exemption rule, cooperatives meeting 

the criteria of the exemption would 

have to clear swaps pursuant to section 

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

either: (1) Entering into a swap with a 

member that is subject to required 

clearing, or (2) transacting with another 

financial entity to hedge or mitigate risk 

related to loans with members or swaps 

with members related to such loans. 

Required clearing would introduce 

additional costs for cooperatives, 

including fees associated with clearing 

as well as costs associated with margin 

and capital requirements. 

Regarding fees, DCOs typically charge 

Futures Commission Merchants 

(‘‘FCMs’’) an initial transaction fee for 

each of the FCM customers’ swaps that 

are cleared, as well as an annual 

maintenance fee for each of their 

customers’ open positions.72 As a result, 

cooperatives eligible for the exemption 

will bear lower costs related to swaps 

and would likely pass along these costs 

savings to their members either by 

providing swaps at more attractive rates 

or through larger patronage distributions 

or allocations.73

The ABA questioned whether the 

exemption would have benefits that 

accrue to members of exempt 

cooperatives. The ABA stated that in the 

absence of the proposed exemption, 

cooperative members can still exempt 

their swaps from clearing. Therefore, the 

ABA believes that ‘‘the proposed 

clearing exemption would solely benefit 

cooperatives larger than $10 billion.’’ 

The Commission, however, 

anticipates that benefits will accrue to 

members of exempt cooperatives. 

Generally, as discussed in section IV, 

the mission of the cooperatives is to 

provide loans and other financial 

services to particular types of borrowers 

and the cooperatives operate for the 

mutual benefit of their respective 

members. As such, in keeping with its 

mission and purpose, a cooperative is 

likely to elect the exemption only if the 

election thereof benefits its members. As 

discussed further in this section VI, the 

exemption is likely to lower operational 

costs for exempt cooperatives and to 

reduce their margin requirements. As a 

consequence, exempt cooperatives will 

be able to provide lower-cost funding to 

their members, to retain more member 

allocable capital, or to pay out higher 

patronage distributions to their 

members. Ultimately, the members, as 

owners of the cooperatives, will benefit. 

Regarding margin requirements, by 

allowing cooperatives to exempt certain 

swaps from clearing, the final rule may 

reduce the amount of margin that 

exempt cooperatives and their 

counterparties are required to post for 

swaps used to hedge or mitigate risk 

associated with loans to eligible 

members and for swaps related to those 

loans.74 Reduced margin requirements 

will reduce the amount of capital that 

exempt cooperatives must allocate to 

margin, which will increase the amount 

of capital that exempt cooperatives may 

distribute or allocate to members. On 

the other hand, to the extent that the 

exemption results in exempt 

cooperatives and their counterparties 

holding less margin against exempt 

swap positions, each will be exposed to 

greater counterparty risk. 

The final rule may also affect the 

capital that cooperatives that are 

financial entities are required to hold 

with respect to their swap positions 

pursuant to prudential regulatory 

capital requirements. As stated above, 

when compared to a situation in which 

the cooperative exemption is not 

available, the cooperative exemption 

will reduce the number of swaps that 

exempt cooperatives are required to 

clear. The Commission anticipates that 

reducing the number of swaps that such 

cooperatives clear may impact the 

amount of capital that exempt 

cooperatives are required to hold. This 

creates both benefits and costs. If 

reduced clearing lowers the amount of 

capital that exempt cooperatives must 

hold, that would increase the 

cooperative’s lending capacity, enabling 

them to lend more to their members 

without retaining or raising additional 

capital. As for costs, this allows exempt 

cooperatives to become more highly 

leveraged, which increases the 

counterparty risk that they pose to their 

members and other market participants 

with whom they transact. On the other 

hand, if reduced clearing increases the 

amount of capital that exempt 

cooperatives must hold, that would 

have the opposite effect. 

Cooperatives that elect the exemption 

will be required to report, or to cause to 

be reported, additional information to 

an SDR or to the Commission, which 

will create incremental costs for the 

reporting party. The final rule requires 

that exempt cooperatives adhere to the 

reporting requirements of § 50.50(b). For 

each swap where the exemption is 

elected, either the exempt cooperative 

or its counterparty (likely if the 

counterparty is an SD or MSP) must 

report: (1) That the election of the 

exemption is being made; (2) which 

party is the electing counterparty; and 

(3) certain information specific to the 

electing counterparty unless that 

information has already been provided 

by the electing counterparty through an 

annual filing.75 In addition, for entities 

that are registered with the SEC, the 

reporting party will also be required to 

report with respect to the electing 

counterparty: (1) The SEC filer’s central 

index key number; and (2) that an 

appropriate committee of the board of 

directors has approved the decision for 

that entity to enter into swaps that are 

exempt from the requirements of 

sections 2(h)(1) and 2(h)(8) of the Act. 

For each exempted swap, to comply 

with the swap-by-swap reporting 

requirements in §§ 50.50(b)(1)(i) and (ii), 

the reporting counterparty will be 

required to check one box indicating the 

exemption is being elected and 

complete one field identifying the 

electing counterparty. The Commission 

expects that this information will be 

entered into the appropriate reporting 

system concurrently with additional 

information that is required by the CEA 

and part 45 of the Commission’s 

regulations. Furthermore, the 

Commission estimates that there will be 

approximately 500 swaps per year that 

are exempted from clearing pursuant to 

this rule.76 Therefore, each reporting 


tkelley on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52301 

that each of the 10 potential exempt cooperatives 

will enter into 50 swaps each year. Accordingly, it 

is estimated that exempt cooperatives may elect the 

cooperative exemption for 500 swaps each year. 77Wage estimates are taken from the SIFMA 

‘‘Report on Management and Professional Earnings 

in the Securities Industry 2011.’’ Hourly wages are 

calculated assuming 1,800 hours per year and a 

multiplier of 5.35 to account for overhead and 

bonuses. In light of the challenges of developing 

precise estimates, the results of calculations have 

been rounded. 

78The average wage for a compliance attorney is 

$300.95 [($112,505 per year)/(2,000 hours per year) 

* 5.35 = $300.95]. For the purposes of the Cost 

Benefit Considerations section, the Commission has 

used wage estimates that are taken from the SIFMA 

‘‘Report on Management and Professional Earnings 

in the Securities Industry 2011’’ because industry 

participants are likely to be more familiar with 

them. Hourly costs are calculated assuming 2,000 

hours per year and a multiplier of 5.35 to account 

for overhead and bonuses. All totals calculated on 

the basis of cost estimates are rounded to two 

significant digits. 79As noted above, the average wage for a 

compliance attorney is $300.95 per hour [($112,505 

per year)/(2,000 hours per year) * 5.35 = $300.95]. 

counterparty is likely to spend 15 

seconds to 2 minutes per transaction in 

incremental time entering the swap-byswap information into the reporting 

system, or in the aggregate, 1.5 hours to 

17 hours per year for all 500 estimated 

swaps. A financial analyst’s average 

salary is $208/hour, which corresponds 

to approximately $1–$7 per transaction 

or in aggregate, $300–$3,500 per year for 

all 500 estimated swaps.77 While the 

above information must be reported on 

a swap-by-swap basis, some information 

may be reported annually. Regulation 

§ 50.50(b)(1)(iii) allows for certain 

counterparty specific information 

identified therein to be reported either 

swap-by-swap by the reporting 

counterparty or annually by the electing 

counterparty. When exempt 

cooperatives enter into exempt swaps 

with members, the cooperative is likely 

to be the reporting counterparty. 

Furthermore, assuming the cooperative 

is the reporting counterparty, the time 

burden for the first swap entered into by 

an exempt cooperative in collecting and 

reporting the information required by 

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

the same as the time burden for 

collecting and reporting the information 

for the annual filing. Given the cost 

equivalence for annual reporting to 

reporting a single swap if the exempt 

cooperative is both the electing and 

reporting counterparty, the Commission 

assumes that all ten exempt 

cooperatives will make an annual filing 

of the information required for 

§ 50.50(b)(1)(iii). The Commission 

estimates that it will take an average of 

30 minutes to 90 minutes to complete 

and submit the annual filing. The 

average hourly wage for a compliance 

attorney is $300, which means that the 

annual per cooperative cost for the filing 

is likely to be between $150 and $450. 

If all ten exempt cooperatives were to 

undertake an annual filing, the aggregate 

cost would be $1,500 to $4,500.78

Furthermore, when an exempt 

cooperative is not functioning as the 

reporting counterparty (i.e., when 

transacting with a SD or MSP), it may, 

at certain times, need to communicate 

information to its reporting 

counterparties in order to facilitate 

reporting. That information may 

include, among other things, whether 

the electing counterparty has filed an 

annual report pursuant to § 50.50(b) and 

information to facilitate any due 

diligence that the reporting counterparty 

may conduct. These costs will likely 

vary substantially depending on the 

number of different reporting 

counterparties with whom an electing 

counterparty conducts transactions, 

how frequently the electing 

counterparty enters into swaps, whether 

the electing counterparty undertakes an 

annual filing, and the due diligence that 

the reporting counterparty chooses to 

conduct. The Commission estimates that 

non-reporting electing counterparties 

will incur between 5 minutes and 10 

hours of annual burden hours, or in the 

aggregate, between approximately 1 

hour and 100 hours. The hourly wage 

for a compliance attorney is $300, 

which means that the annual aggregate 

cost for communicating information to 

the reporting counterparty is likely to be 

between $300 and $30,000. Given the 

unknowns associated with this cost 

estimate noted above, the Commission 

does not believe this wide range can be 

narrowed without further information.79

The ABA and the ICBA suggested that 

the Commission’s assumption that each 

potentially exempt cooperative engages 

in 50 swaps a year does not take into 

account the fact that the number of 

swaps entered into by the exempt 

cooperatives may change or increase 

over time. The ABA also commented 

that the Commission underestimated the 

number of cooperatives eligible and 

assumes that the number of cooperatives 

would not increase by either 

reorganization or growth. 

The Commission contacted the FCA 

and National Credit Union 

Administration for further assistance in 

assessing whether the estimates used in 

the NPRM are reasonable. These 

regulators discussed generally the 

observed level of swap activity of the 

cooperatives they regulate. Based on 

these discussions, the Commission 

concluded that the estimates in the 

NPRM are reasonable and appropriate 

for this rulemaking. The Commission 

recognizes that the number of entities 

eligible for the exemption and the 

number of swaps per eligible 

cooperative is likely to change in the 

future and that the benefits of this 

exemption for exempt cooperatives 

could encourage the number or size of 

exempt cooperatives and of swaps used 

by those cooperatives to grow. However, 

the Commission notes that the extent to 

which such growth is realized also 

depends on several additional factors 

that the Commission does not have 

adequate information to evaluate, 

including: (1) Subsequent changes to 

laws or regulations affecting one or 

more types of cooperatives; (2) increases 

or decreases in the size of the industries 

served by those cooperatives; and (3) the 

frequency with which exempt 

cooperatives make loans or experience 

other changes that require rebalancing 

of their hedging strategies. Because the 

Commission does not have sufficient 

information to estimate the direction or 

magnitude of the effect that these forces 

will have on the number of exempt 

cooperatives and exempt swaps per 

cooperative, it is not possible to 

evaluate how future changes in either 

are likely to affect the costs or benefits 

related to the exemption. 

2. Costs and Benefits for Counterparties 

to Electing Cooperatives 

The benefits of the exemption for 

counterparties to electing exempt 

cooperatives differ depending on 

whether they are members of the 

cooperatives. For entities that are 

members of the electing cooperative, 

they will likely benefit from the reduced 

operational costs the exempt 

cooperative achieves through reduced 

clearing fees associated with the 

cooperative’s swaps with the market. 

The benefit may be passed on in the 

form of better terms on swaps between 

members and the cooperative and 

through the cooperative’s patronage 

distributions to members. For entities 

that are not members of the cooperative 

(i.e. market makers entering into swaps 

with the cooperative), the benefits are 

different. Market makers entering into 

swaps with cooperatives that are subject 

to the exemption do not participate in 

the pro rata patronage distributions, but 

may benefit from reduced clearing costs 

associated with non-cleared swaps. 

Reduced clearing of swaps by exempt 

cooperatives will increase counterparty 

risk for both exempt cooperatives and 

their counterparties. Cooperatives will 

be more exposed to the credit risk of 

their counterparties, and conversely, the 

cooperatives’ counterparties will be 

more exposed to the credit risk of the 

exempt cooperatives. This could be 


tkelley on DSK3SPTVN1PROD with RULES2
52302 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

80The 2012 ISDA Margin Survey indicates that 

71% of all OTC derivatives transactions were 

subject to collateral agreements during 2011, but 

notes that the degree of collateralization may vary 

significantly depending on the type of derivative 

and counterparties entering into a transaction. 

81The Commission notes, however, that most 

small banks are also eligible for the end-user 

exception, which can be elected for a wider range 

of swaps than the cooperative exemption. Section 

50.50(d) of the Commission’s regulations provides 

that banks, FCS institutions, and credit unions that 

have total assets of $10 billion or less are eligible 

for the end-user exception with certain 

exceptions—primarily that they not be SDs or 

MSPs. 

82As noted above, the ability of collateral 

agreements to mitigate counterparty risk and risk to 

the public depends on the details of those 

agreements with regard to the amount and quality 

of collateral required, the frequency with which it 

is adjusted to reflect changing valuations, and the 

speed with which the non-defaulting party can 

claim the collateral in the event that their 

counterparty defaults. 

83ABA stated that the four Farm Credit banks 

have approximately $15 billion, $29 billion, $76 

billion, and $90 billion in assets. 

84ABA stated that there are four credit unions 

with more than $10 billion in assets and are likely 

to be several more within the next year. They also 

stated that one credit union has nearly $50 billion 

in assets and another has more than $25 billion. 

problematic for an exempt cooperative if 

one of the dealers with which the 

cooperative has large non-cleared 

positions defaults, or if groups of 

members whose financial strength may 

be highly correlated and whose 

aggregate non-cleared positions with the 

cooperative are large, encounter 

financial challenges. In this way, the 

credit risk of one of the cooperative’s 

counterparties could adversely impact 

the other counterparties of that 

cooperative. 

Conversely, if an exempt cooperative 

becomes insolvent and its positions 

with a SD or MSP are substantial, it is 

possible that its non-cleared positions 

could be large enough to exacerbate 

instability at the SD or MSP or could 

create greater risk exposure for the 

members with which the cooperative 

entered into swaps. 

The FCC stated that because FCS 

institutions have collateral agreements 

in place, ‘‘clearing offers very little 

additional protection to FCS 

institutions.’’ The Commission 

acknowledges that counterparty risk can 

be mitigated through collateral 

arrangements, but also notes that the 

extent to which counterparty risk is 

reduced through collateral agreements 

depends on the amount of collateral 

required from each party to the swap, 

the liquidity of that collateral in stressed 

market conditions, the frequency with 

which the amount of collateral is 

adjusted to account for variations in the 

value of the swap or the collateral, and 

the ability of the non-defaulting party to 

claim the collateral quickly in the event 

that their counterparty defaults.80 The 

Commission does not have adequate 

information to determine how 

effectively collateral arrangements may 

mitigate counterparty risk born by 

exempt cooperatives and their 

counterparties in the absence of central 

clearing. 

3. Costs and Benefits for Other Market 

Participants 

The ABA commented that the 

Commission did not consider 

competitive harm to banks when 

analyzing the costs and benefits of the 

cooperative exemption. The ABA and 

ICBA commented that cooperatives 

compete with banks for the same 

business opportunities and provide 

similar services. They further stated that 

the exemption would provide 

cooperatives with a competitive 

advantage because they ‘‘would have 

more liquidity available for lending than 

comparable banks would and be able to 

provide lower cost funding.’’ Further, 

the ABA stated that ‘‘the competitive 

impact of the proposed exemption 

would grow as more cooperatives 

increase their swaps portfolios to take 

advantage of the pricing and other 

economic benefits it affords.’’ 

The Commission recognizes that the 

cooperative exemption may provide 

clearing cost savings related benefits to 

eligible cooperatives with assets in 

excess of $10 billion.81 However, in 

assessing the competitive costs and 

benefits of the cooperative exemption 

the Commission believes the policy 

considerations for establishing 

cooperatives also need to be taken into 

account. As described section IV, 

Congress and the states have established 

the cooperative legal structure distinct 

from other corporate forms to facilitate 

the economic advantage of cooperative 

action for the mutual benefit of a 

cooperative’s members. The cooperative 

exemption provides the members with 

the benefits of the end-user exception, 

both directly and indirectly through 

their cooperatives, without having to 

switch from doing business with their 

existing cooperatives to doing business 

with small financial institutions or other 

entities that can elect to exempt their 

swaps from clearing, but which are not 

organized for the specific purpose of 

benefitting those members. The 

cooperative exemption furthers these 

benefits by recognizing that the 

cooperatives were established to act on 

behalf of their members in the 

marketplace and providing an 

exemption from clearing to eligible 

cooperatives. In effect, the cooperative 

exemption ensures that the existing 

members of exempt cooperatives can 

achieve the full benefits of both 

cooperative action and of the end-user 

exception. 

4. Costs and Benefits to the Public 

The public generally has an interest in 

mandatory clearing because of its 

potential to reduce counterparty risk 

among large, interconnected 

institutions, and to facilitate rapid 

resolution of outstanding positions held 

by such institutions in the event of their 

default. By narrowly crafting the 

proposed cooperative exemption to 

incorporate qualifying criteria limiting 

both the types of institutions and the 

types of swaps that are eligible, the 

Commission has sought to conserve this 

public interest. 

The ABA and the ICBA commented 

that the four FCS banks and FCS 

lending associations are jointly and 

severally liable for one another, and that 

‘‘the aggregated asset size of these 

institutions is $230 billion and growing 

rapidly.’’ The ICBA also stated that the 

financial cooperatives affected by the 

exemption will grow larger over time 

and may present a systemic risk in the 

future. The ABA stated that because the 

FCS is a GSE, it is a potential liability 

to U.S. taxpayers. The CUNA, on the 

other hand, asserted that the exemption 

would not have significant impact on 

the overall swap market because of the 

small number of entities eligible for the 

exemption. Similarly, the FCC stated 

that because of collateral agreements 

that FCS institutions have in place that 

‘‘the FCS poses no systemic risk to the 

U.S. financial system.’’ 

The Commission acknowledges that 

the magnitude of risk and potential 

costs to the public created by an 

exemption from clearing depends on 

several factors including: The number 

and size of the exempt cooperatives 

electing the exemption; the size, 

number, and type of exempt swaps held 

by each institution; the risks inherent in 

their outstanding swaps; the 

concentration of swaps with individual 

counterparties; the financial strength of 

counterparties to exempt swaps; and the 

presence of collateral agreements related 

to the exempt swaps.82 The Commission 

has limited data with which to evaluate 

these factors. Commenters provided 

limited data, noting the size of the four 

farm credit banks 83 and the number and 

size of certain credit unions with more 

than $10 billion in assets.84 However, 

commenters did not provide, and the 

Commission does not have, detailed 

data regarding the size of exempt 

cooperatives’ non-cleared swaps, 

information regarding the concentration 


tkelley on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52303 

85 77 FR 42559 (Jul. 19, 2012). 

86Note, for example, that while the FHL Banks 

have thousands of members that qualify for the 

small financial institution exemption and who 

therefor can elect the end-user exception, over one 

hundred members of the FHL Banks would not 

qualify because they are financial entities with total 

assets in excess of $10 billion. These members 

include some of the largest financial entities in the 

United States. In addition, as described above in 

section III, financial entities with assets in excess 

of $10 billion have borrowed more than half the 

amount lent by the FHL banks to members. 

87The Commission notes that banks and other 

entities that qualify for the small financial 

institution exemption from the financial entity 

definition are not excluded under the regulation 

from being members of exempt cooperatives. 

of non-cleared positions with particular 

counterparties, or information regarding 

the financial strength of those 

counterparties. In addition, while 

commenters noted the potential for 

collateral agreements to mitigate 

counterparty risk in the absence of 

clearing, they did not provide data or 

additional information regarding the 

agreements that they anticipate will be 

used. Each of these factors could have 

a significant bearing on how much risk 

is created for the public by exempting 

eligible counterparties from the clearing 

requirement. 

Notwithstanding the limited data 

available, the Commission considered 

the potential risks that could arise from 

cooperatives entering into non-cleared 

swaps and the Commission believes it 

has mitigated these risks with the 

conditions imposed in the rule that 

limit the number of entities and types of 

swaps eligible for the cooperative 

exemption. These conditions are 

described in sections I, II and II above. 

In addition, the Commission notes 

that cooperatives that may qualify as 

exempt cooperatives are supervised by 

other regulators that have access to more 

detailed information regarding the 

swaps executed by the cooperatives and 

that are likely to have additional 

information regarding the risk factors 

discussed above. These regulators can 

monitor the use of swaps by these 

cooperatives and the risk factors related 

to that swap activity. Using this 

information, these regulators can assess 

the risks related to the non-cleared 

swaps in the context of the overall 

regulatory framework applicable to the 

cooperatives and the changing financial 

condition of the cooperatives and in that 

context address the potential systemic 

risk with the cooperatives using their 

regulatory authority. 

Finally, while it is important to 

consider the potential risks noted above, 

it is also important to assess the benefits 

provided by the cooperative exemption. 

The Commission believes ensuring that 

the members of exempt cooperatives can 

continue to use their cooperatives in the 

manner intended and also realize the 

full benefits of the end-user exception 

through their cooperatives is 

appropriate given the unique nature of 

cooperatives and the statutory and 

policy considerations discussed above 

in section III. 

D. Costs and Benefits Compared to 

Alternatives 

There were several alternatives 

proposed by commenters that the 

Commission considered including: 

Providing a ‘‘ride along’’ exemption for 

community banks larger than $10 

billion; and including cooperatives with 

members that are financial entities, 

either with or without additional 

restrictions on the eligibility of swaps 

conducted by such cooperatives. 

The Commission considered a ‘‘ridealong’’ provision, proposed by the ICBA, 

which would provide a clearing 

exemption for community banks that 

exceed the $10 billion total assets 

threshold. Providing a ‘‘ride-along’’ 

provision could mitigate the potential 

competitive effects of the exception, as 

alleged by the ICBA, but would also 

increase the potential risk to the public 

by increasing the number of large 

financial entities eligible for an 

exemption from clearing. 

Moreover, expanding the exemption 

in this way could also make it possible 

for SDs, MSPs, and other large financial 

institutions to avoid clearing by using 

exempt community banks as an 

intermediary for their swap 

transactions. Finally, allowing noncooperatives to use the exemption 

would not reflect the unique structure of 

cooperatives that is the basis for the 

exemption and result in an expansion of 

the small financial institution 

exemption beyond the parameters 

detailed in the final release for the 

Commissions regulations implementing 

the end-user exception.85 For these 

reasons, the Commission has 

determined not to include the suggested 

‘‘ride-along’’ provision. 

The ICBA also stated that the 

cooperative exemption does not include 

the FHL Banks, and that thousands of 

small banks that are members of the 

FHL Bank system will be disadvantaged 

by the cooperative exemption because 

the FHL Banks will not be able to 

provide the same or similar low cost 

financing to community banks as FCS 

lenders do for their cooperative 

associations. The ICBA and the FHL 

Banks commented that the FHL Banks 

should be included as exempt 

cooperatives either generally, or to the 

extent they provide services to their 

members that qualify for the small 

financial institution exemption from the 

definition of financial entity. 

In the NPRM, the Commission 

considered including cooperatives 

consisting of members that could not 

elect the end-user exception, as 

suggested by the FHL Banks. Such an 

exemption would assist in ensuring that 

a greater number of cooperatives are 

able to elect not to clear swaps. 

However, as described in greater detail 

in section III, if the cooperatives elected 

the exemption when transacting with or 

for the benefit of members that are not 

eligible for the end-user exception (i.e. 

financial institutions with total assets 

greater than $10 billion) it could 

significantly increase the number of 

swaps that are exempt from the clearing 

requirement and result in exemptions 

for entities that Congress has not 

provided any indication should be 

exempt from the clearing requirement.86

If the cooperative exemption were 

expanded in this way, it would reduce 

the benefits derived from required 

clearing. By contrast, with the limiting 

conditions included in the cooperative 

exemption rule, the Commission is 

ensuring that the exemption is only 

available to cooperatives whose 

members can elect the end-user 

exception or are themselves 

cooperatives whose members can elect 

the end-user exception.87

The FHL Banks suggested that this 

problem could be addressed by limiting 

the exemption to swaps that hedge risks 

associated with loans to eligible 

members. However, allowing new or 

existing cooperatives with financial 

entity members to elect not to clear 

swaps related to activities with 

members that are eligible for the enduser exception would dilute the benefits 

that qualifying members achieve 

through the exemption thereby 

undermining the purpose for the 

exemption. For example, as described 

above in section III, if the FHL Banks 

elect the cooperative exemption only for 

swaps related to members who qualify 

as small financial institutions, the 

decision not to clear those swaps could 

create clearing cost savings for the FHL 

Banks. Those savings would increase 

the capital that the FHL Banks distribute 

or allocate to their members as part of 

the full member pro rata patronage 

distribution. If larger members hold a 

large ownership stake in the 

cooperative, those members would also 

receive a proportionately large share of 

the distributions, including a 

proportionately large share of the 

savings that result from the cooperative 


tkelley on DSK3SPTVN1PROD with RULES2
52304 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

88See section II above for a full discussion of the 

relative benefits available to different sized 

members of the FHL Banks. 

89See section III.C above. 

90See Chen, K., et al. ‘‘An Analysis of CDS 

Transactions: Implications for Public Reporting,’’ 

September 2011, Federal Reserve Bank of New York 

Staff Reports, at 14. 

exemption.88 In other words, members 

that are eligible for the end-user 

exception would not receive the full 

benefits of the exemption that is 

extended to the cooperative. By 

contrast, with the limiting conditions 

included in the cooperative exemption 

rule, the Commission is ensuring that 

the exemption is only available to 

cooperatives whose members could all 

elect the end-user exception or are 

themselves cooperatives whose 

members could elect the end-user 

exception, and thus the additional prorata patronage distributions that an 

exempt cooperative makes because of 

the cooperative exemption will only go 

to such entities. 

The FCC requested clarification with 

respect to the Commission’s view on 

what swaps are ‘‘related to’’ a 

cooperative’s loans to its members, and 

advocated a broad interpretation. They 

also stated that ‘‘clarification of these 

items will serve to increase the 

likelihood that the System’s farmer and 

rancher member borrowers will be able 

to benefit from this proposed exemption 

from clearing.’’ The broader 

interpretation requested by the FCC 

could increase the number of swaps that 

are eligible for the exemption by 

including swaps that serve non-member 

related purposes, which would further 

reduce clearing-related costs for eligible 

cooperatives, but would also increase 

the counterparty risk that eligible 

cooperatives and their counterparties 

bear due to decreased clearing. In the 

Commission’s view, this broader 

exemption is not justified given the 

rationale behind the cooperative 

exemption. As stated above, the term 

‘‘related to’’ is intended to include 

swaps that the exempt cooperatives may 

enter into with non-members to hedge 

or mitigate the risks incurred by the 

cooperatives related to their member 

lending activities. For example, where 

cooperatives obtain wholesale funding, 

only the portion of funding that is not 

used to make non-member loans may be 

hedged with exempt swaps.89 By 

limiting the eligibility of exempt 

cooperatives’ swaps in this way, the 

Commission reduces the counterparty 

risk that exempt cooperatives and their 

counterparties could experience due to 

decreased clearing. 

E. Section 15(a) Factors 

1. Protection of Market Participants and 

the Public 

As described above, if exempt 

cooperatives elect to exempt certain 

swaps from required clearing, these 

cooperatives may not need to pay DCO 

and FCM clearing fees for clearing those 

swaps. In addition, the exemption may 

reduce the amount of capital that 

exempt cooperatives must allocate to 

margin accounts with their FCM. This, 

in turn, provides benefits to the 

members of exempt cooperatives, that 

may otherwise absorb such costs as they 

are passed on by the cooperatives to 

their members in the form of fees, less 

desirable spreads on swaps or loans 

conducted with the cooperative, or 

lower member allocated capital or 

patronage distributions. 

The exemption will create certain 

reporting costs for eligible entities. 

However, as described in the 

rulemaking for the end-user exception 

where the specific reporting 

requirements were addressed, the 

reporting required uses a simple checkthe-box approach and elective annual 

reporting of certain information that 

should minimize per swap reporting 

costs, particularly for cooperatives that 

enter into multiple swaps. 

The exemption is narrowly tailored to 

exempt only a relatively small number 

of institutions and to include only 

swaps that are associated with positions 

established in connection with 

originating loans made to customers, or 

that hedge or mitigate risk arising in 

connection with such member loans or 

swaps. These limitations will tend to 

mitigate the risk to the public that could 

result from the exemption. 

In addition, this exemption is likely to 

increase counterparty risk for 

counterparties to exempted swaps as 

well as for the exempted cooperatives. 

However, as described above, exempted 

cooperatives and their counterparties 

may use collateral agreements with 

exempted swaps to mitigate 

counterparty risk. 

2. Efficiency, Competitiveness, and 

Financial Integrity of Swap Markets 

While the cooperative exemption 

would take swaps out of clearing, it 

mitigates the impact on the financial 

integrity of the swap markets by limiting 

the types of entities and swaps that are 

eligible. As discussed above, the 

exemption is designed to include only 

cooperatives that are made up entirely 

of entities that could elect the end-user 

exception, and only swaps associated 

with loans between the cooperative and 

such members. 

The exemption may have competitive 

effects by allowing the members of 

exempt cooperatives to achieve 

additional benefits from the actions of 

their cooperatives. The Commission 

believes such benefits are consistent 

with the intended public interests 

served by the establishment of 

cooperative structures as a separate legal 

form by Congress and the states. The 

Commission addresses these issues in 

section IV and VI.C.3. Commenters did 

not provide, and the Commission does 

not have, information that is sufficient 

to quantify the competitive effects that 

will result from the exemption. 

3. Price Discovery 

Clearing, in general, encourages better 

price discovery because it eliminates the 

importance of counterparty 

creditworthiness in pricing swaps 

cleared through a given DCO. That is, by 

making the counterparty 

creditworthiness of all swaps of a 

certain type essentially the same, prices 

should reflect factors related to the 

terms of the swap, rather than the 

idiosyncratic risk posed by the entities 

trading it.90 To the extent that the 

cooperative exemption reduces the 

number of swaps subject to required 

clearing, it will lessen the beneficial 

effects of required clearing for price 

discovery. However, the Commission 

anticipates that the number of swaps 

eligible for this exemption, currently 

estimated at approximately 500 a year, 

will be a de minimis fraction of all those 

that are otherwise required to be 

cleared. Therefore, the Commission 

believes that there will not be a material 

impact on price discovery. 

4. Sound Risk Management Practices 

To the extent that a swap is removed 

from clearing, all other things being 

constant, it is a detriment to a sound 

risk management regime. To the extent 

that exempt cooperatives enter into noncleared swaps on the basis of this rule, 

it likely increases the exposure of 

exempt cooperatives and their 

counterparties to counterparty credit 

risk. For the public, it increases the risk 

that financial distress at one or more 

cooperatives could spread to other 

financial institutions with which those 

cooperatives have concentrated 

positions. However, as discussed above, 

this additional risk may be reduced by 

the presence of bilateral margin 

agreements, which the Commission 


tkelley on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52305 

91The Small Business Administration identifies 

(by North American Industry Classification System 

codes) a small business size standard of $7 million 

or less in annual receipts for Subsector 523— 

Securities, Commodity Contracts, and Other 

Financial Investments and Related Activities. 13 

CFR parts 1, 121.201. 

92 5 U.S.C. 601 et seq. 

93 It is possible that a cooperative or members 

thereof may not be ECPs. However, pursuant to 

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

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

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

designated as a contract market under Section 5 of 

the CEA. All such swaps must be cleared by the 

board of trade. See section 5(d)(11) of the CEA, 7 

U.S.C. 7(d)(11). In effect all swaps entered into by 

a cooperative or a member that is not an ECP will 

need to be executed on a board of trade and 

therefore will be cleared. 

94See 77 FR 30596, 30701 (May 23, 2012); see 

also 75 FR 80898, 80926 (Dec. 23, 2010). 

95 7 U.S.C. 2(e). 

96See 66 FR 20740, 20743 (Apr. 25, 2001). 

97The FHL banks would not qualify for the 

cooperative exemption because they have large 

financial entity members. See section IV above. 

believes are often used in the absence of 

clearing. 

5. Other Public Interest Considerations 

The Commission believes that the 

cooperative exemption serves the public 

interest by furthering the public benefits 

cited by Congress and state legislatures 

in legislation authorizing cooperative 

business forms as discussed in section 

IV above. The cooperative structure 

allows the members to pool their 

resources, achieve economies of scale, 

and realize the benefits of acting in 

markets through larger entities. 

However, absent the cooperative 

exemption, the exempt cooperatives 

would be unable to elect the end-user 

exception because the amount of their 

assets precludes them from qualifying as 

small financial institutions. In effect, the 

cooperative structure, which is intended 

to provide advantages to its memberowners by creating a large entity whose 

mission is to serve their interests, 

instead prevents the members from 

receiving the full benefits of the enduser exception when using their large 

cooperatives. The cooperative 

exemption therefor is in the public 

interest because it resolves a conflict 

between the small financial institution 

language of section 2(h)(7) of the CEA 

and the general policy behind 

establishing cooperatives of creating 

large financial institutions with the 

mission of serving the mutual interests 

of their member-owners. 

VII. 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 91

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact.92 Regulation § 39.6(f) (now 

§ 50.51) would affect cooperatives, their 

members, and potentially the 

counterparties with whom they trade. 

These entities could be SDs, MSPs, and 

eligible contract participants 

(‘‘ECPs’’).93 Regulation § 39.6(f) (now 

§ 50.51) would additionally affect SDRs. 

As noted in the NPRM, the Commission 

has previously determined that SDs, 

MSPs, and SDRs are not small entities 

for purposes of the RFA.94

It is possible that some members of 

cooperatives may be small entities 

under the RFA. For these members to be 

impacted by the cooperative exemption 

compliance requirements they would 

have to be entering into swaps with the 

exempt cooperative and the exemption 

would need to be elected. In order for 

two counterparties to a swap to enter 

into a swap bilaterally, both parties 

must be ECPs.95 Based on the definition 

of ECP in the Commodity Futures 

Modernization Act of 2000, and the 

legislative history underlying that 

definition, the Commission has 

previously determined that ECPs should 

not be small entities for purposes of the 

RFA.96 The Commission has been made 

aware in other contexts that some ECPs, 

specifically those that do not fall within 

a category of ECP that is subject to a 

dollar threshold, may be small entities. 

If there are cooperative members that 

are both ECPs as defined in the CEA and 

small entities for purposes of the RFA, 

the exemption is nevertheless most 

likely to provide an economic benefit to 

the cooperative member. Furthermore, if 

elected, the cooperative exemption 

would impose the same or similar costs 

of compliance on members that the 

previously adopted end-user exception 

from the clearing requirement imposes. 

The end-user exception provides 

effectively the same type of relief from 

clearing. Accordingly, the cooperative 

exemption does not create any 

materially new or different compliance 

costs than similar regulations that were 

previously adopted. Finally, the 

cooperative exemption is elective. If a 

member that is a small entity wanted to 

clear its swap, the cooperative 

exemption does not require them to 

enter into swaps with their cooperatives 

and they could execute swaps with 

other parties that would agree to 

clearing. Accordingly, the cooperative 

exemption would not cause any new 

significant economic impact on these 

members. 

The Chairman, on behalf of the 

Commission, certified in the NPRM, 

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

§ 39.6(f) (now § 50.51(a)) will not have 

a significant impact on a substantial 

number of small entities. The 

Commission requested comment on this 

decision in the NPRM. 

The ICBA commented that the 

proposal impacts a substantial number 

of small community banks because they 

are members of the FHL banks and the 

FHL banks are not exempt cooperatives. 

According to the ICBA, the small bank 

members of the FHL bank system would 

be disadvantaged because the FHL 

banks will not be able to provide the 

same or similar low cost financing to 

community banks as FCS lenders will 

for their cooperatives. 

The Commission also received two 

comments regarding the impact of 

Regulation § 39.6(f) (now § 50.51(a)) on 

the competition between banks that are 

small entities and cooperatives that 

elect the cooperative exemption. 

According to the ABA, the 

Commission’s analysis of the economic 

impact on small entities did not 

consider that economic impact on the 

‘‘hundreds of end-user banks that are 

competing with cooperatives for the 

same business opportunities.’’ 

Similarly, the ICBA commented that the 

‘‘competitive advantages afforded to 

large credit unions and large FCS 

funding banks . . . would allow these 

institutions advantages in competing 

directly against small community banks 

even if they have a small financial 

institution exemption.’’ The ICBA then 

referenced CoBank as an example of an 

FCS funding bank with a wide 

geographic footprint over two dozen 

states that could grow larger. 

The ABA and the ICBA asserted that 

the Commission is obliged under the 

RFA to consider the impact of the 

regulation on small banks, including 

small banks that are members of the 

FHL bank system. Specifically, 

commenters asserted that the 

Commission should consider the 

competitive benefit the cooperative 

exemption might give to exempt 

cooperatives as compared to small 

banks that might be small entities for 

purposes of the RFA both on their own 

and because small banks are members of 

the FHL bank system.97 The 

Commission has applied the RFA to 

entities that are cooperatives who may 

elect the cooperative exemption and 

their members. Small community banks 

that are not members of exempt 

cooperatives are not subject to the 

cooperative exemption. The 

Commission also notes that, as 

discussed above, to the extent a small 


tkelley on DSK3SPTVN1PROD with RULES2
52306 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

98 44 U.S.C. 3501 et seq. 

99 Id. 

community bank is or becomes a 

member of an exempt cooperative and 

enters into a swap bilaterally with an 

exempt cooperative for which the 

cooperative exemption is elected, that 

member would have to be an ECP, in 

order to enter into the swap bilaterally, 

and also an entity that could elect the 

end-user exception. Accordingly, the 

Commission continues to believe that 

the cooperative exemption will not have 

a significant economic impact on small 

entities. 

Therefore, the Chairman, on behalf of 

the Commission, hereby certifies, 

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

final regulation would not have a 

significant economic impact on a 

substantial number of small entities. 

B. Paperwork Reduction Act 

Regulation § 39.6(f)(3) (now 

§ 50.51(c)) requires a cooperative to 

conform with certain reporting 

conditions if it elects the cooperative 

exemption. These new requirements 

constitute a collection of information 

within the meaning of the Paperwork 

Reduction Act of 1995 (‘‘PRA’’).98

Under the PRA, an agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless it has been approved 

by the Office of Management and 

Budget (‘‘OMB’’) and displays a 

currently valid control number.99 This 

rulemaking contains new collections of 

information for which the Commission 

must seek a valid control number. The 

Commission therefore requested that 

OMB assign a control number and OMB 

assigned control number 3038–0102 for 

this new collection of information. The 

Commission has also submitted the 

proposed rulemaking, this final rule 

release, and supporting documentation 

to OMB for review in accordance with 

44 U.S.C. 3507(d) and 5 CFR 1320.11. 

The title for these new collections of 

information is ‘‘Rule 39.6(f) Cooperative 

Clearing Exemption Notification.’’ 

Responses to these information 

collections will be mandatory if the 

cooperative exemption is elected. 

With respect to all of the 

Commission’s collections, the 

Commission will protect proprietary 

information according to the Freedom of 

Information Act and 17 CFR part 145, 

‘‘Commission Records and 

Information.’’ In addition, section 

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

Commission, unless specifically 

authorized by the Act, from making 

public ‘‘data and information that 

would separately disclose the business 

transactions or market positions of any 

person and trade secrets or names of 

customers.’’ The Commission also is 

required to protect certain information 

contained in a government system of 

records according to the Privacy Act of 

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

1. Information To Be Provided by 

Reporting Parties 

For each swap where the exemption 

is elected, either the cooperative, or its 

counterparty if the counterparty is an 

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

election of the exemption is being made; 

(2) which party is the electing 

counterparty; and (3) certain 

information specific to the electing 

counterparty unless that information 

has already been provided by the 

electing counterparty through an annual 

filing. As noted in the NPRM, the third 

set of information comprises data that is 

likely to remain relatively constant for 

many, but not all, electing 

counterparties and therefore, does not 

require swap-by-swap reporting and can 

be reported less frequently. In addition, 

for entities registered with the SEC, the 

reporting party will also be required to 

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

key number; and (2) that an appropriate 

committee of the board of directors has 

approved the decision for that entity to 

enter into swaps that are exempt from 

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

the CEA. 

Exempt cooperatives entering into 

swaps with members and electing the 

exemption will likely be responsible to 

report this information. When 

cooperatives enter into swaps with SDs 

or MSPs, the SDs or MSPs will be 

responsible for reporting the 

information, but cooperatives would 

bear some costs related to the personnel 

hours committed to reporting the 

required information. 

As discussed in the NPRM, for 

purposes of estimating the cost of 

reporting in connection with the 

cooperative exemption, the Commission 

estimated that each of the ten exempt 

cooperatives would enter into 50 swaps 

per year on average. Accordingly, the 

Commission estimated that exempt 

cooperatives would elect the 

cooperative exemption for 500 swaps 

each year. The reporting cost estimates 

are discussed separately below 

according to each requirement. 

The Commission invited public 

comment on any aspect of the reporting 

burdens discussed in the NPRM. The 

Commission received two comments on 

the Commission’s approach to 

calculating the estimated cost burdens. 

The ABA questioned whether the 

Commission had underestimated its 

estimations of the number of 

cooperatives eligible for the exemption, 

and the number of swaps each eligible 

cooperative engages in per year. The 

ABA also commented that the figures 

used are static and as such do not allow 

for potential future growth in the 

number of potential exempt 

cooperatives and number of swaps in 

which they may transact. The ICBA 

similarly commented on the static 

nature Commission’s approach, and 

noted that the approach does not 

account for future growth when the use 

of swaps in the OTC market has grown 

significantly in recent years. 

Furthermore, the ICBA noted that the 

CFTC looked at information from five of 

the ten estimated cooperatives that may 

be eligible for the cooperative 

exemption, but did not indicate which 

of the five cooperatives it considered or 

what the reason was for not reviewing 

information from the other five 

cooperatives. 

In response to the comments received, 

the Commission notes that the 

commenters provided no data or other 

information to support their assertions 

that the number of cooperatives and the 

number of swaps that may be eligible for 

the cooperative exemption may be low 

or inaccurate. The summary information 

regarding swap activities of five 

prospective exempt cooperatives was 

provided to the Commission on a 

voluntary basis through the FCC and 

CFC. Based on discussions with these 

entities, the Commission believes that 

these five cooperatives were more active 

than the other potential exempt 

cooperatives in using swaps and 

therefore this sampling of information 

was appropriate for estimating the 

number of swaps executed by the ten 

potential exempt cooperatives identified 

by the Commission. Subsequent to 

receipt of the comments on the NPRM, 

the Commission contacted the 

regulators for FCS cooperatives and 

federal credit unions and these 

regulators expressed a view that the 

Commission’s estimates were not 

inappropriate. 

In response to the comments that the 

estimates represent only a current snap 

shot of activity, the Commission 

recognizes that the number of entities 

eligible for the exemption and the 

number of swaps per eligible 

cooperative is likely to change in the 

future and that the benefits of this 

exemption for exempt cooperatives 

could encourage more exempt 

cooperatives to use swaps and could 

increase the number of swaps used by 

those cooperatives. However, the 

Commission notes that whether such 

growth is realized also depends on 


tkelley on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 52307 

100The Commission noted the wide range in this 

estimation, but explained the range could not be 

narrowed given the unknowns associated with the 

cost estimate. 

additional factors that the Commission 

does not have adequate information to 

evaluate such as: (1) Subsequent 

changes to laws or regulations affecting 

one or more types of cooperatives and 

the extent to which they may use swaps; 

(2) increases or decreases in the total 

amount of borrowing undertaken by the 

members of those cooperatives; and (3) 

the frequency with which exempt 

cooperatives make the types of loans or 

experience other business changes that 

might increase or decrease the use of 

swaps. It is not possible to evaluate how 

future changes in these factors are likely 

to affect the number of swaps for which 

the cooperative exemption may be 

elected. Accordingly, the Commission 

believes using a static estimate is 

reasonable. 

a. Regulation § 39.6(f)(3) (now 

§ 50.51(c)): Reporting Requirements 

Regulation § 39.6(f)(3) (now 

§ 50.51(c)) requires exempt cooperatives 

that are reporting counterparties to 

comply with the reporting requirements 

of § 50.50(b), which require delivering 

specific information to a registered SDR 

or, if no SDR is available, the 

Commission. An exempt cooperative 

that is the reporting counterparty would 

have to report the information required 

in § 50.50(b)(1)(i) and (ii) for each swap 

for which it elects the cooperative 

exemption. 

As discussed in the NPRM, the 

Commission anticipates that to comply 

with § 50.50(b)(1)(i) and (ii), each 

reporting counterparty would be 

required to check one box in the SDR or 

Commission reporting data fields 

indicating that the exempt cooperative 

is electing not to clear the swap. The 

Commission estimated that the cost of 

complying with this requirement for 

each reporting counterparty to be 

between less than $1 and $7 for each 

transaction, or approximately $300 to 

$3,500 per year for all transactions. 

The Commission did not receive any 

comments concerning the cost to 

exempt cooperatives from complying 

with § 50.50(b)(1)(i) and (ii). 

b. Regulation § 50.50(b)(1)(iii): Annual 

Reporting Option 

Regulation 50.50(b)(1)(iii) allows for 

certain counterparty specific 

information identified therein to be 

reported either swap-by-swap by the 

reporting counterparty or annually by 

the electing counterparty. As discussed 

in the NPRM, the Commission 

anticipates that the exempt cooperatives 

will make annual filings of the 

information required. The Commission 

estimated the annual per cooperative 

cost for the filing to be between $200 

and $590, or $2,000 to $5,900 as the 

aggregate cost for all exempt 

cooperatives. 

The Commission did not receive any 

comments concerning the cost to 

exempt cooperatives for electing the 

annual reporting option under 

§ 50.50(b)(1)(iii). 

c. Updating Reporting Procedures 

As discussed in the NPRM, the 

Commission anticipates that 

cooperatives electing the exemption that 

are reporting counterparties may need to 

modify their reporting systems to 

accommodate the additional data fields 

required by the rule. The Commission 

estimated that the modifications to 

comply with § 39.6(f)(3) (now § 50.51(c)) 

would likely cost each reporting 

counterparty between $340 and $3,400, 

with the aggregate one-time cost for all 

potential exempt cooperatives to be 

$3,400 to $34,100. 

The Commission did not receive any 

comments concerning the cost to 

exempt cooperatives in updating their 

reporting systems to comply with 

§ 39.6(f)(3) (now § 50.51(c)). 

d. Burden on Non-Reporting 

Cooperatives 

As discussed in the NPRM, when an 

exempt cooperative is not functioning as 

the reporting counterparty (i.e., when 

transacting with an SD or MSP), the 

Commission anticipated that it may, at 

certain times, need to communicate 

information to its reporting 

counterparties in order to facilitate 

reporting. This information might 

include whether the exempt cooperative 

has filed an annual report pursuant to 

§ 50.50(b), and information to facilitate 

any due diligence that the reporting 

counterparty may conduct. The 

Commission estimated that a nonreporting exempt cooperative would 

incur an annual aggregate cost for 

communicating information to the 

reporting counterparty between $400 

and $39,000.100

The Commission did not receive any 

comments concerning the cost a nonreporting exempt cooperative will incur 

in communicating information to the 

reporting counterparty. 

List of Subjects in 17 CFR Part 50 

Business and industry, Clearing, 

Cooperatives, Reporting requirements, 

Swaps. 

Accordingly, the CFTC amends 17 

CFR part 50 as follows: 

PART 50—CLEARING REQUIREMENT 

AND RELATED RULES 

■ 1. The authority citation for part 50 

continues to read as follows: 

Authority: 7 U.S.C. 2 and 7a–1 as 

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

■ 2. Add § 50.51 to read as follows: 

§ 50.51 Exemption for Cooperatives. 

Exemption for cooperatives. Exempt 

cooperatives may elect not to clear 

certain swaps identified in paragraph (b) 

of this section that are otherwise subject 

to the clearing requirement of section 

2(h)(1)(A) of the Act if the following 

requirements are satisfied. 

(a) For the purposes of this paragraph, 

an exempt cooperative means a 

cooperative: 

(1) Formed and existing pursuant to 

Federal or state law as a cooperative; 

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

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

Act, solely because of section 

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

(3) Each member of which is not a 

‘‘financial entity,’’ as defined in section 

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

is a financial entity solely because of 

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

such member is: 

(i) Exempt from the definition of 

‘‘financial entity’’ pursuant to 

§ 50.50(d); or 

(ii) A cooperative formed under 

Federal or state law as a cooperative and 

each member thereof is either not a 

‘‘financial entity,’’ as defined in section 

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

from the definition of ‘‘financial entity’’ 

pursuant to § 50.50(d). 

(b) An exempt cooperative may elect 

not to clear a swap that is subject to the 

clearing requirement of section 

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

(1) Is entered into with a member of 

the exempt cooperative in connection 

with originating a loan or loans for the 

member, which means the requirements 

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

satisfied; provided that, for this 

purpose, the term ‘‘insured depository 

institution’’ as used in those sections is 

replaced with the term ‘‘exempt 

cooperative’’ and the word ‘‘customer’’ 

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

(2) Hedges or mitigates commercial 

risk, in accordance with § 50.50(c), 

related to loans to members or arising 

from a swap or swaps that meet the 

requirements of paragraph (b)(1) of this 

section. 

(c) An exempt cooperative that elects 

the exemption provided in this section 

shall comply with the requirements of 

§ 50.50(b). For this purpose, the exempt 

cooperative shall be the ‘‘electing 


tkelley on DSK3SPTVN1PROD with RULES2
52308 Federal Register / Vol. 78, No. 163 / Thursday, August 22, 2013 / Rules and Regulations 

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

2 7 U.S.C. 6m. 

3 7 U.S.C. 1a(11) and 1a(12). 

4 7 U.S.C. 6n(3)(A). Under part 4 of the 

Commission’s regulations, unless otherwise 

provided by the Commission, entities registered as 

CPOs have reporting obligations with respect to 

their operated pools. See 17 CFR 4.22. 

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

6 17 CFR 4.5. See 77 FR 11252 (Feb. 24, 2012); 

correction 77 FR 17328 (March 26, 2012). Prior to 

this Amendment, all RICs, and the principals and 

employees thereof, were excluded from the 

definition of ‘‘commodity pool operator,’’ by virtue 

of the RICs registration under the Investment 

Company Act of 1940. The 2012 amendment to 

§ 4.5 maintained this exclusion for those RICs that 

engage in a de minimis amount of non-bona fide 

hedging commodity interest transactions. See id. 

Specifically, the amendment to § 4.5 retained this 

exclusion for RICs whose non-bona fide hedging 

commodity interest transactions require aggregate 

initial margin and premiums that do not exceed five 

percent of the liquidation value of the qualifying 

pool’s portfolio, or whose non-bona fide hedging 

commodity interest transactions’ aggregate net 

notional value does not exceed 100 percent of the 

liquidation value of the pool’s portfolio. 

7 15 U.S.C. 80a–1, et seq. ‘‘SEC’’ as used herein 

means the Securities and Exchange Commission or 

its staff, as the context requires. 

8 17 CFR 1.3(yy). 

9Pursuant to the terms of § 4.14(a)(4), CPOs are 

not required to register as CTAs if the CPOs’ 

commodity trading advice is directed solely to, and 

for the sole use of, the pool or pools for which they 

are registered as CPOs. 17 CFR 4.14(a)(4). 

10 76 FR 7976 (Feb. 11, 2011). 

11See Notice of CFTC Staff Roundtable 

Discussion on Proposed Changes to Registration 

and Compliance Regime for Commodity Pool 

Operators and Commodity Trading Advisors, 

available at http://www.cftc.gov/PressRoom/Events/ 

opaevent_cftcstaff070611. 

counterparty,’’ as such term is used in 

§ 50.50(b), and for purposes of 

§ 50.50(b)(1)(iii)(A), the reporting 

counterparty, as determined pursuant to 

§ 45.8, shall report that an exemption is 

being elected in accordance with this 

section. 

Issued in Washington, DC, on August 13, 

2013, by the Commission. 

Melissa D. Jurgens, 

Secretary of the Commission. 

Note: The following appendix will not 

appear in the Code of Federal Regulations. 

Appendix to Clearing Exemption for 

Certain Swaps Entered Into by 

Cooperatives—Commission Voting 

Summary 

Appendix 1—Commission Voting Summary 

On this matter, Chairman Gensler and 

Commissioners Chilton, O’Malia, and Wetjen 

voted in the affirmative. 

[FR Doc. 2013–19945 Filed 8–21–13; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 4 

RIN 3038–AD75 

Harmonization of Compliance 

Obligations for Registered Investment 

Companies Required To Register as 

Commodity Pool Operators 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is adopting final regulations 

with respect to certain compliance 

obligations for commodity pool 

operators (‘‘CPOs’’) of investment 

companies registered under the 

Investment Company Act of 1940 

(‘‘registered investment companies’’ or 

‘‘RICs’’) that are required to register due 

to the recent amendments to its 

regulations. The Commission is also 

adopting amendments to certain 

provisions of part 4 of the Commission’s 

regulations that are applicable to all 

CPOs and Commodity Trading Advisors 

(‘‘CTAs’’). 

DATES: Effective dates: This rule is 

effective August 22, 2013, except the 

amendments to §§ 4.7(b)(4), 4.12(c)(3)(i), 

4.23, 4.26, and 4.36 which are effective 

September 23, 2013. 

Compliance dates: Registered CPOs 

seeking exemption under these rules 

shall be required to comply with the 

conditions adopted in § 4.12(c)(3)(i) 

when the associated registered 

investment company updates its 

prospectus as described in Section II.F., 

below, and files the prospectus with the 

SEC. Moreover, the publication of these 

rules trigger the conditional compliance 

date that was established in the 

Commodity Pool Operators and 

Commodity Trading Advisors: 

Compliance Obligations rulemaking. 77 

FR 11252, 11252 (Feb. 24, 2012). With 

the publication of these rules, registered 

CPOs of RICs must comply with § 4.27 

on or before October 21, 2013. 

FOR FURTHER INFORMATION CONTACT: 

Amanda Lesher Olear, Associate 

Director, Telephone: (202) 418–5283, 

Email: aolear@cftc.gov, or Michael 

Ehrstein, Attorney-Advisor, Telephone: 

202–418–5957, Email: mehrstein@

cftc.gov, Division of Swap Dealer and 

Intermediary Oversight, Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1155 21st Street NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

This rulemaking is related to the final 

rule adopted under RIN 3038–AD30. 

A. Recent Amendments to § 4.5 as 

Applicable to RICs 

The Commodity Exchange Act 

(‘‘CEA’’) 1 provides the Commission 

with the authority to require registration 

of CPOs and CTAs,2 to exclude any 

entity from registration as a CPO or 

CTA,3 and to require ‘‘[e]very 

commodity trading advisor and 

commodity pool operator registered 

under [the CEA] to maintain books and 

records and file such reports in such 

form and manner as may be prescribed 

by the Commission.’’ 4 The Commission 

also has the authority to ‘‘make and 

promulgate such rules and regulations 

as, in the judgment of the Commission, 

are reasonably necessary to effectuate 

the provisions or to accomplish any of 

the purposes of [the CEA].’’ 5

In February 2012, the Commission 

adopted modifications to the exclusions 

from the definition of CPO that are 

delineated in § 4.5 (‘‘2012 Final Rule’’).6

Specifically, the Commission amended 

§ 4.5 to modify the exclusion from the 

definition of ‘‘commodity pool 

operator’’ for those entities that are 

investment companies registered as 

such with the Securities and Exchange 

Commission (‘‘SEC’’) pursuant to the 

Investment Company Act of 1940 (‘‘ ’40 

Act’’).7 This modification amended the 

terms of the exclusion available to CPOs 

of RICs to include only those CPOs of 

RICs that commit no more than a de 

minimis portion of their assets to the 

trading of commodity interests that do 

not fall within the definition of bona 

fide hedging and who do not market 

themselves as a commodity pool or 

other commodity investment.8 Pursuant 

to this amendment, any such CPO of a 

RIC that exceeds this level, or markets 

itself as such, will no longer be 

excluded from the definition of CPO. 

Accordingly, except for those CPOs of 

RICs who commit no more than a de 

minimis portion of their assets to the 

trading of commodity interests that do 

not fall within the definition of bona 

fide hedging and who do not market 

themselves as a commodity pool or 

other commodity investment, an 

operator of a RIC that meets the 

definition of ‘‘commodity pool 

operator’’ under § 4.10(d) of the 

Commission’s regulations and § 1a(11) 

of the CEA must register as such with 

the Commission.9

B. Harmonization Proposal 

In response to the Commission’s 

February 2011 proposal to amend the 

§ 4.5 exclusion with respect to CPOs of 

RICs,10 as well a staff roundtable held 

on July 16, 2011 (‘‘Roundtable’’),11 and 

meetings with interested parties, the 

Commission received numerous 


tkelley on DSK3SPTVN1PROD with RULES2